Must there be More Than Damage to a Structure to be Structural Damage?

Sturctural Damage Is  Damage Which Impedes the Structural Components from Supporting the Loads That They Are Intended to Support

Sinkholes are a serious problem in Florida. Without warning the earth beneath a structure simply opens up and swallows structures, cars and people. As a result homeowners policies in Florida, by statute, are required to insure against structural damage caused by a sinkhold.

In Hegel v. First Liberty Ins. Corp., — F.3d —-, 2015 WL 821146 (C.A.11 (Fla.) 2/27/15) the Eleventh Circuit Court of Appeal was asked by an insurer to reverse a trial court judgment finding that damage to the insured’s house was “structural damage” and thus covered by the insurance policy.

FACTS

Severin and Stephanie Hegel (the Hegels) sued The First Liberty Insurance Corporation (First Liberty) claiming improper denial of their claim for “sinkhole loss” that had been defined under their homeowner’s insurance policy as “structural damage to the building, including the foundation, caused by sinkhole activity.”  The Hegels claim that First Liberty improperly denied their claim for a “sinkhole loss.” First Liberty argued that the damage to the Hegels’ residence does not qualify as “structural damage,” a term that was not defined in either the policy or the version of the Florida sinkhole-insurance statute applicable to their claim. In February 2014, the district court granted summary judgment for the Hegels, finding that “structural damage” meant any “damage to the structure” and awarding them $166,518.17 in damages. First Liberty timely appealed.

BACKGROUND

The Hegels had a homeowner’s insurance policy with First Liberty for their Spring Hills, Florida residence. This policy insured against “Sinkhole Loss” as an exception to the policy’s exclusion for damage caused by earth movement. Under the policy, “Sinkhole Loss means structural damage to the building, including the foundation, caused by sinkhole activity.” (Emphasis added.)

The version of the Florida statute governing sinkhole insurance that was in effect in 2010 contained the same definition of “sinkhole loss” as the policy did, but similarly failed to define the term “structural damage.” See Fla. Stats. § 627.706(2)(c) (2005). Prior to the statute being substantially amended in 2005, however, the term “sinkhole loss” was defined as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property.” Fla. Stats. § 627.706(3) (1981) (emphasis added).

The Florida Building Code (2004), on the other hand, defined “structural” as it relates to buildings: “For purposes of this code, ‘structural’ shall mean any part, material or assembly of a building or structure which affects the safety of such building or structure and/or which supports any dead or designed live load and the removal of which part, material or assembly could cause, or be expected to cause, all or any portion to collapse or fail.”

THE DAMAGE AND ESTIMATES OF REPAIR

The Hegels allege that, on March 1, 2011, they “discovered damage to their home, including, but not limited to, progressive physical damage to the walls and floors of the residence.” They subsequently submitted a claim for their damages to First Liberty under their homeowner’s policy.

First Liberty retained Structural Engineering and Inspections, Inc. (SEI) to investigate the claim in September 2011. SEI concluded in a report that the Hegels’ residence “DOES NOT MEET the criteria for Structural Damage as defined by Florida Statutes § 627.706 [2011].” (Emphases in original.) The SEI report noted some cracking and other issues, but determined that nothing rose to the level of “structural damage” as defined in the 2011 version of the statute. In addition, SEI listed several possible causes for the observed damage that were unrelated to sinkholes, including differential settlements and ordinary concrete shrinkage.

First Liberty accordingly denied the Hegels’ claim in October 2011, stating that their residence “ha[d] not sustained structural damage to the building or foundation” and that the damage was “related to normal concrete shrinkage, differential settlement, and improper embedment of [the] foundation.”

In November 2011, the Hegels requested a neutral evaluation. Kevin Scott, the neutral evaluator engaged for the claim, issued a report in July 2012. His report concluded that the damage to the Hegels’ residence was “the result of a combination of factors, including sinkhole activity,” but that “the observed distresses to the house can primarily be attributed to minor differential settlement of the structure and normal shrinkage/drying characteristics of the masonry materials.”

ANALYSIS

On appeal, First Liberty sets forth two independent, alternative theories to support its argument that the district court’s contractual interpretation was erroneous:

(1) the plain meaning of “structural damage” cannot be any “damage to the structure” in the context of the contractual phrase “structural damage to the building”; and

(2) the insurance policy incorporates the definitions of “structural” under the Florida Building Code (2004) and “structural damage” as “clarified” by the 2011 amendment to Florida Statutes § 627.706, such that the term “structural damage” must mean more than any “damage to the structure.”

The Eleventh Circuit agreed with First Liberty that the plain meaning of “structural damage” cannot be simply any “damage to the structure” in the relevant context. The parties disagreed on what was the plain meaning of the term “structural damage”.

The Eleventh Circuit, however found no genuine ambiguity exists because construing “structural damage” to mean simply any “damage to the structure” in the context of the insurance policy “is facially unreasonable.” Terms and phrases cannot be viewed in isolation. Courts must construe an insurance contract in its entirety, striving to give every provision meaning and effect.

The district court awarded the Hegels damages for all subsurface and cosmetic repairs based on the parties’ stipulation that there was “physical damage to Plaintiffs’ home.” Because “structural damage” is necessary for the Hegels to recover under the policy, the court must have equated “physical damage to Plaintiffs’ home” with “structural damage to the building.” Equating the two, however, essentially defines “structural damage” as “physical damage” — an untenable result. Such a construction would render the word “structural” meaningless because all property damage is physical, thereby violating a foundational rule of contract construction that every word be given effect.

Florida courts commonly adopt the plain meaning of words contained in legal and non-legal dictionaries. “Structural” is an adjective, defined in the Oxford English Dictionary as “[f]orming a necessary part of the structure of a building or other construction, as distinct from its decoration or fittings.” The noun “structure,” on the other hand, is simply a synonym for a building. Based on these definitions, “damage to the structure” would encompass any physical damage to a building, even if only cosmetic, whereas “structural damage” would exclude damage to a building’s “decoration or fittings.” Although any structural damage would necessarily encompass damage to the building, the opposite is not necessarily true. For example, many types of lesser damage to a building would not be structural damage. To equate “structural damage” with any “damage to the structure,” as the district court did, was untenable.

Kevin Scott, the neutral evaluator and a professional engineer, defined the term as follows: “It’s damage which impedes the structural components from supporting the loads that they are intended to support. That is my engineering opinion of structural damage.”

ZALMA OPINION

Courts may not rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties.  Similarly, an insurer cannot, by failing to define the terms in a policy, insist upon a narrow, restrictive interpretation of the coverage provided. The independent expert found no sinkhole and no stuctural damage. He found cracks and some settling. The trial court erred by concluding that the damage seen, damage to the structure, was structural damage although the building was performing as defined and supporting the loads it was designed to support.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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Should Fraud Be Insurable?

Insurer Seeks Coverage From Its Insurers For Its Fraudulent Acts

Since insurance, by definition, only covers contingent or unknown events. Therefore, by definition intentional or fraudulent acts are not covered. Some insurers, in order to cross every “t” and dot every “i” include an intentional act exclusion to reiterate the common law.

Insurance companies often make unusual decisions when they dispute coverage where one insurer is an insured and others insure it against certain risks. In Cigna Corp. v. Executive Risk Indem., Inc., — A.3d —-, 2015 WL 836933 (Pa.Super.,2/27/15) more than ten years of litigation boiled down to a declaratory relief action seeking coverage for the insured insurer’s admittedly fraudulent acts concerning its employee retirement plan.

FACTS

Cigna Corporation appealed from the order granting summary judgment in favor of Executive Risk Indemnity, Inc. and Nutmeg Insurance Company (Appellees), and dismissing Cigna’s complaint with prejudice. Cigna sought a declaration of coverage under a fiduciary liability policy for ERISA violations found in an underlying federal class action. Appellees denied coverage under a policy exclusion for deliberately fraudulent or criminal acts or omissions. Cigna challenges the trial court’s application of the fraudulent acts exclusion.

This protracted course of litigation has extended longer than a decade. A more complete factual account is contained in Amara v. CIGNA Corp., 534 F.Supp.2d 288 (D.Conn.2008), and Amara v. CIGNA Corp., 559 F.Supp.2d 192 (D.Conn.2008), as well as the Supreme Court’s discussion of the case in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011).

In 1998 Cigna amended its retirement plan, retroactive to January 1, 1998. In simplified terms, Cigna converted its traditional defined benefit pension plan to a cash balance plan. Cigna assured plan participants in the notification materials that the conversion would not affect benefits accrued as of December 31, 1997. In fact, the conversion was presented as an enhanced benefit. Nevertheless, there is no dispute on appeal that under certain circumstances some plan participants would have their expected benefits or accruals reduced or frozen, in a process designated “wear away.” Furthermore, there is no dispute that to avoid an anticipated employee backlash at the wear away phenomenon (and the possible reduction in retirement benefits), Cigna withheld or declined to provide documentation which would have confirmed the risk of reduced benefits.

In 2001, plan participants brought a class action lawsuit on behalf of some 27,000 employees, alleging in essence that the plan amendments had the net effect of reducing benefits or benefit accruals for some plan participants in violation of ERISA. Eventually, Judge Mark R. Kravitz, of the federal district court in Connecticut, decided that Cigna’s changes were permitted under ERISA, but that Cigna or its affiliate pension plan had violated ERISA-required notice provisions by providing misleading summary plan descriptions (SPD’s) and Summaries of Material Modifications (SMM’s) in an apparent effort to forestall objections from plan participants. Judge Kravitz ruled, in part: “[I]n effectuating the conversion to the cash balance plan, CIGNA did not give a key notice to employees that is required by ERISA; and CIGNA’s summary plan descriptions and other materials were inadequate under ERISA and in some instances, downright misleading. … This is where CIGNA failed to fulfill its obligations; the company did not provide its employees with the information they needed to understand the conversion from a traditional defined benefit plan to a cash balance plan and its effect on their retirement benefits.” (emphasis added)

However, the United States Supreme Court vacated and remanded. See CIGNA Corp. v. Amara, 131 S.Ct. 1866 (U.S.2011). In reviewing whether the district court applied the correct legal standard for relief, the High Court reasoned, in part, that the district court relied on the wrong ERISA remedy provision.

CIGNA’s deficient notice led to its employees’ misunderstanding of the content of the contract, and CIGNA did not take steps to correct their mistake. Instead, CIGNA affirmatively misled and prevented employees from obtaining information that would have aided them in evaluating the distinctions between the old and new plans.

While no “single statement … accurately define[s] the equitable conception of fraud,” it generally consists of obtaining an undue advantage by means of some act or omission which is unconscientious or a violation of good faith.  Here, defendants misrepresented the terms of CIGNA’s new pension plan and actively prevented employees from learning the truth about the plan.

During the relevant time period, Cigna was insured under a multi-line insurance policy, including professional liability and fiduciary liability. The primary insurer was Certain Underwriters of Lloyd’s of London. Appellees were excess carriers whose obligations were determined on a follow-form basis to the Lloyd’s of London policy (i.e., tracking the terms, conditions, and exclusions of the primary Lloyd’s policy).

In 2012, Cigna filed the complaint seeking a declaratory judgment to declare coverage under the fiduciary liability provisions of the policy for claims made against it in the underlying class action. Appellees filed a motion for summary judgment. The trial court granted the motion for summary judgment, and dismissed Cigna’s complaint with prejudice.

THE APPEAL

Did the trial court commit an error of law or abuse of discretion in applying the “deliberately fraudulent acts” exclusion to preclude coverage under the Fiduciary Liability coverage part?

ANALYSIS

Whether [the insurer] breached a duty imposed by contract is a legal conclusion

In Pennsylvania the rule is firmly established that it is irrelevant whether or not the insured intended to be bound by the [policy’s] exclusion for intentional torts, since it is against the public policy of the Commonwealth of Pennsylvania to provide insurance coverage for intentional acts.

Notably, Cigna does not dispute that “the Liability Opinion,” Amara, supra (534 F.Supp.2d 288), found that its (Cigna’s) summary plan descriptions and summary of material modifications were “affirmatively and materially misleading.”

Under Pennsylvania law the court’s duty is to ascertain the intent of the parties as manifested in the language of the written instrument. In discharging this duty, the court must view the policy in its entirety, giving effect to all of its provisions. Moreover, an insurance policy, like every other written contract, must be read in its entirety and the intent of the policy is gathered from consideration of the entire instrument.
Cigna’s argument, in effect, would have the court of appeal (and the trial court) read the wrongful acts provision (providing coverage certain acts defined as “wrongful acts”) as negating the fraudulent acts exclusion. The plain meaning of the policy is that the fraudulent or criminal act exclusion operates as an exception to the more general wrongful acts coverage provision. The appellate court read the insurance policy in its entirety, not piecemeal, giving effect to all of its provisions.

The federal district court, and the Second Circuit in affirmance, expressly concluded that Cigna’s conduct was fraudulent.

In addition to an unequivocal finding of fraud in the Amara litigation, we observe that Cigna’s conduct, including affirmative efforts at concealment and intentionally misleading representations that the benefits under the previous plan would not be disturbed, would clearly qualify as fraudulent under Pennsylvania law.

On the issue of finality, the appellate court noted that under Pennsylvania law, the federal courts’ finding of fraud clearly constituted a final judgment.

Pennsylvania case law is unequivocal that reimbursement from insurance for intentional acts is against the public policy of the Commonwealth.  In the context of contracts for insurance, it is against the public policy of Pennsylvania to provide insurance coverage for intentional acts. Cigna attempts to distinguish numerous cases reflecting this policy, and draws a universal, albeit incorrect, conclusion that “there is no blanket public policy in Pennsylvania against insurance coverage for intentional acts.” The court of appeal could find no reason or basis to read an exception into the public policy under the facts of this case.

ZALMA OPINION

This case is an example of an insurer, caught defrauding its employees, sought to obtain from its insurers a coverage it would never have provided to any insured equally convicted of intentional fraud. To drag this dispute over a period of ten years to obtain coverage for intentional and fraudulent acts – acts that have been uninsurable since the inception of modern insurance in the 18th Century. Insurance is a contract of indemnity against damage caused by a contingent or unknown event. Since fraud is always intentional the finding of fraud made it impossible to insure against losses caused by fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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Only Stupid Fraudsters Get Caught

    Zalma’s Insurance Fraud Letter

March 1, 2015

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

CURRENT ISSUE

The current issue of ZIFL reports on:

1.    Nine Prior Convictions for Insurance Fraud Had no Deterrent Effect
2.    New From Barry Zalma
a.    Ebooks
i.    Getting the Whole Truth
ii.    Random Thoughts on Insurance – Vol. III
b.    National Underwriter Publishes:
i.    Insurance Claims: A Comprehensive Guide;
ii.    Construction Defects Coverage Guide; and
iii.    Mold Claims Coverage Guide
iv.    All Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    The Insurance Fraud Deskbook
3.    The Biggest Legal Fraud in History
4.    Stupid Is as Stupid Does
5.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to shrink in 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

The last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Innocent Mortgagee Collect – Spouse Not Innocent – February 27, 2015
•    Plea of Guilty to Insurance Fraud Stands – February 26, 2015
•    Does “Notice-Prejudice Rule” Apply to Claims Made Policy? – February 25, 2015
•    Rescission Means Policy Never Existed – February 24, 2015
•    Any Insured Can Change Limits – February 23, 2015
•    Insurance Irrelevant to Subrogation Action – February 23, 2015
•    Can Insured Profit as an Additional Insured? – February 19, 2015
•    Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation – February 19, 2015
•    Comply With Insurance Condition or Lose – February 18, 2015
•    Insurance Policy Means What It Says February 17, 2015
•    B & T Zalma’s Passover 2015 – February 16, 2015
•    Discount for Ace Conference – February 16, 2015
•    Is Pool Pop-Out Excluded? – February 16, 2015
•    Insurance Fraud Fails Occasionally – February 15, 2015
•    Interviewing is an Art & Science – February 13, 2015
•    New E-Books from Barry Zalma – February 12, 2015
•    Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith – February 12, 2015
•    Misrepresent Material Fact – Lose Coverage – February 11, 2015
•    Mailing is All Needed to Perfect Nonrenewal – February 10, 2015
•    It Doesn’t Pay to Seek Penalties Not Owed – February 9, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Innocent Mortgagee Collect – Spouse Not Innocent

Going to Pot

How to Lose Fire Insurance Coverage

Members of the public think that the covenant of good faith and fair dealing only applies to the insurer and the insured can do whatever they want and hide important information from the insurer to avoid increased premium or loss of coverage. In Michigan endorsements added to homeowners policies require the insured to report any change in risk on penalty of losing coverage.

In Nationwide Mut. Fire Ins. Co. v. McDermott.. — Fed.Appx. —-, 2015 WL 756206 (C.A.6 (Mich.) 2/24/15) the insurer paid for a fire loss under a reservation of rights to the insured and mortgagee and then  sought recovery of what it paid to Kasey McDermott for  a fire loss caused by the intentional acts of a co-insured.

FACTS

On January 13, 2012, McDermott’s then-husband, Brien Mathews, accidentally started a fire—while manufacturing and smoking marijuana in their basement—that burned down their home.

McDermott’s insurer, Nationwide Mutual Fire Insurance Company, paid McDermott $160,209.50 for the loss. After learning that Mathews’ marijuana lab caused the fire, however, Nationwide challenged its liability through a declaratory action filed in district court. Following discovery, the district court held: (1) that the policy did not cover McDermott’s loss; and (2) that Nationwide was entitled to subrogation for payments made to McDermott following the fire before it learned of the fire’s cause. On appeal, McDermott challenges the denial of her insurance coverage and her liability to Nationwide for payments made.

In 2010, Brien Mathews, McDermott’s then-husband, became a licensed medical marijuana patient and caregiver pursuant to M.C.L. § 333.26421 et seq. After obtaining his “registry identification card,” Mathews worked “up to eight hours a day” to operate and expand his marijuana operation, an operation that, at the time of the fire, served four patients, including himself. From 2010 to 2012, Mathews spent upwards of $20,000 on lab equipment, purchasing dirt, fertilizer, and “[t]ons of lighting.” The operation took place almost exclusively in two rooms in the basement of McDermott’s home, though occasionally Mathews stored marijuana in the garage.

THE DANGER OF PRODUCING HONEY OIL

After Mathews began growing and distributing marijuana, he learned of a process known as “butane extraction,”  which involves drawing liquid butane through chopped marijuana leaves to extract THC and produce “honey oil,” a THC-rich substance users smoke. Honey oil would sell for four to eight times as much as marijuana. Mathews understood that butane extraction was risky, because “butane was highly flammable.” He knew that he “didn’t want to have any source of ignition around the butane.” He also knew “not to smoke” when he was using butane, and to keep it away from “open flame” and “any object that sparks.”

On January 13, 2012—the day of the fire—Mathews was performing butane extractions when a flame he had lit to smoke some of the honey oil ignited butane that had not yet evaporated. The resulting fire consumed the house and most of their possessions.

Although McDermott knew that Mathews had been growing marijuana in the basement, she claims that she did not know about the butane extractions or that butane was flammable.

At the time of the fire in January 2012, McDermott had a Nationwide Homeowner Policy that provided coverage for “accidental direct physical loss to [the] property” described therein. The policy specified which types of losses were not covered, such as those caused by an intentional act of the insured or those “occurring while hazard [was] increased by a means within the control and knowledge of an insured.” Further, by a Michigan Amendatory Endorsement to the policy, Nationwide informed McDermott that she had “a duty to notify [Nationwide] as soon as possible of any change which may affect the premium risk under th[e] policy,” including “changes … in the occupancy or use of the residence premises.”

The district court found that the policy did not cover McDermott’s losses because the fire was not an accident, and, in any event, McDermott was barred from recovery under the Increased Hazard exclusion; and as a result, Nationwide was entitled to subrogation in the amount of $139,841.04 for payments made on McDermott’s behalf.

INNOCENT CO-INSURED CLAIMS

McDermott challenges the district court’s ruling, arguing that, as an innocent co-insured under Michigan law, she is entitled to recover under the policy despite her then-husband’s conduct, and should not be “required to reimburse Nationwide.”

ANALYSIS

The appellate court concluded that because McDermott failed to notify Nationwide of the change in use of her basement—notification expressly required by the policy—the district court correctly denied coverage. The “Michigan Amendatory Endorsement” to McDermott’s policy provided that McDermott had a duty to notify Nationwide as soon as possible of any change which may affect the premium risk under the policy, including, but not limited to, changes in the occupancy or use of the residence premises.

McDermott failed to fulfill the notification condition by not informing Nationwide of Mathews’ marijuana growing operation. During their depositions, both McDermott and Mathews admitted that they had not informed Nationwide that in 2010, Mathews set up a marijuana growing operation in their basement, effectively “changing” the use of the basement from an area “simply used for storage and [their] washer and dryer to an area where [Mathews was] manufacturing and processing marijuana.” Because McDermott failed to satisfy the notification condition in her policy and, by so doing, knowingly omitted—in her representations to Nationwide—a “material fact … during the policy period.” As a result she is not entitled to recovery and is obligated to reimburse Nationwide the money it paid to the mortgagee.

The ruling was required because Nationwide was not informed, as required by the policy, that:

1.  Mathews had approximately 28 marijuana plants growing in the basement.

2.  Two rooms in the basement had been converted into growing rooms—with one housing plants in the “vegetative state” and the other serving as the “flower room”.

3.  Mathews had spent upwards of $20,000 on lab equipment, including “[t]ons of lighting” and numerous cans of butane.

4.  According to Nationwide’s representative, had McDermott informed Nationwide of Mathews’ marijuana operation, Nationwide would have declined coverage altogether, because such an operation is an increased hazard and “an unacceptable risk.”

It is impossible to hold an insurance company liable for a risk it did not assume. [Auto–Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich.1992).] Because McDermott is not entitled to recover under the policy, Nationwide is also contractually entitled to subrogation.

The mortgage clause clearly and unambiguously provides, “[i]f [Nationwide] pay[s] the mortgagee for loss and den[ies] payment to you[,] … [Nationwide is] subrogated to all the rights of the mortgagee granted under the mortgage on the property.”

ZALMA OPINION

This case proves, without using the words, that the covenant of good faith and fair dealing applies equally to the insured as it does to the insurer. The insured was under a mandatory duty to advise the insurer that they were using a highly flammable substance – butane – in their basement as part of a marijuana growing and processing operation. Had the insurer known the true facts it would never have insured the risk. Since it paid the innocent mortgagee it was entitled to reimbursement from the insured’s including the claimed innocent spouse who failed to advise of the change in risk.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Plea of Guilty to Insurance Fraud Stands

Insurance Fraud Results in Eight Years in Prison

When a party pleads guilty to multiple crimes in open court and with the advice of competent counsel he or she can expect to spend time in jail or prison and to have no opportunity to withdraw the plea. However, in People v. Dobson, Not Reported in Cal.Rptr.3d, 2015 WL 466810 (Cal.App. 4 Dist., 2/3/15), the defendant attempted to withdraw his plea after being sentenced to eight years in prison claiming that his lawyer was not competent to adequately represent him.

Defendant and appellant Randy Kenneth Dobson pled guilty to arson of an inhabited structure,  presenting a false insurance claim, presenting a false statement in conjunction with an insurance claim, possession of methamphetamine, and possession of drug paraphernalia. The trial court imposed the maximum it said it would consider, which was eight years in state prison. Defendant orally moved to withdraw his guilty plea, but the trial court denied the request. His sole contention on appeal is that this act constitutes an abuse of discretion.

FACTS

On December 26, 2011, a fire broke out at a mobilehome owned by codefendant Lori Jo Alhadeff. The Riverside County Fire Department extinguished the blaze. California Department of Forestry and Fire Prevention conducted an investigation in which it concluded that two people had been present in the residence prior to the fire. It determined that the fire was the result of arson.

Investigators found a glass pipe often used for smoking methamphetamine, which contained a white crystalline substance. Defendant, whom Alhadeff described as a “casual fling,” arrived at the scene of the fire on the day it occurred. When questioned by investigators, defendant stated he had been at Aldaheff’s residence the day before the fire but insisted he was only there for a couple of hours in the afternoon. He denied that the pipe belonged to either him or Alhadeff. He asserted he “wasn’t anywhere near” Alhadeff’s mobilehome when the fire began and was instead at a friend’s house playing ping-pong.

In addition to appearing at the scene of the fire and speaking to investigators, on the day of the fire defendant also left “several urgent messages” with Alhadeff’s insurer indicating that her house had burned down but that she was “too upset to call.” Approximately an hour after an insurance representative told defendant she could not answer his questions because he was not on the policy, defendant and Alhadeff appeared at the insurer’s office to file a claim. Defendant prompted Alhadeff to ask questions about valuing the claim at $554,000. Suspicious of the fire’s origin, the People obtained and executed a search warrant for defendant and Alhadeff’s hotel room, as well as the latter’s vehicle and residence was issued.

Among other items, officers seized “a document strategizing the insurance fraud, in what appears to be [defendant’s] handwriting”; glass pipes; a substance that later field-tested positive for methamphetamine; correspondence between defendant and Alhadeff “detailing how to execute the plan to obtain the insurance claim”; and a binder and folder containing insurance paperwork. At some point during the investigation, law enforcement even discovered “a lighter engraved with what is believed to be the inception date of the arson scheme.” Once in custody and Mirandized defendant admitted that he had helped Alhadeff with her insurance claim because she was “not very smart” and he had experience in handling similar claims because of a house fire.

At the preliminary hearing on March 1, 2013, defendant entered a plea of guilty on all counts. Defendant executed a plea form explicitly stating that the maximum sentence he could serve was 11 years two months, that his entitlement to formal probation would be “decided by the court,” and the term he would serve in custody would not exceed eight years in state prison.Defendant told the court that he had a “clear mind” and understood what was happening, he understood that a conviction would violate any probation or parole from previous cases, and he had no questions about the plea form he had executed. When the prosecutor asked if he had committed the acts alleged in each count, he answered, “Yes.” The court asked, “Given our discussion, how do you plead, Mr. Dobson, to each of these counts?” Again without questions or caveats, defendant answered, “Guilty, Your Honor.”

Defendant did not appear at his sentencing hearing, and a bench warrant issued. Later the trial court filed a letter defendant had written to the trial judge indicating that he had not appeared “because this case has been packed with police misconduct and attorney misconduct and would have sent me straight to prison where [he would be] unable to fight for what is true and correct.” He then asserted that defense counsel promised him probation, with no more than one year in jail if he pled guilty, and that “state prison ha[d] been removed from the table.” A hearing was held and defense counsel explained that he and his client were present because defendant had indicated “he wished to explore withdrawing his plea” on the ground of ineffective assistance of counsel.

Defense counsel provided a lengthy description of events preceding defendant’s entry of a guilty plea. The trial court then repeated that it had reviewed the transcript from the preliminary hearing and concluded that defendant received oral advisements that he could face eight years in prison.

ANALYSIS

Defendant contends he should have been allowed to withdraw his guilty plea because: (1) he only had a few minutes to confer with trial counsel regarding his charges and possible defenses; (2) his statement that he was not at the scene of the fire constitutes proof of factual innocence; (3) he did not understand the plea terms; and (4) he could not read the plea form because he lacked his eyeglasses. The appellate court held that the trial court did not abuse its discretion in finding that defendant failed to prove by clear and convincing evidence that either contention provided good cause to withdraw his plea. In fact, reviewing his arguments he had no evidence, just a panoply of whines.

To establish good cause to withdraw a plea it must be shown that defendant was operating under mistake, ignorance, or any other factor overcoming the exercise of his free judgment. However, a plea may not be withdrawn simply because the defendant has changed his mind.   In this case, defendant had ample opportunity to consider the terms of the deal the court offered him. He pled guilty nine months after initially pleading not guilty, and defense counsel stated that he and defendant “had discussed the case for months” before entry of a guilty plea. Also, the trial court told defendant multiple times that he could serve up to eight years in state prison if he pled guilty. The court could not see any clear and convincing evidence that defendant’s plea was insufficiently knowing and voluntary.

Contrary to Defendant’s claims, a person is guilty of arson when he or she willfully and maliciously sets fire to or burns or causes to be burned “or who aids, counsels, or procures the burning of, any structure, forest land, or property.”

Defendant made no objection when the court informed him he could face up to eight years in state prison, and he asked no questions before stating, “Guilty, Your Honor,” when asked what his current plea was.

ZALMA OPINION

The Defendant helped the victim of his arson with her claim because she was not too smart. He accepted a plea, failed to appear for his scheduled sentencing, claimed his lawyer was inadequate and claimed he had no idea what he was agreeing to since he couldn’t read the agreement without his glasses. Regardless, as the court noted, the agreement was read to him aloud and the judge advised the insured that he was guilty.
A person told by a judge that he could be sentenced to 8 years in jail should never plead guilty if he believes he is innocent when there is a court reporter available to take down every word spoken when his plea of guilty was taken in open court. Apparently Mr. Dobson was even less intelligent than the woman he convinced to try an arson for profit scheme. He will spend eight years in prison.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Does “Notice-Prejudice Rule” Apply to Claims Made Policy?

Claims Made Policies Are Different From Occurrence Policies

An insured brought a state-court action against a claims-made directors and officers (D&O) liability insurer to recover for breach of contract in connection with insurer’s denial of claim for reimbursement of legal fees and settlement payment. Insurer removed case. The United States District Court for the District of Colorado granted insurer’s motion to dismiss. Insured appealed. The federal court certified questions to the Colorado Supreme Court about the application of the notice-prejudice rule to a claims made policy.Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests.

In Craft v. Philadelphia Indemnity Insurance Company, — P.3d —-, 2015 WL 658785 (Colo., 2/17/15) the Colorado Supreme Court noted that a claims-made policy covers only those claims brought against the insured during the policy period and reported to the insurer by a date certain, typically within a brief window following the expiration of the policy period. The date-certain notice requirement effectuates the parties’ arrangement and limits the insurer’s liability to those claims reported within the time specified.

In this case, the policy required the insured to give prompt notice of a claim; specifically, notice “as soon as practicable” after learning of the claim. The policy also required the insured to give notice of the claim by a date certain; specifically, “not later than 60 days” after the expiration of the policy. Near the end of the one-year policy period, a company officer was sued for alleged misrepresentations he made during a merger. Unaware of the insurance policy, the officer defended himself against the suit. When he learned of the policy, approximately sixteen months after the policy period had expired, he immediately contacted the insurer but did not receive a response. The officer later settled the suit. He then sued the insurer for denying coverage under the policy. The district court granted the motion to dismiss, rejecting the officer’s argument that the notice-prejudice rule applied to the claims-made policy issued by the insurer. The officer appealed, and the case is now before the Tenth Circuit who submitted questions to the Colorado Supreme Court.

THE QUESTIONS

(1) whether the notice-prejudice rule applies to claims-made liability policies in general; and

(2) if so, whether the rule applies to both types of notice requirements in those policies.

Craft v. Phila. Indem. Ins. Co., 560 Fed.Appx. 710, 715 (10th Cir. 2014). The Supreme Court limited its analysis to the date-certain notice requirement.

FACTS

Dean Craft, appellant in the Tenth Circuit Court of Appeals, was the principal shareholder and president of Campbell’s C–Ment Contracting, Inc. (“CCCI”). At the time he was sued, Craft did not know that CCCI and Suburban had purchased directors and officers liability insurance from appellee Philadelphia Indemnity Insurance Company (“Philadelphia”).

As an express condition precedent to coverage, the policy required the insured to provide written notice to Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired. The relevant policy period for this coverage was November 1, 2009 to November 1, 2010.

Craft did not learn of the insurance policy until March 2012, more than a year after the policy period in which the suit was filed had expired, nor did he or the company give notice to the insurer.

ANALYSIS

In resolving this issue, the Supreme Court reviewed the development of Colorado’s notice-prejudice rule and the salient differences between occurrence and claims-made liability insurance policies. In either type of policy, a “prompt” notice requirement protects the insurer’s interest in investigating and defending a claim. Unique to a claims-made policy, however, a “date-certain” notice requirement serves only to effectuate the agreed-upon temporal limits of coverage. Thus, to excuse notice given after the expiration of the reporting period would rewrite a fundamental term of the insurance contract.

An insurer is prejudiced by an insured’s breach of a policy requirement where the breach defeats the purposes of the requirement. Such a notice requirement protects the insurer’s opportunity to investigate and defend a claim adequately. Yet where the insurer in fact has that opportunity, the rationale for strict enforcement of such a notice requirement is absent.

In Colorado there is a presumption of prejudice to the insurer in instances where the insured provides notice after disposition of the liability case, the insured has the burden of going forward with evidence to dispel this presumption, if such evidence is presented, the presumption loses any probative force it may have, and it is then up to the insurer to go forward with the evidence that actual prejudice existed.

THE DIFFERENCES BETWEEN “OCCURRENCE” AND “CLAIMS MADE” POLICIES

The Colorado Division of Insurance defines an occurrence policy as “an insurance policy that provides liability coverage only for injury or damage that occurs during the policy term, regardless of when the claim is actually made.” 3 Colo. Code Regs. 702–5:5–1–8 (2014). A claims-made policy, by contrast, is “an insurance policy that provides coverage only if a claim is made during the policy period or any applicable extended reporting period.”  Thus, occurrence policies and claims-made policies are almost the mirror image of each other.  Claims-made policies provide only potential coverage because timely notice of the claim to the insurer is a prerequisite to coverage under such policies. In other words, coverage is triggered only if the insured provides timely notice of the claim.

THE REASONS FOR CLAIMS MADE POLICIES

Claims-made policies proliferated in the 1970s as a solution to the problems many insurers were facing in writing professional malpractice insurance policies. In setting premiums for occurrence policies, underwriters had difficulty predicting decades into the future considerations such as inflationary trends, jury verdicts that outpaced inflation, and new theories of liability. Faced with increasing costs of doing business, the typical insurer either had to raise premiums, offer fewer products, or withdraw from the professional liability insurance market altogether. With claims-made policies, however, the risk to the insurer passes when the policy period expires. Given this limitation, a more predictable rate structure could be assembled and justified for such policies, and, thus, rates bore a more reasonable relationship to the current fiscal situation in a given state.”

Both occurrence and claims-made policies typically contain a requirement that the insured notify the insurer of a claim or potential claim “promptly.”Claims-made policies typically contain a second type of notice requirement not found in occurrence policies: the requirement that the insured provide notice of a claim within the policy period or a defined reporting period thereafter. Such a date-certain notice requirement fulfills a very different function than a prompt notice requirement. The date-certain notice requirement defines the temporal boundaries of the policy’s basic coverage terms. For this reason, although excusing late notice and applying a prejudice requirement make sense in the context of a prompt notice requirement, extending such concepts to a date-certain notice requirement would defeat the fundamental concept on which coverage is premised.

The Supreme Court concluded that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy, so advised the Tenth Circuit, who now will invariably adopt the position of the Colorado Supreme Court and will affirm the District Court’s decision to rule against the insured.

ZALMA OPINION

The notice-prejudice rule has an important function with regard to an occurrence policy when prejudice cannot be shown. It has no place when it comes to a claims-made policy’s date-certain notice requirement since to do so would rewrite the policy and defeat the purpose of the contract.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Rescission Means Policy Never Existed

Innocent Co-Insured Doctrine Does Not Apply to Rescission

Legal malpractice insurance policies are purchased by one member of a law firm on behalf of all partners and associates in the firm. The application for insurance or renewal is the basis on which the insurer makes a decision to insure or not insure a lawyer or law firm. The concept of utmost good faith requires that the lawyer signing the application or otherwise seeking renewal of an insurance policy must be frank and totally honest in response to the inquiries made by the application.

In Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, — N.E.3d —-, 2015 IL 117096, 2015 WL 728111 (Ill., 2/20/15) the Illinois Supreme Court was called upon to decide the propriety of an appellate court decision applying the Innocent Co-Insured Doctrine to rescind a policy as to the lawyer who signed the application but force the policy to stay in effect as to all other lawyers in the firm.

THE DECLARATORY RELIEF ACTION

Plaintiff Illinois State Bar Association Mutual Insurance Company (ISBA Mutual) filed a complaint for rescission and other relief against the Law Office of Tuzzolino & Terpinas (firm); Sam Tuzzolino and Will Terpinas, Jr., partners in the firm; and Anthony (“Antonio”) Coletta, the plaintiff in an underlying legal malpractice action against Tuzzolino, Terpinas and the firm. In its complaint, ISBA Mutual sought rescission of the legal malpractice insurance policy it had issued to the firm, alleging that Tuzzolino’s material misrepresentation on an ISBA Mutual renewal application induced ISBA Mutual to issue the policy. Ruling on motions for summary judgment, the circuit court of Cook County granted ISBA Mutual’s motion and rescinded the policy. Terpinas and Coletta appealed that judgment, arguing the rescission should not apply to Terpinas. The appellate court agreed and reversed the judgment of rescission as to Terpinas. 2013 IL App (1st) 122660, ¶¶ 38, 46, 377 Ill.Dec. 299.

BACKGROUND

In the underlying legal malpractice action, Coletta alleged that Tuzzolino and the firm represented either Coletta or his home construction business in various legal matters from 2002 to 2008, and that Tuzzolino mishandled some of those matters, including the “Baja litigation.”

Tuzzolino also allegedly suggested that Coletta try to recover his losses by suing the lawyer who handled a Baja bankruptcy in 1999. Tuzzolino filed a legal malpractice action against the bankruptcy lawyer at the end of 2005, but the case was dismissed six months later on the ground that it was barred by the statute of repose for legal malpractice claims. Coletta alleged Tuzzolino failed to inform him that the suit had been dismissed, allowing Coletta to believe it was proceeding toward trial. Coletta alleged that in February 2008, after he learned the case had been dismissed, he confronted Tuzzolino with that knowledge. According to Coletta, Tuzzolino offered to pay him $670,000 to settle any potential claim for legal malpractice arising out of Tuzzolino’s work on the suits against the Baja coventurers and the bankruptcy attorney.

Less than three months later, shortly before the April 30, 2008, expiration of the firm’s 2007–08 legal malpractice policy with ISBA Mutual, Tuzzolino completed a Renewal Quote Invoice and Acceptance Form for the purchase of a policy meant to cover the firm during the 2008–09 policy year. Question No. 4 on the form asked: “Has any member of the firm become aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise to a claim that has not been reported?” Tuzzolino checked the “no” box corresponding to this question. He signed his name as “owner/partner” and dated the form April 29, 2008.

Terpinas allegedly learned of Tuzzolino’s malfeasance about a month later, on June 10, 2008, when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to ISBA Mutual. In May 2009 ISBA Mutual brought suit seeking rescission and other relief against Tuzzolino, Terpinas, the firm, and Coletta.

Terpinas and Coletta, but not the firm, appealed that judgment, arguing that Terpinas was an “innocent insured” who was not to blame for Tuzzolino’s misrepresentation and the policy should not have been rescinded as to him. The appellate court agreed with that argument and concluded that a common law “innocent insured doctrine” applied to misrepresentations made on the renewal application. The court held that this doctrine preserved Terpinas’s coverage even as Tuzzolino’s was properly rescinded.

ANALYSIS

The question presented is whether Illinois law allows rescission of an insurance policy in its entirety for a material misrepresentation on the written application.

Summary judgment is appropriate when the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law

Section 154 of the Insurance Code provides: “No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefor. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company.” (emphasis added)

The Supreme Court noted that section 154 expressly refers to misrepresentations “made by the insured or in his behalf” — that is, not necessarily by the insured personally.

ISBA Mutual points to Home Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir.1992), which observed that rescission of an insurance policy because of a misrepresentation on the application is distinctly different from the denial of insurance coverage because of excluded wrongdoing.

Rather than the innocent insured doctrine, Dunn concerned a “waiver of exclusion” clause in the policy that the insurer sought to rescind. Dunn involved a “crooked attorney” who obtained a legal malpractice policy for himself and the other attorneys associated with his firm, but “understandably” failed to disclose his own criminal activities on the policy application. One of the other attorneys in the firm, who had no involvement in the policy application or his colleague’s misrepresentation, was sued for legal malpractice unrelated to his colleague’s criminal activities. The insurer sought rescission of the policy due to the material misrepresentation on the application. The insured who was not involved in the misrepresentation, as well as the underlying malpractice plaintiffs, objected to the rescission of the policy as to that attorney, relying on the waiver-of-exclusion provision.

The Seventh Circuit found it irrelevant that no other attorney in the firm took part in the crooked attorney’s fraud, or even knew of it. “Though the other attorneys did not intend to deceive, the falsehood on the application is fatal. [The crooked attorney’s] misrepresentation caused [the insurer] to issue a policy to all the attorneys that otherwise would not have been forthcoming.”

The innocent insured doctrine does not apply in the rescission context. Unlike in rescission cases, the innocence of an insured matters a great deal when another insured’s wrongdoing triggers a policy exclusion, and a dispute arises over whether the insurer has a duty to defend the innocent insured under a policy that undisputedly was in effect. A misrepresentation on the policy application goes to the formation of the contract. The Supreme Court concluded that the appellate court erred in applying the innocent insured doctrine in this case. That doctrine is relevant to issues of policy exclusions and insurance.

However, the innocent insured doctrine is not suited to rescission and contract formation.
Section 154, which establishes public policy on the issue of rescission, allows rescission when the relevant requirements are met. When the requirements were satisfied rescission was proper and the court, granting rescission, establishes that the contract of insurance never came into force so there was no insured at all, let alone an innocent insured.

ZALMA OPINION

Rescission is an ancient equitable remedy allowing parties to an insurance contract to be placed in the status they were in before the policy came into effect because of fraud, material misrepresentation or concealment of material fact. In this case the insured who signed the application for insurance knew that a client was claiming he had committed malpractice, had made an offer to settle the potential malpractice claim, and still answered the question about potential claims in the negative. He intentionally misrepresented material facts and removed from the insurer the right to evaluate the risk it was asked to take. That fraud should not be honored. The Illinois Supreme Court agreed and rescinded the policy from its inception.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Any Insured Can Change Limits

Jury’s Finding Is Affirmed

When two or more people are named insured’s on a policy of insurance any one may, by the terms of the contract of insurance, ask the insurer to amend or modify the policy. When a loss occurs, the remaining insured, who did not know of the change, will argue that the change should not be enforced because he or she was not aware of the change. This is especially so when the policy limits are reduced.

In Brown v. Government Employees Ins. Co., Not Reported in A.3d, 2014 WL 7882070 (N.J.Super.A.D., 2/17/15) a New Jersey appellate court was asked to reverse a trial court verdict in favor of the insurer and grant the plaintiff a new trial because the plaintiff did not agree to a reduction in policy limits.

FACTS

This litigation arises from the tragic accidental death of a young woman and her mother. On February 14, 2011, twenty-four-year-old Jaclyn McVaugh was driving her mother’s 2005 Mitsubishi Galant heading northbound on Key Road in Winslow Township when she rear-ended a Ford Expedition, causing her car to cross over the center lane and collide with a Honda “which was stopped or almost stopped in the southbound passing lane” of Key Road. McVaugh’s mother, Frances Mitchell–Brown, was seated in the front passenger seat; McVaugh’s three-year-old daughter was in a child-seat in the rear passenger compartment. Neither one of the adult occupants of the Mitsubishi were wearing their seatbelts. Both died. The child survived.

At the time of the accident, the Mitsubishi was insured by defendant Government Employees Insurance Company (GEICO). Plaintiff Randy Brown was married to Mitchell–Brown; McVaugh was his stepdaughter. Plaintiff and Mitchell–Brown were the only named insureds on the Mitsubishi policy issued by GEICO. Plaintiff sued GEICO claiming the coverage limit on the Mitsubishi policy was improperly reduced without the authorization of one of the two named insureds. The case was tried before a jury resulting in a verdict in favor of GEICO.

In June 2008, plaintiff purchased from GEICO an insurance policy for his own car, a 2005 Mitsubishi Gallant. Plaintiff testified that he worked in the automobile industry in various capacities for nearly thirty-seven years. He testified that his employment experience made him “absolutely” familiar with coverage limits and automobile insurance policies. Thus, he requested “maximum coverage” when he purchased his policy from GEICO.

The first auto policy GEICO issued to plaintiff had a six-month coverage period that began on June 17, 2008 and ended on December 17, 2008. Thereafter, the policy renewed in six-month intervals. The policy listed plaintiff and his wife Mitchell–Brown as the named insureds. In this capacity, each had the authority to unilaterally change the terms of the policy, including the coverage limit, without the other’s knowledge or approval.

In November 2010, GEICO records reflect certain specific changes were made to plaintiff’s Mitsubishi policy. Plaintiff does not dispute that the policy was amended. However, he contended before the jury that these changes or amendments to the policy were not made by one of the two named insureds.

During the November 24, 2010 phone call, the person identified as plaintiff’s wife made a number of changes to the policy. According to GEICO’s representative, records indicated that “ ‘Ms. Policyholder requests to add daughter Jaclyn McVaugh to policy.’ And ‘Jaclyn’s driver’s license is suspended. Advised policyholder to have daughter clear.’ “ Jaclyn’s vehicle, a 2001 Toyota Camry, also became insured under the policy, and Jaclyn’s email address, jaclyn_meah@yahoo.com, was added as a contact source. GEICO’s records indicate that new “I.D. cards [were] being mailed at 12:59 p.m …. for the 2001 Toyota.” The cards were mailed to plaintiff’s home and emailed to Jaclyn McVaugh’s personal email address.

One of the key changes made to the policy concerned the coverage. Bodily injury liability limits were reduced from $250,000/$500,000 to $15,000/$30,000, to take effect at the time of the policy renewal scheduled for December 17, 2010. With respect to PIP coverage  an automated coverage adjustment form was signed and effective date 12/17/10. That refers to the coverage selection form, the e-signed coverage selection form for the reduction of the PIP option from … 250,000 to … 15,000. The change in PIP coverage required the insured’s signature to take effect. According to GEICO records, “Randy Brown” e-signed the documents on the GEICO website.

Plaintiff testified and argued to the jury that this should be considered as evidence of an improper modification of the policy because he always used his middle initial when signing his name. In rebuttal, Lubow testified that it is not uncommon for policy holders to make changes.  Policy holders routinely drop coverages from $250,000/500,000 to $15,000/30,000.

A GEICO policy with a declarations page dated November 25, 2010, was mailed to plaintiff’s residence. Lubow explained that “[a] declarations page is issued by GEICO to its policyholders.  When the PIP coverage limits were subsequently lowered, the premium decreased to $892.50.

Without a competent evidential basis, plaintiff testified that he believed Jaclyn took his credit card and made the payment without his knowledge or consent. GEICO’s records indicate payments were made on plaintiff’s policy via credit card on at least three other occasions, including twice after the death of Jaclyn and plaintiff’s wife.

The jury returned a 7–1 verdict in favor of GEICO, finding it had not “improperly lowered the automobile insurance coverage limits for [plaintiff] and his wife, Frances Mitchell–Brown.” The trial judge thereafter denied plaintiff’s motion to set aside the jury’s verdict as against the weight of the evidence.

ANALYSIS

Plaintiff failed to provide or otherwise include in the appellate record either the trial judge’s written statement of reasons explaining the basis for his decision to deny plaintiff’s motion for a new trial, or a transcript containing the judge’s oral decision.

The appellate court is bound to defer to the trial court’s “feel of the case” derived from the judge’s personal observations of the witnesses’ testimony during the trial and other intangible factors that cannot be duplicated by or extracted from the examination of the transcribed record. The “feel of the case” is not just an empty shibboleth—it is the trial judge who sees and hears the witnesses and the attorneys, and who has a first-hand opportunity to assess their believability and their effect on the jury. It is the judge who sees the jurors wince, weep, snicker, avert their eyes, or shake their heads in disbelief. Those personal observations of all of the players is the feel of the case to which an appellate court defers.

Determining the credibility of a witness’ testimony is a function exclusively delegated to the jury. Given plaintiff’s failure to provide the appellate court with the trial judge’s reasons for denying his motion to set aside the jury’s verdict.

The appellate court emphasized that the jury considered the evidence presented by the parties over two days of trial. This evidence consisted primarily of the testimony from two witnesses: plaintiff and GEICO’s senior underwriter.

Based on this evidence, the jury found plaintiff did not prove, by a preponderance of the evidence, that GEICO improperly lowered the automobile insurance coverage limits in the policy issued to plaintiff and his wife, the late Frances Mitchell–Brown. It was undisputed that plaintiff and decedent were listed as the named insureds under the original policy. They were individually vested with the authority to unilaterally amend the coverage under the policy. GEICO provided competent evidence at trial and properly admitted documentary evidence, that plaintiff’s wife lowered the bodily injury liability coverage prior to the accident on February 14, 2011.

ZALMA OPINION

This is clearly a case of sour 20/20 hindsight. The plaintiff who suffered a severe loss of a wife and step-child learned after their death, that his wife had reduced the limits of their policy instead of keeping the high limits he had originally purchased. Of course, he never complained about the lower premium, until after the accident. Since the jury and judge saw the witnesses and ruled in favor of GEICO, the appellate court had no option but to affirm because the plaintiff produced no convincing evidence that GEICO did anything wrong when it accepted the wife’s request to reduce limits and premium.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

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Insurance Irrelevant to Subrogation Action

Subrogation is Only Either a Tort or Breach of Contract Action

Subrogation lawsuits seek recovery from a tortfeasor who caused damage to property, the risk of loss of which was insured, and allows the insurer to step into the shoes of its insured to recover from the tortfeasor what the insured could have recovered had the insured not been insured. In Certain Underwriters at Lloyd’s London v. North Shore Signature Homes, Inc. — N.Y.S.2d —-, 2015 WL 669745 (N.Y.A.D. 2 Dept., 218915), 2015 N.Y. Slip Op. 01409 the New York Supreme Court, Appellate Division, in one of its amazingly brief opinions, held that the insurer’s claim file was not discoverable since it had no relation to the tort action.

Applying the law of the case doctrine in a subrogation action to recover benefits paid to the plaintiffs’ insureds, the defendant Richard Wischhusen appealed, and the defendant North Shore Signature Homes, Inc., separately appealed, from so much of an order of the Supreme Court, Nassau County (Jaeger, J.), that granted that branch of the motion of the plaintiff in Action No. 1 for a protective order preventing the disclosure of its insurance coverage file referable to the underlying property damage claim, and denied those branches of those defendants’ respective cross motions to compel the disclosure of that file.

Contrary to the contention of the defendants Richard Wischhusen and North Shore Signature Homes, Inc. (hereinafter North Shore), the Supreme Court properly granted that branch of the motion of the plaintiff insurer in Action No. 1 which was for a protective order preventing the disclosure of its insurance coverage file referable to the underlying property damage claim, and properly denied those branches of their respective cross motions which were to compel disclosure of that file. In reaching its conclusions, the Supreme Court properly applied the law of the case doctrine, since, in an order dated May 24, 2011, from which Wischhusen and North Shore did not appeal, the court had already determined that the disputed file was irrelevant and not directed to discover admissible evidence in the tort action that only required proof of liability and damages.

ZALMA OPINION

A subrogation action is not an insurance case just because an insurance company is a party to the lawsuit. Every first party property insurance policy contains a contract requirement that the insured assign to the insurer its rights against any third party that caused the damage. Stepping into the shows of the insured all that the plaintiff need prove is that the defendant is liable for the injury and the damages sustained. Insurance has no bearing since the policy might have required the insurer to pay, under a replacement cost policy, more than tort damages or with a large self-insured-retention less than the damages. Allowing insurance coverage to enter the case would simply cause confusion and have no probative value.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Can Insured Profit as an Additional Insured?

Construction Defect Defense Claims to Multiple Insurers May Allow Insured to Profit From Claim

Because of the way construction contracts are written multiple insurers who named or caused the general contractor to be an additional insured, are required to defend the general contractor. Usually the various insurers will work together to provide a single defense to the general contractor additional insured. Often, some of the insurers fail or refuse to defend or indemnify the additional insured. As a result, when the case is completed the general contract will sue the insurers who did not defend it seeking reimbursement for the fees expended. Some seek the same defense costs from each of the recalcitrant insurers.

Developers are more aggressively pursuing their rights under additional insured (AI) endorsements issued to subcontractors, seeking full coverage in lieu of triggering any self-insured or direct insured monies. Applying its aggressive tactics it used a motion in limine to deprive the defendant of its right to present evidence that it did not owe defense.

FACTS

In McMillin Companies, LLC v. American Safety Indemnity Company, — Cal.Rptr.3d —-, 2015 WL 270034 (Cal.App. 4 Dist. 2/33/3025), 15 Cal. Daily Op. Serv. 751, 2015 Daily Journal D.A.R. 888, it was claimed that the trial court erred and deprived an insurer that named McMillin as an additional insured of defending itself.  The general contractor, McMillin, settled the underlying construction defect action using AI monies and then pursued a dozen or more AI carriers for unreimbursed defense costs.

Since each AI carrier had an independent obligation to defend the entire action, there should have been complete coverage for all defense costs. Nevertheless, McMillin pursued its action against the AI carriers and recouped more money in that coverage action than its out-of-pocket total.

It did so by claiming that some of the amounts obtained in the coverage action should be attributed to  Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 fees (an insured can recover attorney fees “reasonably incurred to compel payment of the policy benefits”) that were incurred in pursuing the recalcitrant carriers.

BACKGROUND

McMillin, the general contractor sued a subcontractor’s commercial general liability insurer for breach of contract and breach of implied covenant of good faith and fair dealing. The trial court ruled in limine [Latin for “threshold,” a motion made at the start of a trial requesting that the judge rule that certain evidence may not be introduced in trial] that the insurer had a duty to defend but that proceeds of general contractor’s settlements with other insurers completely offset general contractor’s contract damages, and entered judgment based on the parties’ agreement that the rulings in the in limine motions would preclude general contractor from prevailing on its causes of action.

Motions in limine are designed to facilitate management of a case by deciding difficult evidentiary issues in advance of trial. Motions in limine must be limited in scope. The court of appeal concluded that, by granting McMillin’s motion as to the duty to defend, the court essentially granted a summary adjudication motion in favor of McMillin on one of the elements of its cause of action for breach of contract, ruling as a matter of law that ASIC had a duty to defend.

ANALYSIS

Relying on Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1078, 17 Cal.Rptr.2d 210, 846 P.2d 792 ( Horace Mann ), and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (Montrose), McMillin argued that the denial of ASIC’s motion for summary judgment established as a matter of law that ASIC had a duty to defend them in the Baker litigation.

Opposing the motion, ASIC disputed the legal effect of the denial of its summary judgment motion, contending that because the court did not deny the motion by expressly finding a disputed factual issue, the effect of the ruling did not establish the duty to defend as a matter of law.

The court of appeal concluded that the trial court erred in granting McMillin’s motion in limine to preclude evidence or argument that disputed ASIC’s duty to defend; the trial court erred in granting ASIC’s motion in limine to preclude McMillin from presenting evidence or argument either that the Settlement proceeds are not an offset.

Duty to Defend

An insurer owes a duty to defend any lawsuit “which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) Since the duty arises whenever the claim against the insured seeks damages on any theory that, if proved, would be covered by the policy, the insurer is relieved of its duty only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy.

ALLOCATION

The appellate court concluded that the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation.  In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC’s alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin’s proof.

In ruling that McMillin was precluded from arguing that the unallocated Settlement proceeds either are not an offset to contract damages or are allocated to the tort damages, the trial court erred in essentially granting a nonsuit in ASIC’s favor.

ASIC’s arguments regarding offsets based on the Settlement proceeds do not defeat McMillin’s right to go to trial. The fact that McMillin may have obtained the Settlement from 11 other insurers years after the tender of defense to ASIC—regardless how the Settlement proceeds are allocated—affects only McMillin’s potential right to recover damages from ASIC, not whether McMillin suffered damages as a result of ASIC’s alleged breaches.

DECISION

The minute order filed July 26, 2012, precluding ASIC from disputing its alleged duty to defend was, therefore, reversed. On remand, the court should enter an order denying the plaintiffs’ motion in limine. The minute order filed October 22, 2012, precluding McMillin from arguing that the unallocated Settlement proceeds either are not an offset to contract damages or are allocated to the tort damages, was reversed. On remand the trial court should enter an order denying ASIC’s motion in limine.

As evidenced in this appeal, using an in limine motion as a substitute for a potentially dispositive statutory motion produces substantial risk of prejudicial error.

ZALMA OPINION

The Court of Appeals refused to apply proposed precedent in which the receipt of fully offsetting settlements from other carriers resulted in no damages and thus dismissal of the insured’s case. Instead, the Court found that offsets may be used to diminish damages but do not necessarily preclude a claim against a carrier that did not participate in the insured’s defense. This  portion of the opinion leaves the door open for an insured in a multi-carrier insurance coverage case to allocate settlement monies away from defense costs and essentially profit from settlements – attributing them to Brandt fees – while continuing its efforts against non-settling carriers. Insurance is not designed to allow the insured to profit from the loss but only to indemnify it.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation

Insurance Competence Needed to Commit Insurance Fraud

Arson is relatively easy. Pour some gasoline and light a match and a fire will burn. Successfully turning an arson fire into profit is more difficult and requires some knowledge of insurance and insurance claims. In Ross v. State Farm Fire and Cas. Co., Slip Copy, 2015 WL 667608 (S.D.Ohio, 2/17/15) the District Court for the Southern District of Ohio dealt with an attempted arson-for-profit by a person who had no knowledge of insurance and what is necessary to make a successful claim to an insurance company.

State Farm denied the claim of Mr. Ross after a fire at a dwelling in Dayton Ohio.

FACTUAL BACKGROUND

A fire occurred on October 31, 2012, to a real property located in Dayton, Ohio (the “Property”). At the time of the fire, the Property was owned by Djuna Brown–Jennings. Ross, the only person insured by the State Farm policy, had owned the Property. He lived at that address until March or April of 2012. Ross moved out when renovations were started. He testified that he expended nearly $20,000 to renovate.

Ross was the prior owner of the Property and had deeded it to Djuna Brown–Jennings, his sister, prior to the fire.  Ross planned to deed the Property back over to Luxury Sports Superstore, LLC, an entity that he allegedly owned. He claimed that he transferred the Property to his sister because he did not think he could transfer the Property directly to Luxury Sports Superstore without waiting a year. State Farm was not made aware of the Property transfer prior to the fire.

The fire was called into the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Fire crews arrived at the Property at 10:03 p.m. The Dayton Fire Department’s report notes that the fire was incendiary and the material causing the fire was gasoline.

State Farm retained Fire and Explosion Consultants, LLC to determine the cause and origin of the fire who determined that the fire was intentionally set with the use of gasoline and an open flame ignition source. All other potential causes of the fire were eliminated according to the consultants’ report.

Relative to the issues in this case, the Policy includes the following provision regarding concealment or fraud: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.”

On July 3, 2013, State Farm denied Ross’s claim and voided the Policy for multiple reasons. The Policy premiums paid after October 31, 2012, were refunded to Ross.

ANALYSIS

State Farm asserted that the Policy should be voided because Ross misrepresented or concealed material information pertinent to his claim and that Ross did not have an insurable interest in the Property at the time of the incident so he could not collect under the Policy, and that it did not act arbitrarily, capriciously or without reasonable justification when it denied Ross’s claim and voided the Policy.  Ross responded claiming genuine issues of material fact.

Insurable Interest

In Ohio, and every other U.S. jurisdiction, a policy owner must have an insurable interest in the subject matter of the insurance. If not, the policy is void.  A person has an insurable interest when the person would profit by or gain some advantage by the continued existence of the property or would suffer a loss or disadvantage by the destruction of the property. In this case there was evidence that Ross had made an investment in the Property, including renovations, prior to deeding it to his sister. However, the Property was owned by Ross’s sister, Djuna Brown–Jennings, at the time of the fire.
Even though Ross indicates that he planned to deed the Property to Luxury Sports Superstore in the future and assuming that he alone could cause this to happen, Ross was not the owner of the Property at the time of the fire.

Therefore, even though Ross may have made an investment in the Property before the fire, he did not own the Property. Further, since Ross was not the only member of Luxury Sports Superstore, LLC, at the time of the fire, he alone would not profit by the continued existence of the Property and would not suffer a loss or disadvantage by the destruction of the Property.

Since Ross did not have an insurable interest in the Property at the time of the fire the Policy was void at the time of the fire.

Misrepresentation Or Concealment of Material Information?

The Policy at issue here is void if any insured intentionally concealed or misrepresented any material fact or circumstance relating to the insurance. A misrepresentation is material if, in the context of an insurer’s post-loss investigation, the false statement concerns a subject relevant and germane to the insurer’s investigation. Therefore, false answers are material if they might have affected the attitude and action of the insurer or if they were calculated either to discourage, mislead or deflect the insurer’s investigation in an area that might seem to the insurer a relevant or productive area to investigate. Finally, materiality can be decided by a court if reasonable minds could not differ on the materiality question.

Although there is no evidence as to when the fire was set there was evidence that the fire was first reported to the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Ross indicated that he was at Luxury Sports Superstore, his place of business, until about 7:00 or 8:00 p.m. on the night of the fire after which he went to the Marriott. He also indicated that he arrived at the Marriott ten (10) to twenty (20) minutes later. Video at the Marriott, accurate to within fifteen (15) minutes, showed Ross arriving at 9:52 p.m.

Based upon the accuracy of the video time, Ross could have had the opportunity to start the fire and proceed to the Marriott. Ross’s statement that he left his office between 7:00 p.m. and 8:00 p.m. and arrived at the Marriott ten (10) to twenty (20) minutes later is shown to be a misrepresentation by the video at the Marriott. Ross, therefore, misrepresented the time at which he arrived at the Marriott.

This misrepresentation is material to State Farm’s investigation because if Ross’s whereabouts was unknown between 8:20 p.m. at the latest and 9:37 p.m. at the earliest and the fire was reported at 9:59 p.m., Ross could have had time to start the fire. Ross tried to avoid summary judgment by asserting that he was never prosecuted for the fire. This assertion is, of course, irrelevant as to whether Ross misrepresented his whereabouts at the time of the fire. Ross made a misrepresentation of a material fact to State Farm relating to State Farm’s insurance coverage of the Property. Thus, based upon language in the Policy, the Policy is void.

Bad Faith?

An insurer, such as State Farm, has a legal duty to act in good faith, and a bad faith refusal to settle a claim is a breach of the legal duty to act in good faith. In this case, State Farm had reasonable justification for denying Ross’s claim and voiding the Policy. Ross did not have an insurable interest in the Property, and State Farm thought that Ross had materially misrepresented his whereabouts at the time of the fire.

The court concluded that Ross did not have an insurable interest in the Property and that as a matter of law the Policy was properly voided by State Farm. The court also concluded that Ross misrepresented his whereabouts at the time of the fire to State Farm and that according to its terms, the Policy was properly voided by State Farm. Finally, it concluded that State Farm’s voidance of the Policy and failure to pay Ross’s claim was reasonable under the circumstances and was not an act of bad faith.

ZALMA OPINION

Mr. Ross was ignorant of the law of insurance. He maintained insurance on a property in which he had no interest. To obtain the benefits of an insurance policy the person must be insured and must have an interest in the property, the risk of loss of which is insured, so that its loss will cause some damage to the insured. Ross had no interest since he gave it away to his sister. Further, he lied to his insurer about his conduct on the night of the arson fire thereby voiding any coverage that existed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Comply With Insurance Condition or Lose

Failure to Submit Timely Proof of Loss Fatal to Flood Claim

Flood insurance, because it is part of a federal government program is different from insurance written by commercial insurers. As a result, courts require the policy to be strictly construed rather than the opposite result when dealing with a commercial insurer. In Reine v. State Farm Ins. Co., Slip Copy, 2015 WL 631413 (E.D.La., 2/13/15) the insured learned that it was expensive to deal with a flood policy as if it was issued by a commercially based insured.

FACTS

The insurer refusal to make payments on a home insurance policy for some damages that plaintiffs allege they suffered from Hurricane Isaac’s storm surge. Plaintiffs own property in LaPlace, Louisiana (“the residence”). They maintained flood insurance coverage under a Standard Flood Insurance Policy (“SFIP”) issued by FEMA through the National Flood Insurance Program and effective from June 23, 2013 through June 23, 2013.

According to plaintiffs, on August 29, 2012, the residence sustained damage from Hurricane Isaac’s storm surge. Per declarations and documents provided by FEMA, on September 4, 2012, an independent adjuster inspected the property and issued a final report. The report recommended a payment of $116,944.18 for damage to the building and contents loss. On September 10, 2012 an advance payment of $5,000 was issued. On October 30, 2012, plaintiffs submitted a signed proof of loss for $105,629.29 with a statement for replacement cost coverage for $11,314.89.  On November 9, 2012, FEMA issued a final building payment and final contents payment for the amount sworn to in the proof of loss.  On that date, FEMA also issued a denial of additional amounts that plaintiffs had claimed for property damage which FEMA found could not have been caused by the three inches of water that entered the home.

On November 27, 2012, plaintiffs submitted a new estimate of damages by Michaelson and Messinger Insurance Specialists, LLC for $390,203.16 (“November estimate”). However, FEMA alleged that plaintiffs never submitted an additional proof of loss to substantiate the amount claimed in the November estimate. On August 28, 2013, plaintiffs filed suit against FEMA and State Farm Insurance Company (“State Farm”), alleging breach of contract, bad faith claims adjusting, negligent claims adjusting, and intentional infliction of emotional distress due to defendants’ refusal to make further payments for the damages claimed in the November estimate.

ANALYSIS

FEMA claims it is entitled to summary judgment on plaintiffs’ breach of contract claim because plaintiffs failed to submit a proof of loss in support of the November estimate. Plaintiffs were covered under a Standard Flood Insurance Policy (“SFIP”) issued by FEMA. Federal regulations require as a precondition to recovery that the insured submit a proof of loss to their insurer within 60 days.

The proof of loss must be signed and sworn and must the date and time of loss, specifications of damaged buildings and detailed repair estimates, and an inventory of damaged personal property. Although normally the insured must submit proof of loss within 60 days, the Acting Federal Insurance Administrator extended this deadline for claims related to Hurricane Isaac, giving plaintiffs approximately 240 days to submit the proof of loss.

The Fifth Circuit Court of Appeals has held that “the provisions of an insurance policy issued pursuant to a federal program must be strictly construed and enforced” and that the failure to provide proof of loss “relieves the federal insurer’s obligation to pay what otherwise might be a valid claim.” Gowland v. Aetna, 143 F.3d 951, 954 (5th Cir.1998). Because plaintiffs failed to produce any evidence that they did in fact timely submit a proof of loss, the Court was compelled to find that FEMA is entitled to summary judgment on plaintiff’s breach of contract claim.

ZALMA OPINION

In state courts dealing with commercially issued insurance policies that contain the same 60-day requirement for a proof of loss required by the Flood Insurance policies, courts will ignore the harsh result unless the insurer can prove it was prejudiced by the delay. However, since flood insurance is issued as a result of a federal statute, there are no arguments available to the insured if he, she, or it fails to present the proof of loss within 60 days or whatever date that was extended. This insured failed even when the claim was presented with the assistance of what was assumed to be an insurance professional.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insurance Policy Means What It Says

No Cover for Person Not Named as an Insured

Some people refuse to accept the fact that an insurance  policy is controlled by the language of the policy if clear and unambiguous. When a policy explains, in clear and unambiguous language, who is insured, no brilliant argument, no Aristotelian logic can change the meaning of the contract of insurance.  For example, in Dean v. Kentuckiana Medical Reciprocal Risk Retention Group, Not Reported in S.W.3d, 2015 WL 603729 (Ky.App., 2/13/15), the Kentucky Court of Appeal was asked to rule that a person not named on a policy of insurance as an “insured” was intended to be an insured.

FACTS

Alan Dean Hicks and Tracy Norris Hicks, individually and as administrators of the Estate of Sarah Elizabeth Hicks, appealed from the summary judgment entered in favor of Kentuckiana Medical Reciprocal Risk Retention Group (“KMRRRG”). The issue on appeal involves insurance coverage; specifically, whether KMRRRG is obligated to provide coverage under a professional liability insurance policy purchased by Pediatric Cardiology Associates, P.S.C. (“the P.S.C. policy”) for the allegedly negligent acts or omissions of one of its physicians, Dr. Christopher L. Johnsrude. The trial court concluded that KMRRRG was not obligated to provide coverage for defense or indemnity.

As an infant, Sarah Elizabeth Hicks was diagnosed with congenital heart conditions that caused her to suffer with an abnormal heart rhythm. On April 14, 2008, Dr. Johnsrude of Pediatric Cardiology Associates performed an electrophysiology study and a cardiac ablation procedure on Sarah. These relatively minor procedures were intended to restore her heart to a proper rhythm. However, following the treatment, Sarah suffered a stroke and died at the age of ten years.

On April 10, 2009, the Hickses filed a wrongful death action against Dr. Johnsrude, Pediatric Cardiology Associates, Norton Hospitals, Inc., and Norton Healthcare, Inc. The claims against the Norton defendants were eventually dismissed by summary judgment, and no appeal was taken.
The Hickses agreed to settle the negligence action that they had brought against Dr. Johnsrude and the vicarious liability claims that they had asserted against Pediatric Cardiology Associates. Under the terms of the settlement agreement, the parties agreed that coverage for the alleged negligent acts or omissions of Dr. Johnsrude was provided by KMRRRG under a professional liability policy issued to Dr. Johnsrude individually. KMRRRG paid out the limits under the Dr. Johnsrude’s policy as part of the settlement of the wrongful death action.

However, KMRRRG and the Hickses did not agree that the separate liability policy issued by KMRRRG to Pediatric Cardiology Associates (the “P.S.C. policy”) provided coverage for the group’s vicarious liability for any negligent acts or omissions of Dr. Johnsrude. The parties agreed to submit that coverage dispute to the trial court for resolution.

The trial court observed that the P.S.C. policy was clear and unambiguous on its face. The policy expressly limited coverage to Pediatric Cardiology Associates and to those physicians and allied health professionals named on a schedule prepared by the group. Only nurses and office staff employed by Pediatric Cardiology Associates were included on the schedule, and there is no dispute that Dr. Johnsrude was not included among those named in the list submitted by the P.S.C. The court observed that no physician was identified in the policy and that no premium was paid for coverage for any liability arising from the negligent acts or omissions of any physician.

ANALYSIS

Summary judgment is proper where there exists no material issue of fact and the movant is entitled to judgment as a matter of law.

The Hickses contend that the circuit court erred by rendering summary judgment in favor of KMRRRG. They argue that the policy issued to Pediatric Cardiology Associates covers claims made against the group for its vicarious liability for the negligent acts or omissions of any physician acting on its behalf. KMRRRG contends that the limited purpose of the P.S.C. policy is to provide coverage to the P.S.C. for liability resulting from the acts or omissions of the allied health professionals and staff employed by the group.

On its declarations page, the P.S.C. policy provides, in part, as follows: “Named Insured  ¶ Pediatric Cardiology Associates, PSC ¶ Insured(s) ¶ Those physicians and allied health professionals who are named on the Schedule of Insureds on file with the company, submitted by the Named Insured.”

The named insured requires each to be listed on “Schedule of Insureds” submitted by the Named Insured. ¶ (3) An Allied Health Professional who is named on the “Schedule of Insureds” but only with respect to Professional Services rendered as an employee of the Named insured or an Insured. ¶ (4) A person or organization which, at the time of a Medical Incident giving rise to a claim under this policy, was an Insured under this policy or prior policies, issued by the Company, which this policy renews.” (emphasis added)

“Insured” is defined in Part II as follows: “any person, corporation, or organization qualifying as an Insured under the Persons Insured provisions of Section I Part C of this policy while rendering services on behalf of their respective University of Louisville Practice Plan.”

After completing its analysis the appellate court concluded that the terms of the policy are clear and unambiguous.  Part I, Paragraph C provides coverage for the P.S.C. “but only with respect to Professional Services rendered by an Insured or by any person other than a physician or dentist under the direction of such Insured, for whose acts or omissions the Named Insured is legally responsible.”

While Dr. Johnsrude may have been rendering services on behalf of the University of Louisville Practice Plan, he did not qualify as an “insured” under the provisions of Part I, Paragraph C of the policy as he was not a physician named on the “Schedule of Insureds;” an allied health professional; or an insured under a prior policy.

Under the very terms of the policy, the definition of “Insured” found in Part II of the P.S.C. policy cannot be read to expand the coverage provided to Pediatric Cardiology Associates,  so as to include coverage for the P.S.C.’s vicarious liability for the acts or omissions of Dr. Johnsrude. That construction proposed by the Hickses is not supported by the clear and unambiguous language of the policy of insurance.

ZALMA OPINION

Insurance policies must, as the Kentucky Court of Appeal found, be read as they are written and not expanded, for reasons outside the contract, to provide coverage where no premium was paid and the insurer took no risk.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Passover 2015

Passover 2015 – In English

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

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

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

Our Version of the Passover Seder are available at http://www.zalma.com/zalmabooks.htm.

 

Posted in Zalma on Insurance | 2 Comments

Discount for Ace Conference

Barry Zalma to Speak at ACE Conference & You Can Get a Discount

 

Here is, from me as one of the speakers, an opportunity to get a discount for attending the 19th Annual America’s Claims Event.

We here at the 19th Annual America’s Claims Event are very excited to welcome you to the event as a speaker in Austin on June 17-19. ACE is a great event and we know you will be an excellent addition to the speaker lineup this year. As a heads-up, we have automatically registered you for the event and no further action needs to be taken on your end with this matter.

Now, there are many industry events out there, and it is our top-notch speaker lineup more than anything else that drives attendees to the event. As such, I would like to provide you with our $100 Guest of Speakers Discount Code – SP100.

This code is designed to encourage you to invite your colleagues/peers/clients to the event as your guest at a discounted rate. An HTML is attached that contains a message that can be easily forwarded to interested parties. We would really appreciate it if you can help spread the word about you speaking at ACE this coming June!

Of course, feel free to reach out with any questions about this or anything else related to the event.

Attend the 19th Annual America’s Claims Event.

AGENDA  SPEAKERS  SPONSORS  VENUE  REGISTER AND SAVE
Every Angle of the Claims Process Covered
with Expertise at ACE 2015

As a speaker at the America’s Claims Event, I would like to extend a special Discount Registration to you to attend the 19th Annual America’s Claims Event in Austin, TX on June 17-19, 2015. Save $100 when you register by May 29th using promo code SP100.

There is no better way to be exposed to new ideas and insights about best practices than attending industry events with our peers.

4 *NEW* FOCUSES FOR 2015
  1. The balancing of innovation and performance in the digital age
  1. Organizational branding & market PR; harnessing the power of new & developing media to engage the client base, improving customer loyalty
  1. Change Management in Claims Transformation
  1. The latest in fraud prevention, preparedness & mitigation

I welcome you to join me at this CAN’T MISS conference. Learn more here!

The Annual America’s Claims Event is one of the ONLY industry events where senior managers, practitioners & experts involved with claims operations can get the insight they need to implement effective and tactical strategies for their claims handling process. More than 400 professionals and decision-makers from mid-size to large Fortune 500 companies attend the event to engage in idea exchanging and peer-to-peer learning. Attendees gain deep insight from the experts and obtain unparalleled access to proven solutions to confront their operational challenges. Register Here Today
Register Today

To take advantage of this $100 discount, mention promo codeSP100 when you register either by phone 888-608-6754 or online on or before May 29th.

Register Online Here

HOW TO REGISTER

Enter Promo Code: SP100

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Discount applies to standard conference rate
and cannot be applied towards existing attendee or additional exhibitor/sponsor staff registrations.

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Is Pool Pop-Out Excluded?

Clear And Unambiguous Exclusion Is Effective

Swimming pools are fun to have but they can often be an expensive addition to a home. A swimming pool is a concrete shell placed in a hole in the ground and held there by the weight of the water kept in the shell. Sometimes science gets in the way. When water gets deep into land the dirt expands and pushes itself upward. If the push from the expanding earth is greater than the weight of the concrete shell and the water in it, the shell will pop out of the ground and cause damage to the hardscape around the pool. Homeowners insurance is not necessarily intended to indemnify for such a loss caused by science and water.

In Liberty Mut. Fire Ins. Co. v. Martinez, — So.3d —-, 2015 WL 585550 (Fla.App. 5 Dist.) the Florida Court of Appeal was called upon to determine the appeal filed by Liberty Mutual Fire Insurance Company (“Liberty”) to set aside a summary judgment entered in favor of its insureds, Nigel and Melissa Martinez, and determine if the water damage exclusion applied.

FACTS

Liberty issued an all-risk insurance policy to the Martinezes insuring their residence and other structures located on their property. During a tropical storm, Nigel Martinez partially emptied his family’s in-ground swimming pool because it was overflowing. The following day, he discovered that the pool had lifted out of the ground. As would be later agreed upon by experts, subsurface water accumulated underneath the pool during the storm, which exerted hydrostatic pressure on the partially emptied pool. This pressure caused the pool shell to lift out of the ground, damaging the shell as well as the pool deck, rock garden, and waterfall.

Thereafter, the Martinezes filed a claim with Liberty, which was denied on the ground that the Water Exclusion provision in the policy excluded damage caused by hydrostatic pressure from coverage.

THE POLICY

The questioned exclusion provides: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.  ¶ …. ¶  c. Water Damage, meaning:  (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind; ¶ …. (3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.” (Emphasis added).
In response, the Martinezes filed suit for breach of contract and argued that their damage was covered under the ensuing-loss provision in the policy.

Both sides moved for summary judgment. The trial court found that the direct cause of the Martinezes’ damage was the pool shell coming out of the ground, rather than the hydrostatic pressure. Accordingly, the court found that the damages were ensuing losses covered by the policy, denied Liberty’s motion for summary judgment, and granted the Martinezes’ motion for summary judgment.

ISSUE

The issue on appeal is whether the Water Exclusion provision excludes the Martinezes’ losses from coverage.

ANALYSIS

Insurance policies are construed in accordance with the plain language of the policy and must be read as a whole, giving each provision its full meaning. As a general rule, insurance coverage must be broadly construed in favor of the insured, while exclusions must be narrowly construed against the insurer. Insurance policies may contain exclusionary provisions that exclude certain risks from the scope of coverage, and exclusionary provisions may carve out coverage exceptions for losses that ensue from an excluded cause of loss. The court of appeal noted that ensuing-loss exceptions are not applicable, however, if the ensuing loss was directly related to the original excluded risk.

Although there are no Florida cases on point, courts in New York and South Carolina have interpreted similar anti-concurrent cause provisions and applied those provisions to analogous facts. For example, in Jahier v. Liberty Mutual Group, 883 N.Y.S.2d 283, 284–86 (N.Y.App.Div.2009), rainfall increased hydrostatic pressure surrounding the insureds’ drained swimming pool and forced it out of the ground. As a result of the pool lifting out of the ground, the pool, surrounding patio, and plumbing were damaged. The insureds filed a claim with their insurer for those damages. Notwithstanding the rainfall and drainage of the pool contributing to the losses, the court held that the water damage exclusion clearly and unambiguously applied to the insureds’ losses.  Similarly, in South Carolina Farm Bureau Mutual Insurance Co. v. Durham, 671 S.E.2d. 610, 612–14 (S.C.2010), the court found that the insureds’ damages—which were sustained when rain increased hydrostatic pressure around their pool, forcing the pool out of the ground and damaging their deck—were excluded from coverage because the policy contained an anti-concurrent cause provision that applied to water damage. Because water pressure was one of the causes that forced the pool out of the ground, the court concluded that the water damage exclusion applied.

The court of appeal agreed with Liberty that under the policy’s plain language, the damage to the Martinezes’ pool deck, rock garden, and waterfall was not an ensuing loss. Rather, the policy expressly excluded the Martinezes’ loss as it specifically excluded losses that occurred directly or indirectly from subsurface water pressure. The damage to the deck, rock garden, and waterfall resulted, directly or indirectly, from subsurfa the court found no reason to look to the ensuing-loss provision.

ZALMA OPINION

Although the thought of something as big and heavy as a swimming pool popping out of the ground like a cork popping off a bottle of sparkling wine is difficult to conceive, it happens more often than one might believe. The effect of hydrostatic pressure is not unusual and is scientifically well known. For that reason the homeowners policy contains the exclusion applied by the court because insurers cannot properly calculate a premium to accept a risk of losing a swimming pool or other property by hydrostatic pressure.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud Fails Occasionally

    Zalma’s Insurance Fraud Letter

February 15, 2015

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

The current issue of ZIFL reports on:

1.    Insurance Fraud Conviction Affirmed.
2.    New From Barry Zalma
a.    Ebooks
i.    Getting the Whole Truth
ii.    Random Thoughts on Insurance – Vol. III
b.    National Underwriter Publishes:
i.    Insurance Claims: A Comprehensive Guide;
ii.    Construction Defects Coverage Guide; and
iii.    Mold Claims Coverage Guide
iv.    All Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    The Insurance Fraud Deskbook
3.    Coalition Against Insurance Fraud Chooses 2015 Leadership Slate
4.    Insurer Agrees to Pay $1.3 Million to California For Fraud In Annuity Sales.
5.    News From the Insurance Research Council
6.    Say It Isn’t So.
7.    Bank Pays Allstate for Mortgage Fraud
8.    Insurance
9.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to shrink in 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

The last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    Interviewing is an Art & Science – February 13, 2015
2.    New E-Books from Barry Zalma – February 12, 2015
3.    Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith – February 12, 2015
4.    Misrepresent Material Fact – Lose Coverage – February 11, 2015
5.    Mailing is All Needed to Perfect Nonrenewal – February 10, 2015
6.    It Doesn’t Pay to Seek Penalties Not Owed – February 9, 2015
7.    Investigating Arson For Profit – February 6, 2015
8.    Covenant Not to Execute Not A Release – February 5, 2015
9.    Duty to Defend Not Effected by Denial of Motion for Summary Judgment – February 4, 2015
10.    Evidence Required to Defeat Summary Judgment – February 4, 2015
11.    Endorsement Trumps Body of Policy – February 3, 2015
12.    Crime Often Pays Until the Criminal Is Caught – February 2, 2015
13.    Insurance Fraud Continues Unabated – February 1, 2015
14.    Don’t Sue Your Agent Until Action Accrues – January 30, 2015
15.    No Good Deed Goes Unpunished – January 29, 2015
16.    When Are Operations Completed? – January 29, 2015
17.    The Staged Insurance Loss – January 28, 2015
18.    Insured Owes Utmost Good Faith To Insurer – January 28, 2015
19.    Insurer Not Obligated to Pay High Bid – January 27, 2015
20.    Careful With Applications – January 26, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Interviewing is an Art & Science

Getting the Whole Truth

The following is an excerpt from my ebook “Getting the Whole Truth” now available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.

Prejudice Blocks the Truth

The foremost aim of the interview is to learn the truth, the whole truth, and nothing but the truth. Truth can only be obtained by an accurate classification of facts obtained through a methodical and detailed investigation and interview. In this regard, the greatest danger any interviewer faces is that resulting from entering into an interview with preconceived opinions.

As the philosopher William James said, “A great many people think they are thinking when they are merely rearranging their prejudices.”

No professional can conduct an effective interview if he or she is convinced, prior to the start of the interview, that the witness will be truthful (or untruthful). A hallmark of the professional is that he or she remains vigilant in this regard, trained to avoid all preconceived opinions and prejudices that could endanger the success of an interview.

Sometimes an unskilled interviewer will jump to a conclusion of guilt long before the interview itself is conducted. Based on such things as the subject’s family background, social position, or seeming lack of an alibi, the novice interviewer’s tendency to prejudge will inevitably limit the effectiveness of the truth-seeking process and the scope of the interview. Starting an interview with a preconceived notion of any kind will simply cause the interviewer to miss important facts . . . facts that his or her prejudices did not envision or investigate.

The tendency to prejudge is extremely common. Insurance brokers, consummate salespeople, feel they could never be deceived by a wealthy customer who pays the full premium before inception. Mothers ardently believe their children would never lie to them. There are police officers who cannot comprehend that a wealthy individual living in Beverly Hills or Vail can commit a petty crime. Judges and lawyers doubt children have the guile to effectively lie to them. Most businesspeople believe a long-time or politically connected customer would never cheat.

Similarly, many inexperienced interviewers immediately assume that an individual is lying because he or she has a past criminal record, or is from a particular racial group or of a particular religion . . . or for any of thousands of other “reasons’” founded in nothing more than the personal biases of the interviewer himself or herself. Prejudice based on preconceptions about the wealth, age, gender, race, religion, or national origin of the subject must be avoided by every professional, not simply as an obvious and positive egalitarian principle, but as anathema to conducting a successful interview. Everyone has prejudices, but the prudent professional recognizes this, places judgment “on hold,” and keeps it out of any interview.

When conducting an interview, the professional accepts that the witness will also, in James’s words, be rearranging his or her prejudices throughout the process. An interviewer who cannot dismiss prejudice during an interview tends to look for and listen to only those things that confirm his or her prejudice. He or she will never get the truth; even if it presents itself he or she will not hear it if it does not comport with the preconceptions, biases, and prejudices he or she brought to the interview.

The Interviewer Who Is Not Objective Has Failed before the Interview Begins

To avoid the negative effects of his or her own prejudices, the professional:

  • believes only what is corroborated and proven
  • never lets personal biases or prejudices color his or her judgment
  • never allows a subject’s personal charisma to influence or curtail an interview
  • exploits the expressed prejudices of the subject to gain truthful answers

Yes; you read that last point right: ironically, the witness’s prejudices and preconceived notions can be used by the skilled interviewer to get to the truth quicker. For example, when interviewing a person who expresses racist opinions, the interviewer can use knowledge of those prejudices to develop a false but effective rapport with the subject. Or, by challenging the subject’s apparent racist attitudes, the interviewer can anger the subject enough that he or she lets loose with a vituperative explosion of words that could provide the breakthrough needed to allow the interviewer to get the whole truth.

Demeanor: Always Remain Calm

Never lose your temper. It’s liable to frighten the subject, and few will respond to or confide in those they fear. Faced with rage, the subject will limit his or her answers to single-syllable words and provide no useful information.

Furthermore, if you lose your temper you will no longer be able to think clearly, nor plan the next step in the interview. You will be forced to cede control of the interview, which will render it ineffective. Like a chess match, the interview must be planned and executed with knowledge of the next four to 10 moves; there is no room for outbursts of temper. If you lack anger management skills, the interview is bound to fail.

Maintain Perspective

The professional never lets a subject think that a full response to all questions is more important to the professional than it is beneficial to the witness him- or herself. Therefore, the professional should not appear to be trying too hard, and should not permit his or her consciousness of the interview’s importance to contribute to an atmosphere of stress. Much as the manager of a business might tell his sales personnel not to use the hard sell technique on a client, the skilled interviewer should not appear to be trying too hard to “oversell” the witness on the necessity of telling the truth. Rather, the interviewer should convey confidence that the truth will be forthcoming.

The interviewer who tries too hard to convince the witness of the necessity for telling the truth is like the young Roman Catholic lady who fell in love with a Protestant. Her mother suggested to her that perhaps he could be taught the tenets of their faith and be converted to Roman Catholicism.

A week later the girl came home in tears. She sobbed:

“I oversold him! He decided he was going to study for the priesthood!”

Have Faith in Your Abilities . . . and in the Process

As an interviewer you will on occasion find yourself discouraged with the lack of progress in an interview. It is important to keep in mind that these periods of depression also strike the world’s greatest athletes, singers, and other performers.

One of two things can happen to the interviewer faced with an interview slump:

  • The interviewer becomes so discouraged that he or she gives up trying.
  • The interviewer works his or her way out of the situation.

Far from allowing him- or herself to succumb, he professional persists by resorting to a multiplicity of tried-and-true techniques, sticking to the fundamentals, and maintaining confidence in the process until the truth is obtained. Like a baseball player in a hitting slump, the professional recognizes that it is necessary to work through the slump . . . to continue confidently applying the process until success ensues. The professional who keeps studying, practicing, reviewing, and interviewing will find that such periodic slumps soon end. He or she recognizes that instances of failure are just slip-ups on the stepping stones on the path to becoming a truly great interviewer.

The Effective Interviewer

The effective interviewer:

  • has self-confidence and demonstrates it
  • is courteous, even in the face of discourtesy
  • honors his or her promises and controls his or her passions
  • wins respect by being respectful and respectable
  • turns up with a smile even when turned down
  • understands, and is understood by, people
  • has faith in purpose
  • is persistent
  • gets all the truth that can be gotten from an interview

Qualifications of an Interviewer

Key qualities a skilled interviewer possesses include:

  • an interest in the operations of human nature
  • a thorough knowledge of the principles of civil investigation
  • a thorough knowledge of the specific subject matter of the interview
  • the ability to engender trust and inspire confidence

Actors often have months in which to learn their lines, practice their gestures, and incorporate their reactions. Moreover, movie or TV actors can always resort to calling for a retake if anything goes wrong in a performance. If an actor is great, his or her words can affect our emotions, even though we know the lines are only scripted by professional writers. We cry at the death scene, even as we are fully aware that it is just the movie character who is dying, not the actor, whose sixth divorce was splashed all over the tabloids last week.

The interviewer must be an actor. No!—He or she must be more than just an actor: the true interview professional must be a consummate actor, the kind of acting professional who does not merely mouth lines someone else has had the luxury of many weeks’ time to write. The interviewer must be ready to improvise and deliver lines with lightning speed, adapting to any and all possible shifts in the interview drama. He or she has no truly meaningful chance to practice the art of interview except within the interview itself. Neither is the interviewer provided with a director to instruct him or her in the use of gestures to maximize dramatic effect. The interviewer is strictly and entirely alone. Any mistakes made in the interview are final. There are no retakes.

An ordinary stage actor performs in front of an audience that is at least 20 feet away. The audience members to whom the professional interviewer plays can be as close as four inches away. If the performance is less than flawless, the audience will not believe the performance and will be silent. If the audience is silent, the performance—the interview—is a failure.

When an actor is doing a good job, the performance itself is invisible. The audience suspends disbelief and the character being portrayed comes to life. Similarly, though it is apparent to the witness when the interviewer is doing a bad job, a good performance by the actor/interviewer passes for reality and the subject becomes convinced of interviewer’s persona and role, forgetting for the moment—or never fully realizing—that he or she is being interviewed. When the interviewer’s acting skills are “on,” the interviewer and the subject become just two interested parties having a lively conversation. Information gained from that purposeful but improvised “conversation” is more detailed than any information extracted through the well-known “third degree” tactic of interrogation. The subject will have no hesitation to converse and will freely convey information.

Consummate acting skills, along with patience and diligence, will give the interviewer information-laden answers like:

“I obtained my Masters degree in biology from Oxford.”

“I’d never wear those ugly-ass shoes!”

“It depends on what the meaning of ‘is,’ is.”

“She had sex with me. I did not have sex with her.”

“I didn’t buy any gasoline in a can.”

“I never had an insurance policy cancelled.”

All these are definite statements that can be corroborated, supported, or proven false by further investigation. If lies are produced in the free flow of this well-acted conversation, they can eventually be proven to be such. If the truth emerges, the ongoing interview and continuing investigation will prove it out. In either case, the interviewer’s acting skill will have produced a wealth of material to verify later, and the interview will be well on the way to a successful conclusion.

The person interviewed is the toughest drama critic in the world. If the interviewer does the acting job correctly, the subject will become not only a spectator but a willing participant, and a complete story will unfold. The subject who participates and tells a complete story even when doing so disadvantages him or her is in effect giving the interviewer a rave review! Again, the acting can only be of the highest quality: if the understudy actor/novice interviewer hams it up or flubs a line, the subject will immediately sense the attempted deception and withdraw. The interview will effectively be over. No matter how long the “performance” is dragged out, it will get nowhere.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

New E-Books from Barry Zalma

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New E-B00ks From Barry Zalma

Getting the Whole Truth

The interview is an essential form of fact gathering for every type of human interaction. Interviews happen everywhere; they are performed by almost everyone. Interviewing is also an art, and the most effective interviews are conducted by those who are knowledgeable and skilled in this art.

The purpose of an interview is to uncover the truth; the method of uncovering the truth is the art of the interview. The standard interview does not have, nor should it be given, the pejorative sense conveyed by the expression “giving someone the third degree.” Interview professionals do not use rubber hoses or hot lights, or subject the interviewee to torture. In their limited arsenal, professionals do not have the power of the state, the reputation of the FBI, the majesty of a court trial, nor the intimidation of a search warrant.

Civil interviewing professionals are, therefore, compelled to get the information they need by intelligence, wit, skill, and experience. They must be masters of the social graces; they must know how to put people at ease. The skill of the professional causes the person being interviewed to actually want to give information to the interviewer. When the interview is successful, the subject becomes a virtual partner with the professional in the effort to uncover the truth, the whole truth, and nothing but the truth.

This ebook will help anyone who needs to obtain information from anyone else gain the information needed whether a business person, reporter, interviewer, investigator or lawyer.
The book will be delivered to you by e-mail shortly after purchase.

Random Thoughts on Insurance – Vol. III

Since 2010 I have been writing a blog post at least five days a week. This e-book is a collection of those posts that reveal my interest in insurance case law. Some of the cases reviewed were important. Some were of first impression. Others will be totally unimportant. All were interesting to me and I hope are interesting to the reader. This e-book is more than 1200 pages of my review of interesting cases from 2013 through January 2014.
After you purchase please wait for the e-book to upload from PayPal. If it does not upload please e-mail zalma@zalma.com and I will personally send you a copy of the e-mail in pdf format.

Both are available with payment through PayPal.

 

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Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith

Defense Duty Exists Without Right to Indemnity

Indemnity agreements and additional insured agreements go hand in hand. The insurer agrees to produce the defense and indemnity its insured agreed in the indemnity agreement. Sometimes, the insurer is kept in the dark about a case for years only to learn about a suit shortly before trial or after a settlement is reached. In Kmart Corp. v. Footstar, Inc., — F.3d —-, 2015 WL 448633 (C.A.7 (Ill.) 2/4/15) the Third Circuit was called upon to resolve such a situation where, under an agreement between Footstar and Kmart, Footstar operated the footwear departments in various Kmart stores as though they were islands. Footstar employees could only work in those departments unless they had written permission from Kmart. On July 27, 2005, a Footstar employee tried to help a customer get an infant carrier off a shelf outside the footwear department and the customer was injured. She sued, and Kmart eventually sought indemnification for the settlement and defense costs from Footstar and its insurer, Liberty Mutual.

BACKGROUND

Section 18.1 of the Master Agreement required Footstar to defend and indemnify Kmart under certain conditions. On July 27, 2005, a customer named Judy Patrick walked into a Kmart store in Hollywood, Florida. According to her complaint, she asked for assistance from Alex Sehat, who turned out to be a Footstar employee, in getting a stroller down from a shelf. Sehat, along with a Kmart employee, reached up and attempted to bring the stroller down. As they were bringing it down, an infant carrier inside the stroller fell and struck Patrick in the face. The accident took place in the infant/stroller department, which is entirely outside of the Footstar department.

Patrick sued Kmart alleging negligence, with no mention of Footstar in her initial complaint. But Patrick’s counsel discovered during the course of the litigation that Sehat was actually a Footstar employee and called Footstar a year into the suit to get Sehat’s employment records. Footstar contacted Liberty Mutual.

Shortly thereafter Kmart defense counsel wrote to Footstar formally requesting defense and indemnification for the first time. Footstar forwarded the request to Liberty Mutual and Patrick amended her complaint two days later to include Footstar as a defendant. Liberty Mutual wrote Kmart refusing to defend or indemnify, stating: “Footstar is not responsible for the referenced claim as it is not a product liability incident.”

Kmart settled with Patrick eight months later for $300,000 and $10,000 in Kmart gift cards.

The Declaratory Relief Action

Kmart then filed a complaint in this action originally against Footstar only, but then added Liberty Mutual, alleging both owed Kmart a duty of defense and indemnification for the Patrick suit. The magistrate judge entered partial summary judgment on Kmart’s breach of contract and declaratory judgment counts, finding both defendants owed a duty to defend, but only as of January 24, 2008, when Kmart first requested defense. The court found Liberty Mutual and Footstar also had a duty to indemnify but only for Footstar’s relative fault, which a jury apportioned at 15%. The court also found Liberty Mutual did not act in bad faith by denying coverage and Kmart did not breach the notice provisions of the Policy and Master Agreement. Kmart appealed naming only Liberty Mutual as an Appellee, while Liberty Mutual and Footstar cross-appealed.

ANALYSIS

The issues on appeal are whether: (1) Footstar and/or Liberty Mutual had a duty to indemnify Kmart; (2) Liberty Mutual and/or Footstar had a duty to defend Kmart and, if so, when that duty began; (3) Liberty Mutual acted in bad faith by denying coverage; (4) Kmart breached the notice provisions of the Policy and Master Agreement; and (5) the court erred in denying Kmart’s motion for prejudgment interest.

Liberty Mutual and Footstar Did Not Have a Duty to Indemnify

Liberty Mutual and Footstar appeal the magistrate judge’s determination that they had a duty to indemnify Kmart for the Patrick suit. The magistrate judge found Liberty Mutual and Footstar liable because it determined the injury arose from Footstar’s work. However, Liberty Mutual /Footstar contend the court ignored the requirement that any injury had to arise “pursuant to” or “under” the Master Agreement to trigger indemnification, and the Master Agreement explicitly prohibited Sehat’s out-of-department action that resulted in the injury.

The duty to indemnify only arises where the insured’s activity and the resulting damages actually fall within the coverage of the policy. In order to determine whether an activity actually falls within the coverage of the policy, the court must review the plain language of the policy. Indemnity contracts are to be strictly construed, and any ambiguity in the agreement is to be construed most strongly against the indemnitee, in this case, Kmart.

Under subpart 1 of the additional insured clause, Liberty Mutual was liable to Kmart for injuries “arising out of” Footstar’s “work.” Under subpart 2, the Policy applies only to “coverage and limits of insurance required by” the Master Agreement, but coverage will “in no event exceed[ ] either the scope of coverage or the limits of insurance provided by this policy.”

Turning to Footstar, it had a duty to indemnify for those injuries “arising out of [Footstar’s] performance or failure to perform under this Agreement.” Again, any indemnification obligation only relates to those acts taken “under [the] Agreement.” A breach of contract, however, was not a “performance” under the Master Agreement—it was an act taken in direct violation of the contract. For the same reasons as with Liberty Mutual, Footstar had no indemnification obligation for its performance.

Liberty Mutual and Footstar Had a Duty to Defend and Are Liable for Defense Costs from When They Received Notice

The duty to defend is broader than the duty to indemnify. The complaint alleged that Footstar caused Patrick’s injuries by “negligently and carelessly … failing to properly remove” the infant stroller from the shelf. Based on these allegations and the expansive way “arising out of” has been interpreted by Illinois and New Jersey courts, the claim could have been potentially covered under subpart 1. There is certainly an argument that Patrick’s injury arose from Sehat’s “work or operation[ ]”, especially if the injury does not have to be “pursuant to” the Master Agreement, as required by subpart 2.

Although the court rejected these readings for indemnity purposes, two triers of fact found that the injury arose from Footstar’s work, including the jury and the magistrate judge, showing the injury was potentially coverable under the terms of the Master Agreement and Policy.

Liberty Mutual Did Not Act in Bad Faith

While Liberty Mutual had a duty to defend, the flip side is that Liberty Mutual had a defensible position and therefore did not act in bad faith in denying coverage. “[I]n order to prove a claim of bad faith under New Jersey law, a plaintiff must prove that: ‘(1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.’” Certain Underwriters at Lloyd’s of London v. Alesi, 843 F.Supp.2d 517, 531 (D.N.J.2011) (citation omitted).  Though Liberty Mutual’s denial letter erroneously refused coverage based on the nature of the complaint—there was an indemnification requirement for personal injury and not just products liability—Liberty Mutual’s position was, at the very least, “fairly debatable” at the time Liberty Mutual denied coverage.

Footstar and Liberty Mutual Cannot Deny Defense Costs Based on Kmart’s Breach of the Notice Provisions

Kmart did not alert Liberty Mutual or Footstar to the suit until thirty months after it first learned about the claim and one-and-a-half years after the suit was filed. This was in contravention of the notice provisions in both the Master Agreement and the Policy.  However, that does not mean that Kmart’s actions precluded it from recovering defense costs. Under New Jersey law, an insurer must show that it was appreciably prejudiced by its insured’s failure to cooperate in order to disclaim coverage based on that failure.  Absent any evidence that the case would have come out differently had the insurer been involved earlier, the third circuit found no bad faith on Liberty Mutual’s part.

ZALMA OPINION

Almost every policy of liability insurance and indemnity agreement requires prompt, if not immediate, notice to the insurer and the indemnitor. In this case that prompt notice was not provided. Regardless, defense duty was owed because there was a potential for coverage, but only from the time of notice. Also, even though the insurer denied coverage in error it had a fairly debatable position and thus avoided bad faith allegations.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Misrepresent Material Fact – Lose Coverage

Uberrimae Fidei Allows Voidance of Marine Insurance Policy

Insurance has, from its inception, been an agreement requiring utmost good faith by both parties to the contract of insurance. As used in maritime insurance failure of an insured to deal in the utmost good faith with its insurer allows the insurer to void the insurance.

A marine insurer sued its insured seeking a declaration that a maritime insurance policy for the insured’s floating drydock was void. The trial involved a maritime insurance policy issued by Appellee Catlin (Syndicate 2003) at Lloyd’s (“Catlin”), to cover the floating drydock Perseverance owned by San Juan Towing and Marine Services (“SJT”), a ship repair company based in San Juan, Puerto Rico. At trial, the district court concluded that the insurance policy was void ab initio by reason of SJT’s violation of the doctrine of uberrimae fidei in its application for the policy. SJT appealed in Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing and Marine Services, Inc., — F.3d —-, 2015 WL 500744 (C.A.1 (Puerto Rico) 2/6/2015) requiring the First Circuit to determine whether the doctrine of Uberrimae Fidei, utmost good faith, applied to the sinking of the floating dry dock.

BACKGROUND

In 2006 SJT purchased the Perseverance for $1,050,000. Subsequently, SJT made improvements to the floating drydock, modifying it so that it could be towed from Louisiana to Puerto Rico. Marine Consultants then issued a valuation report on November 21, 2006, in which it valued the floating drydock at $1,750,000. By 2009, and as late as 2011, due to declining business and increasing financial distress, SJT was actively trying to sell the Perseverance. After failing to sell the dry dock by reducing prices from in September 4, 2011, SJT agreed to sell the Perseverance to Leevac Shipyards (“Leevac”), a Louisiana-based company, for $700,000. However, the deal later fell through.

Between August 2006 and February 2011, SJT insured the Perseverance with the RLI Insurance Company (“RLI”), with a declared hull value of the Perseverance under this policy of $1,750,000, presumably based on the Marine Consultants condition and valuation report dated on November 21, 2006. In February 2011, RLI cancelled the drydock’s insurance policy, cryptically stating “Loss History” as the reason.

Thereafter, at SJT’s request, SJT’s insurance broker, John Toscani (“Toscani”), who was located in New York, approached Catlin seeking, through Lloyd’s, a marine insurance policy “consisting of hull, [protection and indemnity], ship repairs, general liability and contractor’s equipment” (emphasis added). SJT’s broker represented that the Perseverance’s prior insurance coverage was for $1,750,000, but did not provide Catlin with a copy of RLI’s notice of cancellation.  Most importantly, SJT also did not disclose information regarding substantial, preexisting damage to the Perseverance’s hull, which had been evident since at least April 2010.

SJT tug Captain Padilla (“Padilla”) returning from a towing assignment called SJT manage to inform him of the total sinking of the Perseverance. They observed that a fire hose connected to a water main on the dock was still pumping water into the sunken drydock, with the valve on shore still in an open position. Payne proceeded to shut the valve, which was easily seen and accessible to anyone who wished to turn off the flow of water.

SJT proceeded to file a claim with Catlin, alleging the total loss of the Perseverance, in the amount of $1,750,000. Catlin denied this claim, relying on the discrepancy between the amount the Perseverance was insured for according to the Endorsement ($1,750,000) and its actual market value (approximately $700,000 to $800,000), as evidenced by the sale price advertised to potential buyers around the time when SJT sought the quote for the Policy.

On October 8, 2013, after a bench trial, the district court resolved the merits of this controversy. See Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 979 F.Supp.2d 181, 191 (D.P.R.2013) ( “Catlin IV ”).

DISCUSSION

The application of the doctrine of uberrimae fidei to this controversy, which the First Circuit concluded only existed in modern American jurisprudence in the context of maritime insurance, depends on the outcome of the central issue raised by SJT both here and below: whether Puerto Rico’s Insurance Code, P.R. Laws Ann. tit. 26, §§ 1101 et seq. (“the Code”), is the controlling substantive law in this controversy rather than general federal maritime law.

As a general rule, in the absence of established and governing federal admiralty law, the states have largely unfettered power to regulate matters related to marine insurance. The rules of admiralty and maritime law of the United States are presently in force in the navigable waters of the United States in and around the island of Puerto Rico to the extent that they are not locally inapplicable either because they were not designed to apply to Puerto Rican waters or because they have been rendered inapplicable to these waters by inconsistent Puerto Rican legislation.

There can be no doubt that the Policy is an ocean marine insurance policy. The Policy was procured for SJT by Toscani, who “placed a package policy consisting of hull, P & I, ship repairs, legal, general liability and contractors equipment” (emphasis added), with Catlin. Indeed, Toscani admitted that he considered the Policy to be a marine insurance policy. Based on the evidence presented, the district court found as follows: “The Perseverance was designed, constructed, and used to provide marine maintenance and repair services to vessels,” and “[i]ts intended use [was] to lift floating equipment for inspection and repair.”

Marine insurance is vital to the adequate flow of commerce. The nature of the risks that are covered by maritime insurance is such that, given the urgent necessity for the placement of this type of insurance coverage that is often present in the business of maritime commerce, as well as the extreme distances that often separate the insurance seeker and the insurer, it is imperative that the insurer be provided with truthful and valid information about the risk the insurer is asked to undertake by the party most able to provide such data: the insured.
Uberrimae fidei is an established rule of maritime law. This ruling should hardly be surprising. As early as 1828, the Supreme Court characterized an insurance contract as “a contract uberrimae fidei.McLanahan v. Universal Ins. Co., 26 U.S. 170, 185, 1 Pet. 170, 7 L.Ed. 98 (1828).

At the bench trial, Richard Thompson (“Thompson”), a hull inspector who surveyed the Perseverance, testified that he found “heavy wastage” in the drydock’s hull during an April 2010 inspection. After Thompson notified SJT of the rust and deterioration problems, SJT admitted that “those damages were pre-existing.” Because the Perseverance was not in prime condition and business was slow, SJT offered to sell the floating drydock to potential buyers at a price between $700,000 to $800,000, which presumably approximated its actual value at the time. Indeed, in April 2011—the same month that the Catlin Policy took effect—SJT advertised the Perseverance for sale at a price of $800,000. Yet, SJT, in its request for marine insurance coverage from Catlin, represented to Catlin that the Perseverance had been previously insured by RLI for $1,750,000—$700,000 more than what SJT paid for the drydock originally. Catlin could have reasonably assumed the value presented to it in the previous insurance policy from RLI as the actual value and evaluated its risks based on the conditions it would have reasonably expected from a drydock of that value. SJT’s failure to disclose the true value of the Perseverance, what SJT paid for the Perseverence, and the Perseverance’s level of deterioration, therefore, are all material facts, the nondisclosure of which violates uberrimae fidei.

Under uberrimae fidei, when the marine insured fails to disclose to the marine insurer all circumstances known to it and unknown to the insurer which “materially affect the insurer’s risk,” the insurer may void the marine insurance policy at its option. In other words, the policy becomes voidable. As discussed above, the evidence conclusively shows that SJT failed to disclose material information about the Perseverence’s actual value and preexisting deteriorated condition prior to Catlin determining whether it would accept the risk. Catlin was free, therefore, to void the policy.

SJT violated the doctrine of uberrimae fidei in its procurement of the Policy. Thus, Catlin was entitled to void the Policy. The decision of the district court is affirmed, however, its holding is modified to reflect that the contract was voidable, not void ab initio.

ZALMA OPINION

Uberrimae fidei Latin for utmost good faith. It, contrary to the First Circuit’s comments, applies in every jurisdiction as a concept of how the business of insurance should be conducted. For example, in New York or California, even an innocent misrepresentation of the value of a property over half its true value, would allow the insurer to rescind the policy from its inception (ab initio). In cases of marine insurance, rather than allow rescission, the First Circuit concludes that the insurer can declare the policy void in the event of a material misrepresentation. A difference without meaning since, in either case, the insured is without coverage and the policy void.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Mailing is All Needed to Perfect Nonrenewal

Agent Not Required to Inform Insured of Nonrenewal

Some cases go on and on with trial decisions reversed, remanded, retried and appealed again. In Collins v. State Farm Ins. Co., — So.3d —-, 2015 WL 468970 (La.App. 4 Cir.), 2014-0419 (La.App. 4 Cir. 2/4/15) after eight years of litigation over damages resulting from Hurricane Katrina the insured ended up with nothing. His last attempt at recovery was to sue his agent for negligence because he did not inform the plaintiff that his policy had been non-renewed well before Katrina hit New Orleans.

The insured, Edward Collins, brought this suit against his insurer, State Farm Fire and Casualty Company (“State Farm”), and his insurance agent, Reggie Glass. From the trial court’s judgment granting Mr. Glass’ motion for summary judgment. Mr. Collins appeals.

FACTUAL BACKGROUND

In January 2000, Mr. Collins filed a claim under his homeowner’s policy with State Farm for roof damage to his property located at 7508 Lafourche Street in New Orleans, Louisiana. State Farm adjusted the claim and paid the damages due under the policy. In September 2004, Mr. Collins submitted another claim under his homeowner’s policy. During its investigation of this claim, State Farm discovered that Mr. Collins failed to repair his roof after he was paid for his 2000 claim. State Farm thus decided not to renew Mr. Collins’ homeowner’s policy when it expired on May 30, 2005. On April 27, 2005, State Farm sent a notice of nonrenewal to Mr. Collins and his mortgagees. Mr. Collins alleged that he never received a notice of nonrenewal.

On August 28, 2006, Mr. Collins sued State Farm and Mr. Glass. Collins alleged that State Farm violated its duties as an insurer by failing to adjust his claim and by denying coverage in bad faith. He alleged that the week before Hurricane Katrina, Mr. Glass, his insurance agent, informed him that he was fully covered with his flood and homeowner’s insurance policy.

In the deposition of Ms. Jackson, Mr. Glass’ assistant, she testified that the computer system that they used at the time, ECHO, would not display an insurance policy that had been cancelled or non-renewed for more than thirty days. Thus, she contended that Mr. Collins’ story that she turned the computer around and showed him his policy was impossible.

State Farm filed its motion for summary judgment. It contended that it mailed a notice of nonrenewal of the homeowner’s policy to Mr. Collins in compliance with Louisiana law; thus, it contended that it should be dismissed from the lawsuit. The trial court granted State Farm’s motion for summary judgment.

Louisiana law requires that statutes be applied as written and no further interpretation made in search of the legislature’s intent when the law is clear and unambiguous and its application does not lead to absurd consequences. In the present case, the statutes’ language is clear. The mailing of a notice of nonrenewal to the insured’s address, as listed on the policy, at least thirty days before the expiration of the policy, satisfies the burden placed upon the insurer. Noticeably absent from the statutes is language requiring the notice of nonrenewal be received in order for it to be effective.

State Farm presented the trial court with a Certificate of Mailing Listing authenticated by a team manager’s affidavit. The certificate bore the signature of State Farm Postal Operator Margaret Wynn and U.S. Postal Operator Larry Bailey, Jr., the two persons involved in the mailing of Mr. Collins’ nonrenewal notice. The certificate included the name and addresses for the notice recipients, as well as, copies of the notices. These documents indicated that Mr. Collins and his first and second mortgage holders were sent nonrenewal notices on April 27, 2005.

Once State Farm established mailing as required by the applicable statutes, the burden shifted to Mr. Collins. Since receipt of the nonrenewal notice is not required by law, the mere denial of receipt cannot create a genuine issue of material fact under these circumstances. Mr. Collins was unable to produce any evidence that the notice was not mailed.

DISCUSSION

The Louisiana Supreme Court held in the past that an insurance agent owes a duty of “reasonable diligence” to his customer. The duty of “reasonable diligence” is fulfilled when the agent procures the insurance requested. The statute is clear. The insurance agent has no additional or independent duty to inform the insured of the insurer’s decision not to renew. Thus, Mr. Glass had no duty to inform Mr. Collins of State Farm’s decision not to renew his homeowner’s insurance policy in September 2004 or thereafter.

Although Mr. Collins contends that Mr. Glass should have at least informed him of State Farm’s notice of nonrenewal when Mr. Collins’ visited his office in July 2005, Mr. Collins himself admitted, in his deposition, that he had never seen Mr. Glass before Hurricane Katrina, which occurred in August 2005.

ZALMA OPINION

It is almost a certainty that when a loss happens after a policy has been cancelled or non-renewed that the insured will claim that he did not receive the notice. That is the reason why Louisiana law, and that of most states, requires only that the insurer prove mailing. Mr. Collins was not an honorable insured. He took money from State Farm to repair his roof after a legitimate loss only to not use the money to repair it. As a result State Farm decided to non-renew. Mr. Collins ignored the notice of nonrenewal and litigated this case for eight years when, he should have known he had no coverage because he did not receive a bill to pay premium to renew. He gambled that he would not have a loss. Katrina proved his gamble was not a wise one.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

It Doesn’t Pay to Seek Penalties Not Owed

Settlement Is Only a Settlement When Agreed to In Writing

States, like Louisiana, have enacted statutes requiring insurers to pay an agreed claim immediately but no later than 30 days from the date of the agreement. In Louisiana a court can assess a penalty even if the payment is made 34 days after the settlement agreement. However, to get the penalty it is necessary that the statute be read strictly and there must be evidence to establish the date of the written agreement.

FACTUAL BACKGROUND

The plaintiffs in this automobile accident suit settled with the plaintiff/car-owner’s uninsured motorist insurer. After the insurer allegedly failed to remit the settlement funds within thirty days, the plaintiffs filed a motion for penalties. The trial court granted the motion and imposed a $5,000.00 penalty. The insurer appealed.

The underlying claims in this matter arise from an automobile accident. The plaintiffs’ vehicle was driven by Tony Barnes and owned by Shirley Cross, who was also a passenger. In addition to Mr. Barnes and Ms. Cross, Keshela Woodland, Destiny Woodland, Kimberly Miles, Antonio Barnes, Jazalyn Miles, and Ja’Kayshia Miles were all passengers in the plaintiffs’ vehicle. The defendant’s vehicle was driven by Reata West. According to the record, it was eventually determined that the only applicable insurance coverage was Ms. Cross’ uninsured motorist coverage, which was issued by Safeway Insurance Company of Louisiana.

All eight settled with Safeway for the policy limits. However, the plaintiffs alleged that Safeway failed to fund the settlement within thirty days of the date that the agreement was put into writing, and that Safeway is liable for penalties pursuant to a Louisiana statue. Neither the plaintiffs nor Safeway agree on the date that the settlement agreement was put into writing. The trial court found that the agreement was effective March 18, 2013, and that Safeway acquiesced to that date. Accordingly, the trial court found that Safeway paid the settlement thirty-four days after the settlement agreement was reduced to writing. Having made that determination, the trial court assessed a penalty of $5,000.00 against Safeway.

ANALYSIS

Because it is penal in nature, the statute is strictly construed. When a party seeks penalties as a result of an insurer’s failure to pay a settlement within thirty days, the party need not prove that the insurer was “arbitrary, capricious, or without probable cause” in failing to pay the settlement. Instead, the party need only show that the insurer’s failure was “knowingly committed.”

The plaintiffs assert that a settlement was reached and put into writing on March 18, 2013. Safeway objects to this date and contends that the settlement was put into writing on April 5, 2013. It is undisputed that Safeway did not tender the settlement funds until April 22, 2013. If the settlement was put into writing on March 18, 2013, Safeway’s payment was untimely. However, if it was put into writing on April 5, 2013, the payment was within the thirty-day time period, and Safeway would not be liable for penalties under that provision.

On March 18, 2013, the plaintiffs’ attorney, Howell D. Jones, IV, sent a letter to Safeway’s attorney, Simone Dupre, which stated: “This will confirm that we have settled the above referenced matter for $30,000 under Shirley Cross’ UM and for $3137.00 for Ms. Cross’ property damage. Please forward payment and settlement documents to me at your earliest convenience.”
Ms. Dupre sent Mr. Jones an email on March 28, 2013, which referenced an attached letter. However, the attachment, which was a letter from Ms. Dupre to Mr. Jones dated March 28, 2013, was missing from Ms. Dupre’s March 28 email. We note that although the letter indicates that it was sent via facsimile to Mr. Jones, it is unclear from the record before us if that is indeed the case. In any event, the record reveals that Ms. Dupre emailed the letter to Mr. Jones on April 1, 2013. The March 28 letter stated, in part: “This will confirm that on March 20, 2013, you and your clients agreed to accept our policy limits of $30,000.00, plus costs, and in exchange will agree to dismiss all claims of your clients’ against Safeway, with prejudice. In addition, this will confirm that Shirley Cross agrees to accept $3,137.00 (this amount is after deducting the $250.00 deductible) for payment of her property damage claims and will also dismiss her claim for property damage against Safeway, with prejudice. In addition, as discussed, since there seem to be Medicaid and/or medical liens asserted against all or most of your clients, this will confirm that you and your client agree to indemnify and hold harmless Safeway from and for any demands for payment of those liens that are related to treatment received for the subject accident. In exchange for this agreement, Safeway will agree to issue the settlement funds directly to you and your clients, and will not list the lienholders on the check.”

The parties do not dispute that a compromise had been reached, only the date that the agreement was put into writing. The trial court found that the parties’ correspondence reflects a meeting of the minds on March 18, 2013, i.e., the date of Mr. Jones’ initial correspondence and that mentioned in Ms. Dupre’s email of April 5, 2013. the appellate court concluded that the trial court erred in so finding.

Although there is no requirement that a compromise be contained in one writing, a letter written by one party memorializing their understanding of an oral agreement is insufficient to satisfy the “in writing” requirement. Mr. Jones’ March 18 letter is unquestionably such a one-party letter. The earliest date at which multiple writings could be read together such that they would constitute a compromise is March 28, 2013, the date of Ms. Dupre’s confirmatory letter.

Moreover, we are cognizant that there must not only be an agreement to settle a dispute or uncertainty, but that the agreement must be in writing. Thus, for the purposes of invoking the statute the appellate court concluded that any purported acquiescence to a March 18, 2013 settlement date was contrary to law because, although the agreement may have existed on that date, there was no writing at that time as required by statute.

The order was reversed and the costs were imposed on the plaintiffs.

ZALMA OPINION

Penalties should only be assessed in this type of case where eight people had to share in what was left of a $30,000 settlement after the attorney takes his cut, if there is clear evidence that there was a written agreement of settlement. A one sided letter acknowledging an oral agreement is not enough. In this case the one sided letter did not cover the entire agreement which required the supplemental letter from the adjuster that together made a single agreement. Greed seeking penalties that were not appropriate cost the parties plaintiff the costs incurred by the insurer and a loss of the penalty assessed. That the case went to court and then the court of appeal over $5,000 is amazing.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Investigating Arson For Profit

The Most Evil Form Of Insurance Fraud

The following was excerpted from my book “The Insurance Fraud Deskbook” published by the American Bar Association, Tort and Insurance Practice Section and is available at : http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221. 

When indicators exist that a fire was intentionally caused and a claim follows it is incumbent on the insurer to conduct a thorough fire cause and origin investigation and insurance fraud investigation. Arson for profit is the most evil form of insurance fraud because, unlike other white collar crimes, people are injured and die as a result of an accelerated fire.

Do a Detailed Examination

In most fire investigations, a visual search is sufficient. Examine and record burn patterns and other indicators. Examine all utilities, appliances, and other heat producing items to see if they could have caused or contributed to the fire.

If the cause is not obvious, however, it may become necessary to retain a fire cause-and-origin expert to examine the property. An expert will section out each room in the structure like an archeological dig, sifting through the debris and recording a detailed description of the findings at each level.

For a detailed examination, most of the following equipment will probably be required:

•    at least two sets of sifting screens, starting at one-inch mesh down to one eighth-inch mesh or window screening;
•    a 35 mm camera or a single lens reflex film or digital camera;
•    a video recorder;
•    heavy equipment, if large amounts of debris must be removed;
•    a water supply to wash down the scene investigation;
•    lighting equipment for the interior of the structure;
•    a large tarp or ground covers for placement of the evidence; and
•    evidence collection cans.

Instantaneous or onsite laboratory analysis is not practical, so the materials collected must be properly preserved until the analysis is conducted. Clean, new metal paint cans that are easily sealed and resealed are best for debris that contains suspected volatile items. Because cans are non-permeable and available at low cost, they are often used by fire departments and fire cause-and-origin investigators. Glass jars with tight-fitting lids are an alternative, but are subject to breakage.

The investigators must take precautions to prevent evidentiary materials from escaping the container or becoming lost. It is also very important to avoid contamination of the specimens. Each item collected should, therefore, be packed in separate containers of appropriate size with all openings secured by appropriate means, such as tape or staples and labeled at the scene describing the contents.

Trace evidence, like soil specimens or paint chips, should be placed in folded paper bundles that can then be wrapped with tape and sealed or placed in a small cardboard box or envelope on which all seams and other openings have been sealed with tape. These precautions are especially important for multiple items of evidence.

The heat of a fire can indicate whether accelerants have been used. If items are melted, the following list of temperatures at which different materials succumb is a useful starting point to an investigation:

1.    solder melts at 361º F.
2.    tin melts at 449º F.
3.    lead melts at 618º F.
4.    zinc melts at 786º F
5.    magnesium melts at 1203º F.
6.    aluminum melts at 1220º F.
7.    glass melts at 1400º F.
8.    copper melts at 1981º F.
9.    steel melts at 2606º F.
10.    iron melts at 2795º F.

Remember, most metals are alloys and each component will melt at a different temperature. Always examine for melting indicators that will point toward a source of heat. The side of a metal item that has melted is usually the side that is facing the source of heat. This can be used as another indicator pointing back to where the fire came from to help the investigator establish a point or points of origin of the fire.

Check for Arson – An Intentionally Caused Fire

There are many indicators to look for to find out whether an accelerant was used to start a fire. The following are some of the most common.

Spalling

Concrete floors can provide clues to the use of an accelerant. Water trapped in the concrete expands when heated and turns to steam. It then explodes from the concrete, leaving marks called spalling.

Spalling is not always due to arson or the presence of accelerants. Old concrete that has eroded leaving an uneven surface may be subject to spalling even without the help of accelerants. Tar falling from a roof can generate sufficient heat to cause spalling. Polyurethane foam mattresses or furniture cushions burn with extreme heat and will leave a trail of spalled concrete similar to that caused by liquid accelerants. The adjuster and the investigator must be cautious with spalling since polyurethane may give a false indication of an accelerated fire.

Liquid Accelerant Trails

Carpeted floors can also reveal signs of arson. When a liquid is spilled onto a carpet and the fumes are ignited, an outline of the spill can be readily seen. This is because the liquid gasoline does not burn. The liquid keeps the carpet on which it was poured cooler than the surrounding air and there will be islands of unburned carpet visible if the fire was extinguished quickly.

Use of Trailers

To make the building burn faster and completely, some arsonists will use a “trailer,” which is a substance used to spread and accelerate a fire so that the fire buildup is rapid and covers a large area. The arsonist intends the fire to be so complete there will be no evidence of the trailer left.

Trailers can be as sophisticated as small plastic bags filled with accelerants and suspended from ceilings or as simple as newspapers spread throughout a house and sprinkled with accelerants. If they are not totally destroyed in the fire the trailers leading from one room to another will be as obvious as a road cutting through a woodland.

Detection Devices

If the adjuster believes there is the presence of a liquid accelerant, a combustible vapor detector or “sniffer” may be needed. The sniffer, available to most fire cause-and-origin investigators, can help to find where a sample should be taken. Since the sniffer can be confused by naturally occurring products of fires, it is essential to have a qualified person operate the sniffer.

Some fire departments and private investigators use specially trained dogs to sniff out accelerants much as they sniff out illicit drugs in luggage. These trained animals can be of great assistance when finding areas where the use of a flammable liquid is suspected. The dogs have been found, by many investigators, to “alert” on tiny amounts of accelerants that cannot be detected by a combustible vapor detector. The well trained accelerant detection dog is usually able to detect smaller amounts of combustible materials than the electronic accelerants.

Samples of suspected accelerants can also be sent to a laboratory for analysis. An instrument called a gas chromatograph can identify each substance in the sample and whether hydrocarbon-based accelerants were used.

Incendiary Devices

The most basic incendiary system consists of putting a lighted match to easily combustible material. However, a simple match, as anyone who has tried to light candles on a birthday cake, is not always effective and will often fail to cause a destructive fire. The author investigated a claim many years ago where the insured attempted to set fire by starting clothing in a closet. However, he closed the closet doors after lighting the fire, and starved the fire for oxygen. He tried the same thing four times in four different closets only to have the four fire claims denied.

Incendiary devices come in many different shapes and sizes, some simple, some quite elaborate in design. All have the same objective: to burn themselves or to set something else on fire.

Each device consists of three or more basic major components: the fuse, the body, and the filler or incendiary material. The body will be either fragile or unbreakable, depending on its desired usage. A device employing the use of a flammable liquid will usually have a breakable container, while a device containing thermite or other explosive material will be confined to a non-breakable, metal container.

The combination of matches and a cigarette is a simple and often-used incendiary device. It can be assembled in several different ways. One of the most common is to place a cigarette horizontally, just along the tops of the heads of a book of matches after the cover is removed. The distance that the end of the cigarette protrudes beyond the row of match heads measures the amount of delay time wanted by the arsonist. The cigarette is lit. As it burns, it eventually comes in contact with the match heads, which burst into flames. Sometimes, the matches are placed around the cigarette and wrapped with tape, rubber bands, string, or wire. The cigarette/match device is sometimes weighted with a nail or a bag of rocks. This type of incendiary device can be used in conjunction with any combustible or flammable materials. The adjuster who detects the remains of such a device must immediately retain the services of a fire cause-and-origin investigator and a coverage lawyer experienced in fraud and arson.

Arsonists have used candles for more than three centuries as a timed incendiary ignition device.

A hard-to-detect incendiary device is made from paraffin wax and sawdust. Melted wax is combined with a quantity of sawdust and allowed to cool. The wax mixture is then placed into a paper bag next to the intended target. A match is used to ignite the paper bag, and that in turn ignites the wax-sawdust mixture. The fire starts very slowly, taking about two or three minutes before the wax-sawdust mixture is burning strongly enough to spread flames throughout the structure.

In summary, the following are factors that can lead to the conclusion that a fire is of incendiary origin:

•    trailers (connections to or between fire sets);
•    candles used to ignite fire or trailers;
•    discarded matches in out of the way places;
•    chemicals that are unusual for the occupancy;
•    rags, clothing, or curtains soaked in oils;
•    timing devices;
•    unusual arrangements of electrical equipment;
•    electrical equipment that had been tampered with before the fire;
•    disturbed or broken gas piping;
•    gas burners in the “ON” position;
•    unexplained multiple fires;
•    rearrangement of the contents of a room or area in an unnatural way to help the fire burn rapidly;
•    accelerant containers, accelerant patterns, or other evidence of the presence of combustible liquids;
•    fire late at night;
•    fire in a vacant building;
•    unusual burn patterns; and
•    lack of contents in a dwelling that was reported to have been occupied at the time of the fire.
None of these factors, standing alone, allow for the conclusion that a fire is incendiary, but they are all factors that will lead the adjuster or the fire cause and origin investigator to conduct a more thorough investigation.

If you are interested in learning more about arson for profit and other fraud investigations purchase “The Insurance Fraud Deskbook” from the ABA.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Covenant Not to Execute Not A Release

Claim Against Broker Can Be Assigned

It is almost common for a plaintiff who gets a large judgment against a tortfeasor that cannot be collected to enter into an agreement with the defendant to not execute upon the judgment in exchange for an assignment of the defendants claims against its insurer. It is unusual, however, for the insurer to go broke before the suit can be resolved. The assignee then sought recovery against the insurance broker who placed the insurance with the insolvent insurer.

Just such a situation was presented to the Tennessee Court of Appeal in Littleton v. TIS Insurance Services, Inc., Slip Copy, 2015 WL 443740 (Tenn.Ct.App., 2/3/15) after the trial court granted a judgment to the broker.

FACTS

During a prior lawsuit, a construction company – in exchange for a covenant not to execute against the company’s assets – assigned to the entity that obtained a judgment against it the company’s insurance coverage claims. The trial court entered judgment on the pleadings in favor of the insurance broker on the ground that the current plaintiffs would not be entitled to recover any compensatory damages at trial. The plaintiffs appeal.

The plaintiffs, Joy Littleton, Grayling Littleton, and Will Allen Hildreth (“the Assignees”) were assigned a judgment and settlement order in the amount of $3.2 million. The Merit Litigation arose out of a contract between JAG and Merit for the construction of a Holiday Inn Express hotel in Loudon, Tennessee.

The final judgment references the settlement agreement between JAG and Merit and the covenant not to execute on the judgment.After entry of the judgment, JAG was able to collect only a portion of its $3.9 million judgment against Merit because Merit’s Commercial General Liability (“CGL”) carrier, the Highlands Insurance Group (“Highlands”), was placed in receivership by the State of Texas during the pendency of the Merit Litigation. TIS Insurance Services, Inc. (“TIS”) was Merit’s insurance broker and the entity that placed Merit’s CGL coverage with Highlands.

The current action was filed on January 28, 2011, seeking recovery from TIS of the unpaid balance of the judgment (approximately $2.67 million). TIS filed a motion for judgment on the pleadings, on October 12, 2012, the trial court granted the motion and held “that the [Assignee]s’ claim for compensatory damages which they may seek in the trial of this cause is limited to the $25,000 actually paid by Merit Construction in this matter.”

ISSUE

The issue before the court of appeal is whether the trial court erred in entering judgment on the pleadings in favor of TIS on the ground that the Assignees would not be entitled to recover any compensatory damages at trial.

DISCUSSION

The trial court’s ruling is directly contrary to our holding in Tip’s Package Store, Inc. v. Commercial Insurance Managers, Inc., 86 S.W.3d 543 (Tenn.Ct.App.2001), in which we held that a judgment creditor’s covenant not to execute on a judgment debtor’s assets does “not extinguish the underlying liability” of the judgment debtor for compensatory damages. The judgment debtor is “an injured party” that can pursue a negligence claim against its insurance provider for procuring a liability policy that allowed a gap in coverage. In light of our decision in Tip’s, JAG’s covenant not to execute on the judgment against Merit does not extinguish the underlying liability of Merit under the judgment.

A covenant not to execute is merely a contract. It is not a release. Covenants not to execute are different from releases, as the legal liability remains in force against those who have covenants, whereas a release represents “total freedom from liability.” Gray v. Grain Dealers Mut. Ins. Co., 871 F.2d 1128, 1133 (D.C.Cir.1989)

The Assignees, accordingly, are entitled to assert a claim against TIS for $2,701,607.67, the uncollected balance of the judgment against Merit.

ZALMA OPINION

The assignment was an assignment of all rights the original defendant had against its insurer and everyone involved in the acquisition of the policy. The broker convinced the trial court that there was a limitation upon what could be recovered and that the assignment was limited by the covenant not to execute. Finding that the covenant was merely a contractual assignment and not a release, the broker was exposed to the entire amount of the judgment assigned. Of course, that does not resolve the situation since the assignees still need to prove responsibility of the agent to the original insured and knowledge that Highlands was not financially stable, a difficult mountain to climb.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Duty to Defend Not Effected by Denial of Motion for Summary Judgment

Defense Can’t Be Avoided by Use Of Limine Motions

The duty to defend owed by an insurer is very broad and requires an insurer to defend even if there is only a potential for coverage on the facts of the case and the policy wording. Usually, an order denying a motion for summary judgment seeking an order that there is no duty to defend will usually be sufficient to reveal the potential for coverage and a requirement for defense – at least under a reservation of rights – to those insured. In McMillin Companies, LLC v. American Safety Indemnity Company, — Cal.Rptr.3d —-, 2015 WL 270034 (Cal.App. 4 Dist., 1/22/15) the right to claim no duty to defend will still exist even after a motion for summary judgment is denied if the motion order is not dispositive of the claims made by the motion for summary judgment. It also criticized the use of a motion in limine (to limit testimony allowed at trial) when it had the effect of a motion for summary judgment without the protections of a motion for summary judgment.

FACTS

The parties cross-appeal from a final judgment of the superior court in an insurance coverage dispute between a general contractor and the commercial general liability insurer of one of its subcontractors.

ISSUES IN THE CROSS–APPEALS

The Present Insurance Coverage Litigation

In February 2009, eight McMillin-related entities (but not McMillin) filed the underlying complaint against ASIC and 11 other insurance companies. The plaintiffs alleged that each of the defendants was an insurer to one or more of the subcontractors on the projects, that each of the plaintiffs was an additional insured under each of the respective policies, that each of the defendant insurers owed each of the plaintiffs a duty to defend the Baker litigation, and that by denying the tender of the defense of the Baker litigation each of the defendants breached a contract of insurance and its implied covenant of good faith and fair dealing.

The Motions in Limine

In October 2011, in anticipation of trial, the parties filed motions in limine. One dealt with ASIC’s alleged duty to defend.

With regard to the duty to defend, the SAC plaintiffs filed a motion to exclude testimony and argument disputing that ASIC had a duty to defend the Baker litigation.

Duty to Defend

Relying on Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1078, 17 Cal.Rptr.2d 210, 846 P.2d 792 ( Horace Mann ), and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 ( Montrose ), McMillin argued that the denial of ASIC’s motion for summary judgment established, as a matter of law, that ASIC had a duty to defend them in the Baker litigation. Opposing the motion, ASIC disputed the legal effect of the denial of its summary judgment motion, contending that because the court did not deny the motion by expressly finding a disputed factual issue, the effect of the ruling did not establish the duty to defend as a matter of law.

In denying summary judgment, the court had ruled that, with regard to four allegedly undisputed issues, “ASIC has not met its initial burden of proof.” During the in limine proceedings, ASIC argued that the court could not consider the denial of the summary judgment, relying in part on Judge Nevitt’s following comments at the conclusion of the hearing in which he denied ASIC’s motion: “However, I remind counsel that this ruling is of no evidentiary value later. I don’t know what other evidence may be presented to the Court when these issues are next presented. Whether foundations may have been laid for things, not laid here, and so forth. And so should this issue come before the Court again under different circumstances and with potentially different evidence, you should not necessarily count on the same result.”

DISCUSSION

The trial court erred in granting McMillin’s motion in limine to preclude evidence or argument that disputed ASIC’s duty to defend; the trial court erred in granting ASIC’s motion in limine to preclude McMillin from presenting evidence or argument either that the Settlement proceeds are not an offset to McMillin’s Baker fees or that the Settlement proceeds are allocated to Brandt fees; and we are unable to affirm that portion of the judgment in favor of ASIC on McMillin’s cause of action for breach of the implied covenant of good faith and fair dealing.

An insurer owes a duty to defend any lawsuit “which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) Since the duty arises whenever the claim against the insured seeks damages on any theory that, if proved, would be covered by the policy, the insurer is relieved of its duty only when “‘the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”‘ (Montrose, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

Horace Mann instructs: Where “factual issues exist precluding summary judgment in the insurer’s favor …, the duty to defend is then established, absent additional evidence bearing on the issue.” (Horace Mann, supra, 4 Cal.4th at p. 1085, 17 Cal.Rptr.2d 210, 846 P.2d 792.) Denying a summary judgment motion because the moving party failed to meet its initial burden of production is not the same as denying the motion based on an unresolved factual dispute. Accordingly, the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation.  In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC’s alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin’s proof.

Judge Alksne erred in rejecting McMillin’s presentation (that unallocated Settlement proceeds be allocated to resolving the tort claim) and accepting ASIC’s presentation (that unallocated Settlement proceeds be allocated first to resolving the contract claim), leaving McMillin without evidence of damages. In making such a ruling in limine, the trial court essentially granted a nonsuit as to the issue of McMillin’s alleged damages without requiring the statutory procedural protections associated with nonsuit proceedings, thereby precluding McMillin from trying its case.

The Orders Granting the Motions in Limine Are Reversed

Using an in limine motion as a substitute for a potentially dispositive statutory motion produces substantial risk of prejudicial error. The disadvantages of such shortcuts are obvious. They circumvent procedural protections provided by the statutory motions or by trial on the merits; they risk blindsiding the nonmoving party; and, in some cases, they could infringe a litigant’s right to a jury trial.

ZALMA OPINION

This case clarified earlier duty to defend rulings that dealt with dispositive motions for summary judgment. When a court rules that there is a potential for coverage in a partial motion for summary judgment the issue of duty to defend is established. However, in a case like this one where the motion for summary judgment does not rule on any issue and just denies the motion for failure to produce evidence sufficient to rule, the duty to defend is not established. By wrongfully using a motion in limine to prevent the presentation of evidence concerning the duty to defend deprived the party of the right to present evidence to prove its case without any of the safeguards and evidentiary requirements of a motion for summary judgment. The judgment was reversed, the orders in limine were reversed and the case was sent back to be tried.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

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Evidence Required to Defeat Summary Judgment

No Right to UIM Without Proof of Damages In Excess of Tortfeasor’s Insurance

When a bodily injury claim is settled with a tortfeasor the injured party often suffers from buyer’s remorse and tries to find some way to get more money. A settlement with the tortfeasor eliminates one source of funding leaving only the underinsured motorist carrier as an option for more money. In Gallagher v. Ohio Cas. Ins. Co., — Fed.Appx. —-, 2015 WL 367011 (C.A.3 (Pa.) 1/29/15) the Third Circuit Court of Appeal was asked to reverse a summary judgment in favor of an insurer and provide Marianne Gallagher underinsured motorist benefits.

FACTS

In March 2009, Gallagher was injured in an automobile accident when her vehicle was struck by another. Gallagher sued the other driver in Pennsylvania state court, seeking compensation for her injuries, and she sued her own insurer, Ohio Casualty, in federal court, seeking underinsured motorist (“UIM”) benefits.

In the state court action, Gallagher and the other driver agreed to private, nonbinding arbitration, and, after an evidentiary hearing, the arbitrator determined that Gallagher was entitled to $41,715 in total damages. While Gallagher initially rejected this assessment of her damages, in August 2013 she agreed to settle in state court for that exact amount. As required under her Ohio Casualty policy, Gallagher notified the company of her intent to settle with the other driver for $41,715, and it advised that it had no objection to settlement. The settlement was paid by the other driver’s insurance company pursuant to that driver’s liability policy, which limited coverage at $100,000.

In the federal action, Ohio Casualty moved for summary judgment, arguing that Gallagher was not entitled to UIM benefits and that collateral estoppel barred recovery. The District Court declined to apply the doctrine but granted summary judgment in favor of Ohio Casualty because Gallagher had failed to present any evidence to establish that the other driver was, in fact, underinsured — in other words, Gallagher failed to present evidence that her damages met or exceeded the limits of the other driver’s insurance coverage.

ANALYSIS

The appellate court must view the facts in the light most favorable to the non-moving party, drawing all reasonable inferences in that party’s favor. However, where a non-moving party fails sufficiently to establish the existence of an essential element of its case on which it bears the burden of proof at trial, there is not a genuine dispute with respect to a material fact and thus the moving party is entitled to judgment as a matter of law. The nonmoving party cannot establish a genuine dispute as to a material fact by pointing to unsupported allegations in the pleadings.

Pennsylvania’s Motor Vehicle Financial Responsibility Law requires that motor vehicle liability insurance policies contain underinsured motorist coverage. The purpose of such coverage is to protect an insured driver from the risk that a negligent driver of another vehicle would cause injury to the insured but would not have adequate coverage to compensate for the insured’s injuries. The policy defined “underinsured motor vehicle” as a vehicle “to which a bodily injury liability bond or policy applies at the time of the accident but the amount paid for bodily injury under that bond or policy to an insured is not enough to pay the full amount the insured is legally entitled to recover as damages.”

The Court did not hold that Gallagher’s claim failed because she accepted less than the full amount of the tortfeasor’s liability coverage; instead, it held that Gallagher could not survive summary judgment because she failed to present any evidence to support her allegation that the other driver was, in fact, underinsured.

The insured will not be allowed underinsured motorist benefits unless his or her damages exceed the maximum liability coverage provided by the liability carriers of other drivers involved in the accident.

Although Gallagher’s right to UIM benefits is not extinguished by her decision to settle with the other driver for less than the full amount of that driver’s liability coverage, Pennsylvania law also clearly indicates that she is entitled to UIM benefits only to the extent that her damages exceeded the limits of that coverage.

Gallagher failed to present anything beyond mere allegations to suggest that her damages exceeded $100,000. The appellate court refused to consider unsupported allegations in the pleadings as sufficient to establish a genuine issue of material fact and affirmed the trial court’s ruling.

ZALMA OPINION

Since Gallagher did not present evidence her damages exceeded $100,000 and since she settled with the tortfeasor with the amount found by an independent arbitrator that was less than half the available coverage, if she had evidence her damages exceeded $100,000 she would have presented it at the time the motion for summary judgment was heard. Since she did not the motion was properly granted.  If a plaintiff wants to collect more than the tortfeasor’s insurance limits accepting less makes it almost impossible to gain benefits from the UIM cover.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | Leave a comment

Endorsement Trumps Body of Policy

No Coverage for Assault or Battery

There are some risks that most insurers are unwilling to take. Assault and battery are two of those risks, especially when dealing with venues where alcoholic beverages are served. Coverage for such risks are available but they are extremely expensive. In George v. Great Lakes Reinsurance (UK) PLC, Not Reported in S.W.3d, 2015 Ark. App. 36, 2015 WL 374969 (Ark.App., 1/28/15) the Arkansas Court of Appeal was faced with a claim that there was no coverage provided an insured for injuries suffered by plaintiffs shot in his

FACTUAL BACKGROUND

The Benton County Circuit Court granted summary judgment to Great Lakes Reinsurance (UK) PLC. It ruled that Great Lakes had no duty to defend or indemnify separate claims made against the insured (George) because no possibility of coverage existed under the insurance policy. The claims that triggered this coverage dispute were filed in a related circuit-court case. The court found that the commercial general liability policy in this case was unambiguous in excluding coverage for claims arising from an assault or battery that spawned the separate case.

The facts are undisputed. George, through appellant Heart & Soul, LLC, owns a facility in Columbia County that is rented out for dances, parties, and other events. At one of these events, a gunman fired into the crowd and injured several people. Two of those injured, appellants Ricotta Lambert and Neca Scarber, were shot and later filed suit (the underlying action) in Columbia County against George, his LLC, and several John Does, alleging that George and his LLC were negligent in failing to protect them and seeking compensatory and punitive damages.

When the events leading to the underlying action occurred, George was insured under a commercial general liability insurance policy issued by Great Lakes. Under the policy’s liability coverage, Great Lakes agreed to pay damages for bodily injuries caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

THE ASSAULT OR BATTERY ENDORSEMENT

At the time of the policy’s issuance, there was also a Combination Endorsement –1. That endorsement specifically excluded coverage for bodily injuries that arise out of an assault or battery, or coverage for punitive damages—both of which were asserted in the underlying action. The endorsement’s “bodily injury” exclusion provides as follows:

“2. EXCLUSION—EXPECTED OR INTENDED INJURY AND ASSAULT OR BATTERY
“‘Bodily injury’ or ‘property damage’:
“(1) expected or intended from the standpoint of any insured;
“(2) arising out of assault or battery, or out of any act or omission in connection with assault or battery, or with the prevention or suppression of an assault or battery; or
“(3) arising out of charges or allegations of negligent hiring, training, placement or supervision with respect to (1) or (2) above.”

George notified Great Lakes of the underlying action, and Great Lakes notified George that it was providing a defense under a reservation of rights because the policy unambiguously excluded coverage for the claims in the underlying action. Great Lakes then filed this declaratory-judgment case, asserting that it did not have a duty to defend or indemnify George. Great Lakes moved for summary judgment and asked the court to order that George had no coverage under the policy. George also moved for summary judgment, arguing that the policy was ambiguous and should therefore be construed against the drafter to provide coverage for the underlying suit.

ANALYSIS

The trial court ruled that the policy language was not ambiguous and excluded coverage for acts or omissions arising from an assault or battery. The trial court further found that the applicable exclusionary language was contained in an endorsement, that the endorsement was a part of the insurance contract, and that the endorsement expressly deleted and replaced the exclusionary language in the Commercial General Liability Coverage Form. Therefore, the policy did not apply to the claims asserted against George in the underlying action because those claims were excluded, and Great Lakes was not obligated to defend the action.

George argued on appeal that this endorsement is not part of the insurance contract because it was not listed on the first page of the policy, which is captioned “Common Policy Declarations.” The endorsement is, however, listed as one of the forms and endorsements in the commercial general-liability-coverage declarations page. And George initialed and dated each page of the insurance contract, including the one containing the endorsement with the assault-or-battery exclusion.

Although the endorsement was not listed on one declarations page, it was listed on a separate declarations page; it was attached to the policy when it was issued; and George dated and initialed each page. The appellate court affirmed the circuit court’s decision that the assault-or-battery endorsement was part of the insurance contract’s terms.

Having settled the contract’s terms, we turn to George’s primary argument, which is that the presence of the bodily-injury exclusion in the main body of the policy is made ambiguous by the presence of an assault-or-battery endorsement.

The endorsement expressly states: “THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.” (Emphasis added.) By use of the word “changes,” the endorsement clearly advised Great Lakes’ insureds, like George, that it was making the scope of coverage different than what it would have been under the original policy. The endorsement’s plain language also states that the personal-injury exclusion in the policy’s main body “is deleted and replaced,” substituting the provisions in the endorsement for those in the basic policy.

Generally, exclusions in a policy or its endorsements are as much a part of the contract as other parts and must be given the same consideration in determining what coverage exists. George’s argument stumbles over the well-established rule of insurance law that where provisions in the body of the policy conflict with an endorsement or a rider, the provision of the endorsement governs. The more specific and more limiting language of the endorsement controls the more general exclusion that it replaces, and the two are not “irreconcilably inconsistent,” as George argues.

The appellate court concluded that the circuit court correctly found that the policy excluded any potential insurance coverage for the events asserted in the underlying action in Columbia County. Because there is no ambiguity in the policy, we need not consider George’s second point where he argues that he is entitled to summary judgment.

ZALMA OPINION

Courts are obligated to read insurance policies as written. In this case there was no ambiguity because the wording of the policy was clear and unambiguous and the insurer went so far as to require the insured to initial each page of the policy, including the limiting endorsement. That effort eliminated the argument that the insured did not know the exclusion was there. The case would have had the same result had he not initialed each page but by doing so the decision of the court was made easy. The case teaches that all endorsements should be listed on the declarations page and written in clear and unambiguous language.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Crime Often Pays Until the Criminal Is Caught

Chutzpah – The Search for a Writ of Corum Nobis

Insurance fraud comes in many different forms. Most despicable of those are when a government official who is also an insurance professional abuses the public trust to profit from insurance sold to the governmental entity he serves. In Nowlin v. U.S.— F.Supp.3d —-, 2015 WL 363868 (N.D.Miss. 2015), an insurance broker who conspired with a member of the governmental entity was convicted of the crime of conspiracy to profit from health insurance sold to the entity. He tried multiple appeals, the last of which was to seek the ancient writ of Corum Nobis from the District Court of the Northern District of Mississippi.

FACTS

Ken Nowlin and Gary Massey were indicted by the Grand Jury for the Northern District of Mississippi in a 41–count indictment on 31 May 2007. Pursuant to a plea agreement with the government, Nowlin testified before the Federal Grand Jury for the Northern District of Mississippi on 28 June 2007. A superseding indictment was returned that same day, charging both Massey and Nowlin in 53 counts. On 27 July 2007, Nowlin pled guilty to Count One of the superseding indictment and agreed to continue his cooperation with the government.

At the time of his indictment, Nowlin had been in the insurance business for almost three decades. He specialized in brokering health care plans to various companies and governmental entities.  In 1994 or 1995, Gary Massey sold Lafayette County, Mississippi its health care plan, receiving two-thirds (2/3) of the 12% commission on that plan. Massey received 8% of the face amount of the premium, and Nowlin received 4%.  Massey was then elected to the Lafayette County Board of Supervisors in 1994; he took office in January 1995.

The month before Massey took office, Nowlin and Massey discussed the fact that Massey could not sit on the Board and receive commissions as the agent for the county’s health insurance coverage. Massey’s portion of the commission on the Lafayette County plan was at that time about $11,000 per month, and the commissions Massey and Nowlin shared over the period of time from January 1996 until the county placed its coverage with another company in 2004 totaled about $827,000.

Nowlin agreed to replace Massey’s commission check from the insurance company with an equal check written on his own business account each month. When asked if he would have paid Massey the “consulting fee” had it not been for the Lafayette County plan, Nowlin responded under oath that he would not have done so. Indeed, Nowlin testified under oath before the federal grand jury that he increased Massey’s “consulting fee” approximately $3,000 per month because Massey threatened to take away the Lafayette County business—and other business—if he did not.

After failing a polygraph exam Nowlin signed a plea agreement, cooperated with the government, testified in the grand jury about the criminal conspiracy, and pled guilty a month before Massey. The government filed a § 5K1.1 motion for downward departure in recognition of Nowlin’s cooperation.

Nowlin’s case was going as smoothly as one could hope under the circumstances—until he deviated from the advice of his attorney. Prior to sentencing, Nowlin had—over and over—admitted that he was guilty of the crime charged in Count One of the superseding indictment. He had unequivocally admitted guilt. However, for some reason, shortly before sentencing, at a meeting with defense counsel, he changed his mind and began to assert his innocence, arguing once again that his co-defendant, Gary Massey, had misled him regarding the legality of the arrangement to pay Massey the commissions relabeled as “consulting fees.”

The court sentenced Nowlin to the upper end of the guidelines range despite the government’s § 5K1.1 motion. Nowlin is now attacking the 30–month sentence as unreasonable. The Fifth Circuit Court of Appeals affirmed the judgment. After losing several motions Nowlin then filed the instant petition for a writ of error coram nobis.

CORAM NOBIS RELIEF

The term coram nobis, a vehicle to mount a post-conviction collateral challenge to a judgment, is of Latin origin, and literally means “in our presence” or “before us.”  The “us” in the translation refers to the court which rendered the challenged judgment. The purpose of the writ is to present to the court—and obtain relief from errors of fact, such as a valid defense existing in the facts of the case, but which, without negligence on the defendant’s part, was not made, either through duress or fraud or excusable mistake, where the facts did not appear on the face of the record, and were such as, if known in season, would have prevented rendition of the judgment.  Coram nobis applies only to federal convictions—and may not be used to challenge convictions in state court. A defendant seeking coram nobis must do so by filing the petition in the convicting court as part of the original criminal proceeding.

The federal coram nobis remedy requires a fundamental error, whether jurisdictional, constitutional, or otherwise. Coram nobis relief is barred when another remedy is available. However, in a federal coram nobis proceeding, the person receiving relief must not only show that the conviction or sentence is invalid, he must also prove he is suffering adverse collateral consequences resulting from the conviction. Examples of adverse collateral consequences include: Receiving recidivist punishment arising out of a subsequent conviction, threat of deportation, or suffering a loss of civil rights. The requirement regarding adverse collateral consequences when seeking coram nobis reflief cannot be satisfied merely because the defendant, as a result of the conviction, (1) suffers damage to his reputation, (2) experiences difficulty acquiring or keeping a job, (3) suffers monetary loss, or (4) suffers spiritually.

Nowlin alleges a variety of civil disabilities, including: (1) loss of insurance license, (2) loss of insurance business, (3) loss of position as board member of a bank, (4) loss of right to possess a firearm, (5) loss of right to vote, and (6) loss of $500,000 in bonuses (which are non-transferrable) as of the time of his conviction. He also alleged several other losses of a personal nature. On the other hand, the adverse collateral consequences requirement to obtain coram nobis relief is not satisfied simply because the convicted person, as a result of the conviction, (1) is suffering damage to his reputation, (2) is experiencing employment difficulties, (3) is suffering monetary or financial losses, or (4) is undergoing spiritual suffering.

Nowlin pled guilty to conspiracy to commit federal government program fraud.

RESTITUTION

Nowlin argues that the court ordered him to pay more in restitution than the financial harm Lafayette County suffered. A convicted defendant has the right to be sentenced based upon accurate information. However, in this case, Nowlin pled guilty and agreed to the total amount of loss that Lafayette County suffered, though he argued during his change of plea hearing that he should be responsible for restitution only as to the amount of loss attributable directly to him—approximately $275,000. The court agreed with Nowlin’s argument and required restitution of only that amount. Nowlin has not argued that the information the court relied upon to calculate the amount of loss was inaccurate, as he, himself, provided the information and explained the operation of his business to government prosecutors and investigators.

For a defendant to afford himself of the venerable writ of error coram nobis, he must have raised the alleged error at some point earlier in the proceedings. The error Nowlin alleges is one of mathematics—and of such a nature that a longtime businessman in the insurance industry should easily have recognized and brought it before the court prior to imposition of judgment. He did not do so; as such, he has waived this issue.

CONCLUSION
In sum, for the reasons set forth above, the instant petition for a writ of error coram nobis was denied.

ZALMA OPINION

“Chutzpah” is a Yiddish term meaning unmitigated gall. The best legal definition of “chutzpah” is a person convicted of murdering his mother and father seeks clemency because he is an orphan. In this case Nowlin engaged in serious insurance fraud that cost hundreds of thousands of dollars for the governmental entity his co-conspirator represented. He admitted guilt and then, expressing his chutzpah, hired a new lawyer to bring motions to avoid the conviction and the payment of restitution. His crime cost him a great deal in loss of reputation and business. Something he should have thought of before he entered into the conspiracy that made him a great deal of money. Crime often pays well. In this case it did until the two conspirators were caught the crime properly resulted in a financial loss and prison time.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | 3 Comments

Insurance Fraud Continues Unabated

    Zalma’s Insurance Fraud Letter – February 1, 2015

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

The current issue of ZIFL reports on:

1.    Lawyers Accused of Fraud Regarding Asbestos Claims
2.    New from Barry Zalma – The Zalma Insurance Library
3.    Eight Worst Insurance Criminals of 2014 Dishonored
4.    New Hampshire Insurance Fraud Conviction Affirmed
5.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Don’t Sue Your Agent Until Action Accrues – January 30, 2015
2.    No Good Deed Goes Unpunished – January 29, 2015
3.    When Are Operations Completed? – January 29, 2015
4.    The Staged Insurance Loss – January 28, 2015
5.    Insured Owes Utmost Good Faith To Insurer – January 28, 2015
6.    Insurer Not Obligated to Pay High Bid – January 27, 2015
7.    Careful With Applications – January 26, 2015
8.    Workers’ Compensation Is Exclusive Remedy – January 23, 2015
9.    The Cost Of Giving Away the Underwriting Pen – January 22, 2015
10.    Investigating Insurance Fraud – January 21, 2015
11.    No Policy Covers Everything – January 20, 2015
12.    Self-Insured Retention Is Not Insurance – January 20, 2015
13.    Statute of Limitation Tolled by Partial Payment – January 19, 2015
14.    Martin Luther King, Jr. Day & Insurance – January 19, 2015
15.    Sexual Abuse of Minor Not an Occurrence – January 16, 2015
16.    Fraud Continues Apace – January 15, 2015
17.    Failure of Condition Precedent – January 14, 2015
18.    $225 Trip & Fall Verdict Affirmed – January 13, 2015
19.    Additional Insured Breached Policy Condition – January 12, 2015
20.    Construction Defect — January 9, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off

Don’t Sue Your Agent Until Action Accrues

Contingent & Premature Claims Not Viable

There seems to be an unwritten rule that when filing suit in an insurance related issue to sue everyone in sight. It often happens to destroy diversity and keep the case in state courts. Just such a situation was before the District Court for the Southern District of Florida, in Pebb Cleveland, LLC v. Fireman’s Fund Ins. Co., Slip Copy, 2015 WL 328247 (S.D.Fla., 1/23/15) who was asked to remove insurance agents and brokers from the suit since they were fraudulently joined in the suit.

FACTUAL BACKGROUND

Plaintiff Pebb Cleveland LLC (“Pebb”), a Delaware corporation, originally filed this suit against defendants Fireman’s Fund, Halycon and CBIZ in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County, Florida. Count 1 asserted a claim of breach of contract against Fireman’s Fund, a California corporation. Counts 2 and 3 asserted negligence claims against CBIZ and Halycon, Pebb’s Florida-based insurance agent and broker, respectively.
Fireman’s Fund removed the case to the Southern District of Florida on December 1, 2014.

The following facts, drawn from the plaintiff’s complaint, were accepted as true by the court for the purpose of resolving the instant motion.

At a time prior to January 9, 2014, Pebb applied for and obtained an “all risk” business insurance policy from Fireman’s Fund which covered certain commercial property owned by it in Aurora, Ohio. Defendants CBIZ Insurance and Halycon Underwriters represented Pebb in the purchase of the policy, which was delivered to Pebb at its principal place of business in Boca Raton, Palm Beach County, Florida.

On January 9, 2014, a deep freeze caused a sprinkler pipe to burst at Pebb’s Ohio property, causing extensive water damage to the building. Pebb promptly submitted a property damage claim to Fireman’s Fund, which denied the claim on ground the building was allegedly vacant for more than sixty days and the building’s sprinkler system had not been protected from freezing.

DISCUSSION

Motion to Dismiss–Failure to State a Claim

Under Florida law, negligence claims against an insurance agent do not accrue until the existence of insurance has been completely resolved, that is, when the coverage proceedings against the insurer are final. The theory is that an insured claiming that he is entitled to insurance coverage is judicially estopped from simultaneously claiming a lack of coverage against the agent that procured the policy on his behalf.

Under Florida law Pebb’s failure to obtain appropriate insurance coverage claims against Halycon and CBIZ are contingent and premature, as the defendants’ liability for failure to procure, if any, becomes an issue for resolution only upon a final determination that no insurance coverage exists under the policy issued by Fireman’s Fund. If the Court determines that Fireman’s Fund is liable to Pebb under the policy, then Halycon and CBIZ caused no damage to Pebb because insurance was properly procured. On the other hand, if the court determines that Fireman’s Fund is not liable under the policy because it does not cover damage to unoccupied premises, then Halycon and CIBZ are potentially liable for failure to recommend and obtain adequate insurance coverage to meet the known needs of the insured.

There is no possibility that Pebb can state negligent failure to procure claims against Halcyon or CBIZ because the issue is still open and will remain open until the District Court rules on the obligation of Fireman’s Fund to pay or not pay the claim. Therefore, the District Court concluded that the insurance brokerage defendants have been fraudulently joined.

Pebb argues that a stay or abatement of its claims against Halycon and CBIZ is the appropriate remedy if the Court determines that the claims are premature. However, considering the circumstances of this case, and that fact that Pebb’s claims against Halycon and CBIZ may never mature if the court determines that Fireman’s Fund is liable to Pebb under the policy, the court dismissed Pebb’s claims against Halycon and CBIZ, without prejudice.

Pebb cannot properly state a claim against defendant Halcyon or CBIZ, as any negligence action against them is contingent and premature pending the result of the breach of contract claim against Fireman’s Fund. Without an actionable claim against Halcyon and CBIZ, the plaintiff is left with its breach of contract claim against Fireman’s Fund. As such, the two remaining parties to this action are completely diverse in citizenship and have been properly removed to this court.

Pebb has stated a cognizable breach of contract claim against Fireman’s Fund. However, any action against defendants Halycon or CBIZ is premature pending resolution of Pebb’s action against Fireman’s Fund. Because no cause of action has yet accrued against these defendants as a matter of law, they shall be dismissed. The court shall retain jurisdiction over the remaining claim against Fireman’s Fund under its diversity jurisdiction.

ZALMA OPINION

Insurance is a contract, nothing more. The plaintiff sued its insurance company seeking indemnity from its insurer. The issue of coverage, as a result of the suit, was up in the air. The court could rule that Fireman’s Fund owed the claim. If it did, there would be no claim against the agents and brokers. If they lose and the court rules there is no coverage at that point a cause of action would accrue against the agents and brokers and they could then file a separate case. To put the two different allegations together in one suit would be counterproductive and completely confusing to a trier of fact.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | 2 Comments

No Good Deed Goes Unpunished

Policy Limits Not Enough

Sometimes a person is not satisfied even when the insurer pays the insured everything that the policy promised to pay. Thomas v. Fire Insurance Exchange, Not Reported in Cal.Rptr.3d, 2015 WL 274068 (Cal.App. 6 Dist., 1/21/15) was just such a case that was filed even after the insurer paid its full policy limits.

FACTS

Plaintiffs Anthony G. Thomas and Wendi Thomas (the Thomases) sued their homeowner’s insurer, defendant Fire Insurance Exchange (FIE), and their insurance broker/agent, defendant Edwin Higashi, for negligence, negligent misrepresentation, and conversion after their home and its contents were destroyed by fire. FIE had paid the Thomases the full policy limits under their homeowner’s insurance policy (the policy) for the dwelling and the full policy limits under the policy for the contents of the dwelling.

The Thomases claimed that Higashi had assured them that their policy would cover more than $20 million in loose emeralds and other collectibles stored in their home even though the policy’s contents limit was $207,750. The Thomases also claimed that FIE had negligently failed to secure the property after the fire and had taken some of the Thomases’ property from the debris.

The action was tried to a jury, and the jury returned a defense verdict.
On appeal, the Thomases make two claims of prejudicial error. They challenge the trial court’s exclusion of evidence that the Thomases’ dwelling had been undervalued by FIE for insurance purposes and the trial court’s response to a jury question during deliberations about FIE’s liability for actions taken by the salvage company that FIE hired to sift through some of the debris from the fire

THE POLICY

The Thomases obtained a homeowner’s insurance policy from FIE through Higashi for their Morgan Hill residence. The policy limit for the dwelling was $277,000, and the limit for personal property was $207,750. A “personal article floater endorsement,” for which the Thomases paid an additional annual premium of about $650, provided $45,935 in coverage for several specific items of jewelry. The jewelry endorsement was the result of the Thomases obtaining supplemental coverage each time they acquired another item of jewelry. An appraisal was required for each jewelry item, and the premium increased for each item. Another of the policy’s endorsements provided coverage of $200 per card and $1,000 “in the aggregate” for “sports cards.”

THE PROPERTY CLAIMS

The Thomases had a large collection of sports “memorabilia” that they stored in their garage. This collection included hockey cards, baseball cards, and football cards that Anthony Thomas (Anthony) valued at $50,000 or $60,000. Anthony testified that he also had a collection of around 8,000 “cut and polished” emeralds weighing nearly 13 pounds, most of which he stored under a piece of plywood in his attic. Although he testified that he had acquired these emeralds for just under $300,000 (most of it in cash), he claimed that the emeralds were worth $25 million. Anthony stored about 100 of his emeralds in a gun safe and a few in his bedroom. He testified that he stored most of his emeralds in his attic because he wanted to ensure that even if someone stole his gun safe the thief would not get most of his emeralds. Anthony also had two emerald statutes.

The Thomases’ home was destroyed by fire on August 13, 2006 while they were on vacation. The Thomases immediately made a claim under their policy. By the day after the fire, the remains of the Thomases’ dwelling had been bulldozed at the direction of firefighters due to safety concerns. A neighbor retrieved the Thomases’ gun safe from the debris, and it was returned to Anthony. The day after the fire, a fire investigator visited the scene and saw nothing “salvageable.” Kristena Wilk, FIE’s claims adjuster, was assigned to the claim the day after the fire. When she inspected the site on August 16, she found piles of debris scattered around portions of the two-acre lot where the Thomases’ dwelling had been. She saw nothing salvageable or of value in the debris.

FIE hired ServiceMaster, a restoration company, to do some sifting of the debris on the property to see if any items could be recovered. The sifting occurred on August 29, 2006. A few items were found, and ServiceMaster took custody of some of these items to store for the Thomases to later retrieve. FIE ultimately paid the Thomases the $207,750 contents policy limits and $37,435 for the two of the three items of jewelry covered by the floater endorsement that had been lost in the fire.

DISCUSSION

Exclusion of “Undervalued Homes” Evidence

Both Higashi and FIE moved in limine to exclude evidence concerning the adequacy of the policy’s dwelling limits. The Thomases’ claims concerning the policy’s coverage for the dwelling had been settled. The settlement agreement included a release under which the Thomases released FIE and Higashi “from any legal theory that argues that the limits for anything other than the Coverage C—Personal Property portion of the claim are or should be different than on the declarations page … except the Coverage C Personal Property portion of the claim and all causes of action pertaining to the Coverage C Personal property claim….”

FIE sought exclusion of any evidence regarding the policy’s coverage limit for the dwelling including “allegations of under-insurance of the dwelling.” FIE’s motion identified as its targets an “ ‘undervalued homes report’ “ and certain potential testimony by Anthony’s brother. The “Undervalued Homes Report” was single-page list of about 50 FIE “insureds [including the Thomases] who had purchased their policies from defendant Higashi [and] who were possibly underinsured.” Higashi had been questioned at his deposition about this report. In a recorded statement, Higashi had stated that he believed that he had accurately valued the Thomases’ property using FIE’s computerized system based on the information available to him at that time.

An insurance expert testified at trial that the FIE contents coverage limit “is automatically 75 percent of” the dwelling coverage limit. Another insurance expert testified that the premium for a policy covering $25 million in jewelry would be about $300,000 per year. He explained that an insurance agent will generally be motivated to sell more coverage because the agent gets a portion of the premium. The only reason an agent would have for “underinsuring property” would be “to present a more attractive price to the insurance buyer.”

ANALYSIS

The evidence that the trial court excluded had very little, if any, probative value on the issues alleged by the Thomases in their operative complaint on the causes of action that went to the jury. The Thomases alleged that Higashi and FIE were liable for negligence because they had a duty to provide the Thomases with “full replacement cost insurance coverage,” represented that they had done so, but had failed to do so. They alleged that Higashi and FIE were liable for negligent misrepresentation because Higashi had affirmatively assured the Thomases that their emeralds, worth more than $20 million, “were already covered for their full replacement value under the terms of the Policy” and did not require “additional coverage,” that their other personal property was “insured for full replacement cost under the policy [,] and that their insurance coverage was adequate regardless of the specified limits.”

The determination of whether the Thomases’ dwelling was actually undervalued would have necessitated the presentation of a great deal of evidence on an issue that did not directly address any of the Thomases’ allegations. And, as the defense pointed out, it would confuse the jury because no questions concerning the policy’s dwelling coverage were before it.

While there could have been factual questions about whether ServiceMaster engaged in tortious conduct that caused harm to the Thomases, any such questions were not among the issues before the jury in this trial. Under these circumstances, the trial court did not prejudicially err in providing a response to the jury that properly excluded this unpleaded, untried, unargued issue from the jury’s purview.

ZALMA OPINION

The plaintiffs in this case knew that they needed a special coverage for jewelry with appraisals setting the value if they wished to exceed the policy limits scheduled in the policy. Had they advised FIE at the time they acquired the policy that present in the house was over $25 million in jewelry neither identified, appraised nor described the probability that a single loss would have been a total loss even if the house was only slightly damaged. A $25 million jewelry policy could have been obtained but not from FIE. It would require a surplus line broker, an appraisal, and a great deal of security. The premium could easily have been three percent of the value. The claim is obviously suspicious and since the insureds were paid the policy limits their suit was, in my opinion, frivolous.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

When Are Operations Completed?

Pollution Exclusion Effective & Unambiguous

An insured manufacturer of automotive parts brought a state-court action against an umbrella insurer, seeking coverage for underlying claims by neighboring landowners for bodily injury and property damage caused by leakage of Trichloroethylene from insured’s plant into soil and groundwater. The United States District Court for the Southern District of Indiana entered summary judgment for the insurer and the insured appealed. Having struck out in the district court, Visteon appealed to the Seventh Circuit Court of Appeals in Visteon Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., — F.3d —-, 2015 WL 294384 (C.A.7 (Ind.) 2015) the Seventh Circuit Court of Appeal was asked to reverse the trial court’s decision by Visteon.

FACTS

Visteon, a large manufacturer of automotive parts, with manufacturing facilities scattered around the world but its headquarters in Michigan, brought this diversity suit for breach of contract against the National Union insurance company. Visteon had a liability insurance policy with National Union providing worldwide liability coverage between 2000 and 2002. The policy contains an exclusion for liability resulting from pollution caused by Visteon, but the exclusion is expressly made inapplicable to liability arising from a “Completed Operations Hazard.” National Union has refused to indemnify or defend Visteon from suits arising from pollution caused by one of Visteon’s plants.

The plant in question was in Connersville, Indiana. In 2001, and thus during the insurance coverage period, the powerful toxic solvent TCE that was used to clean machinery in the plant was discovered to have leaked into the soil and groundwater. Neighboring landowners sued Visteon for damages caused by the leakage. Visteon expended millions of dollars to settle the suits and additional millions to clean up the pollution that the leakage had caused. When National Union refused either to defend Visteon or to reimburse it for any of the costs it had incurred, Visteon filed this suit in an Indiana state court; National Union removed the case to federal district court.

THE POLICY

The insurance policy excludes coverage for damages caused by “the actual or threatened discharge, dispersal, seepage, migration, release or escape of pollutants anywhere in the world”—which obviously encompasses the TCE leak. With Michigan enforcing pollution—exclusion clauses, Visteon is left to argue that what happened in Connersville is within an exception (part of the Completed Operations Hazard clause) to the pollution-exclusion clause for damages “occurring away from premises you own or rent and arising out of … Your Work except … work that has not yet been completed or abandoned.”

THE QUESTIONS

Under Michigan law the court needed to determine if Visteon’s liability from the TCE leak was within the scope of the Completed Operations Hazard clause of the insurance policy, an exception as we mentioned to the pollution-exclusion clause. The district court ruled that Visteon was not entitled to coverage under that clause and so dismissed Visteon’s entire suit.

The question is whether the TCE leaked by the Connersville plant was a result of completed “work.” Visteon argues that its “work” was “completed” each time a contract to supply products made at the plant was performed. In response National Union points out that operations continued at the plant until 2007, long after the insurance policy expired, when Visteon ceased manufacturing at the plant.

Visteon’s interpretation can’t be right, because it erases the line between completed and ongoing operations. The first definition could, as a semantic matter, embrace pollution occurring after the completion of each contract to sell parts manufactured at the Connersville plant. The problem is that such an interpretation apparently would erase the pollution exclusion for all the pollution caused by the plant.

For Visteon doesn’t acknowledge that the pollution expenses resulting from the TCE leak have to be apportioned between products that the Connersville plant made under contract and products that it made hoping to sell but not yet having a contract to sell. It thinks the Completed Operations Hazard clause entitles it to reimbursement for the entire costs it incurred as a result of the pollution claims made against it. It thus interprets that clause as swallowing the entire pollution-exclusion clause—the exception becoming the rule.

ANALYSIS

Is it plausible that National Union would have issued an insurance policy that vitiated the pollution-exclusion clause of an insurance policy that covers liabilities incurred by Visteon anywhere in the world? Doubtful since it wrote a clear and unambiguous pollution exclusion that, if Visteon’s argument is upheld, would emasculate the exclusion.

The Seventh Circuit concluded that Visteon’s argument from the Completed Operations Hazard clause is wrong for another reason. Visteon doesn’t explain why it should make a difference to coverage whether a fuel injection component or other part is sold pursuant to a contract, or is shipped to some distribution facility owned by Visteon where it is then offered for sale. The difference has nothing to do with pollution, so why should it affect the scope of an insurance policy that has a pollution-exclusion provision? The contract-completion exception is more plausibly read as referring to the end of a relationship with a buyer.

Most courts have interpreted the “completed operations hazard” narrowly—more narrowly indeed than required to decide this case in favor of the insurance company. All the cases reviewed by the court hold that pollution arising from ongoing operations (including manufacturing, as in several of the cases cited above) isn’t covered by the Completed Operations Hazard clause, even though these are cases in which the insureds were completing their performance of particular sales contracts with customers.

The Seventh Circuit, in conclusion, noted finally that the pollution-exclusion clause is unambiguous, and therefore National Union had no duty to defend Visteon against the suits brought against it by neighboring landowners who experienced losses because of the leak of TCE from Visteon’s Connersville plant.

ZALMA OPINION

Pollution cases are always expensive. In this case Visteon incurred damages and defense costs in multiple millions of dollars. The expense was sufficient to attempt to obtain coverage from a policy where there was – at least – a vague possibility for coverage to apply. It’s argument was original and well stated albeit wrong. An insurer like National Union that wrote a clear and unambiguous exclusion would not then give it away. Visteon’s argument that each event in a manufacturing plant finishing a particular product is a completed operation. It’s argument failed because the argument made no logical sense because there was no evidence that there was a project completed for one particular customer that resulted in the pollution. It was, rather, due to parts cleaning over the period that the plant was in operation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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The Staged Insurance Loss

Creating Insurance Fraud

A staged insurance loss is a fictitious loss created for the sole purpose of defrauding an insurer. Wherever insurance exists in the world there is insurance fraud.  It is an equal opportunity crime performed by every race, religion, language spoken or national origin.

The number of variations on types of staged losses is limited only by the imagination of the insurance criminals. This article describes some of the variations and how an insurer should deal with a fraudulent claim when it is discovered.

Staged auto theft

A staged theft occurs when the owner contracts with an intermediary to dispose of a vehicle. The owner ‘gives up’ the vehicle and then reports it to the insurer as stolen. The person to whom the vehicle is given up will pass it to a salvor, also known as a “chop-shop,” because it breaks the vehicle up into its component parts and sells the parts.

The staged theft is difficult to detect unless the perpetrator is sloppy, aggressive or forgets his prepared script as to the loss facts. A staged theft of an automobile performed to defraud an insurer is a crime in almost every jurisdiction in the world and can be punished in both criminal and civil courts.
Abandonment

The owner abandons a vehicle upon which he or she hopes to make a fraudulent claim unlocked with the key in the ignition, on a city street or in a parking lot. Doing so creates what insurers describe as a morale hazard. The temptation is too great for people with an inclination to crime and the vehicle will be taken.  The person insured reports the vehicle stolen and collects from an insurer before the vehicle is recovered.
Dumping

Some creative insurance fraud perpetrators cannot rely on the dishonesty of their neighbors and dispose of a vehicle by dumping it into a lake or other body of water. Some cars have even been found buried underground while others have changed the level of some ponds and lakes where hundreds of allegedly stolen automobiles were found underwater.
Fires to avoid auto lease penalties

Many people, rather than purchase an automobile will lease the automobile because the monthly payments are lower than a vehicle loan. What the purchasers don’t recognize until near the end of the lease is that the lessor puts a limit on the amount of miles on the odometer. If the vehicle is driven more than the limit set by the lease – usually 10,000 to 15,000 miles a year – the lease will include penalties of $0.10 to $0.15 per mile over a pre-set limit. That amount grows rapidly as the vehicle is driven.  I have seen some very expensive cars with a penalty of $2.00 per mile lease payment over a pre-set limit.

Upon learning that at the end of the lease the owner will have to pay a considerable sum that the owner does not have the owner will consider fraud as his only way to avoid the payment. The insured-lessee will often take the vehicle to a remote location, set it afire so that it is totally destroyed, and then report it stolen to avoid payment of the excess charges. The lessor will get the market value of the vehicle at the time of the fire and the insured/lessee will walk free with no expense if he can convince the insurer that the theft and fire was true.d.

The Staged Auto Accident

A typical scenario for a staged accident involves an insured person, in collusion with others, who will drive his vehicle into the rear of a car occupied by four co-conspirators. The insured reports the “accident” to his insurer as his fault. The occupants of the other car all claim to suffer soft tissue injuries (strains, sprains, sore backs, necks, headaches) and make claims against the insured. Since there is no physical evidence of soft tissue injuries there are no effective tests available to a physician to accurately determine whether a person is being honest when he or she complains of pain. Quick settlement is reached with the “victims” of the “accident” who share the money received with the insured.

A variant of this is the Short-Stop accident, sometimes called the “swoop and squat.” The claimant, driving an old and dented automobile, deliberately stops suddenly in front of an expensive automobile. The driver cannot stop in time and has no choice but to rear-end the old vehicle. A claim is presented for extensive injuries.

In the typical swoop and squat setup, at least two conspirators drive through the streets looking for an expensive vehicle that is obviously insured. Once the victim is observed the car driven by these co-conspirators is a car with little value. The target is usually a lone driver with no passengers. The fraudsters usually concentrate on city roads with two lanes traveling in each direction. When they spot a victim driving alone in an area with no potential eyewitnesses, one “swoops” – pulling in front of the other car and then “squats” – hitting the brakes so that the scam victim rear ends their vehicle. To see how a swoop and squat works check the videos at Bankrate.com.1
Staged water damage or mold claim

Not all staged losses deal with automobiles. Real and personal property can be the victim of a staged loss.

Mold and fungi can be destructive and unhealthy. It can also create a major insurance claim for a person anxious to defraud an insurer. The fraud perpetrator first acquires an old, inexpensive dwelling which is then insured for full replacement cost. They turn the heat up to maximum and then soak the interior with hoses or interior water sources. The high humidity and heat is sufficient to start the growth of mold and fungi. The insured waits a week or two allowing the mold to grow and then report a claim to the insurer saying they returned from a short two-week holiday to find the mess. The house is usually extensive and can result in a total loss. The insurer repairs or replaces the dwelling and the fraud perpetrators sell the house at a profit.

The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002 by federal investigators, working in conjunction with the Texas Department of Insurance. The defendants were charged with presenting insurance claims for water and mold damage to a succession of homes that they purchased, bought policies for and then intentionally flooded the houses with water hoses or by damaging water pipes. At least one house was overheated (cooked) to speed up mold growth.

Other members of the ring, posing as vendors and contractors, filed false claims to repair the damage and sold the homes to each other to repeat the process.  Six of the conspirators were found guilty.

As the 21st Century began public hysteria about mold grew.  As insureds and their representatives became knowledgeable about mold the temptation to create a covered loss scenario where none would otherwise exist became almost irresistible.

It is important, therefore, for an adjuster to confirm the actual existence of the broken pipe, ruptured hot water tank or other covered cause of loss before adjusting a mold damage claim. Furthermore, during this early adjustment period, corroborating information should be obtained from plumbers, repairmen and dry-out companies that the loss occurred as claimed, and that the water intrusion appeared in areas that are now claimed to be ruined by mold.

Conclusion

Fraud perpetrators should face prosecution and jail and, at the least, an inability to recover from the insurers. Insurance adjusters and insurer fraud investigators must conduct a thorough investigation recognizing that most police agencies are not interested in insurance fraud. The thorough investigation, conducted to defeat the fraudulent claim, can then be packaged for the police and prosecutors who will prosecute since their work has been completed other than trial. The insurer should, if convinced that fraud has been perpetrated, should seriously consider presenting their cases to the local prosecutor. Staged accident perpetrators who, in the past, understood that if they were caught they faced no more than an order of restitution and probation must be convinced that, if caught, they will face hard time in prison.

No matter how the loss is staged if it was done to deceive and defraud an insurer it is a crime in almost every jurisdiction in the world where insurance is sold. When the fraud is prosecuted successfully those tempted to commit fraud will be deterred.

Insurance fraud is a serious crime taking billions from the insurance industry every year. Everyone who buys insurance must understand that if fraud is defeated or reduced they could save from 10% to 30% of the premium they pay.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Insured Owes Utmost Good Faith To Insurer

Lie on Application – Lose Everything

Marine Insurance requires that both parties treat each other with utmost good faith or face the problem of a policy void from its inception. That means, simply, that neither party may lie to the other about anything material to the decision to insure or not insure.

In Securian Casualty Co. v. Markel American Ins. Co., Slip Copy, 2015 WL 300432 (E.D.Wis., 1/22/2015) Orestes Fernandez, Jr. (Fernandez) lied when he acquired a policy from Markel that Markel contended were material and that caused the policy to be void. Fernandez settled with Markel for a small amount, failed to pay the lienholder, who then sued Markel for the amount of its debt.

FACTS

In 2005, Fernandez purchased a speedboat, a 2005 Black Hawk USA Sea Hawk, relying in part upon financing from Eastern Financial Florida Credit Union. The boat was insured by Markel American Insurance Company for the year beginning June 12, 2007, and Eastern Financial was identified as the lienholder. Eastern Financial was named a “Loss Payee” on the declarations page of the policy.  The boat was stolen in February 2008 and subsequently recovered stripped of its equipment, leading Fernandez to file a claim with Markel.

Markel filed an action in the United States District Court for the Southern District of Florida seeking a declaration that it was not obligated to pay under the policy as a result of misrepresentations made by Fernandez in his insurance application. After the court denied Markel’s motion for summary judgment on the basis that Markel failed to introduce any evidence that the omission of a prior claim on Fernandez’s application was material to Markel’s decision to insure the vessel Markel and Fernandez settled their dispute for $35,000.00.

Eastern Financial was not notified of the loss of the vessel, the subsequent litigation, or the settlement between Markel and Fernandez. Only after Fernandez stopped making its loan payments in 2011 did Eastern Financial learn that the vessel had been stolen and that Markel had settled the insurance claim with Fernandez. Eastern Financial was left with over $61,000.00 owed on a loan for which there was no longer any collateral and with regard to which the insurance claim had already been settled. As a result, Eastern Financial submitted a claim to its insurer, Securian Casualty Company, who provided collateral protection insurance coverage for Eastern Financial. Securian paid $61,479.48 to Eastern Financial (technically, to its successor) for the loss.

Securian, as subrogee of Eastern Financial, sued Markel to recover the amount paid to Eastern Financial on the theory that Markel breached the insurance contract when it paid the settlement to Fernandez rather than to Eastern Financial as the designated loss payee.

ANALYSIS

It is Markel’s position that, notwithstanding its acknowledged error in failing to name Eastern Financial as a defendant in the Florida declaratory judgment action, Securian cannot recover in the present action because a loss payee has no greater rights than those of the named insured.

Under the doctrine of uberrimae fidei, parties to a maritime insurance contract must accord each other the “utmost good faith.” Certain Underwriters at Lloyd’s, London v. Giroire,  27 F.Supp.2d 1306, 1311 (S.D.Fla.1998. This duty requires that the applicant voluntarily and accurately disclose to the insurance company all facts which might have a bearing on the insurer’s decision to accept or reject the risk. If the applicant misrepresents or fails to disclose information that is material to the insurer’s risk, the contract is void.

On the insurance application, when asked if he had any insurance losses or claims in the past, Fernandez checked the box for “Yes.” The question continued: “If yes, please describe in detail with dates and amounts.”  On the line below is written, “NOV 1995 WATER DAMAGE $35,000.00.” Fernandez also stated that he had not had any automobile driving tickets in the past three years and that he had never had insurance refused or cancelled. All of these statements were untrue. Fernandez’s prior insurance claim was in 2005, not 1995, and was for $130,000.00 but settled for $35,000.00. That prior insurer then refused to renew his insurance. Fernandez also had three speeding citations in the year before the application.

These facts were material to Markel’s decision to issue the policy to Fernandez. According to Markel’s managing director for marine insurance, if Markel had known the truth with respect to any of these false statements, it would not have issued the policy to Fernandez. Securian has presented no evidence that calls into question the veracity of Markel’s managing director’s statements. Contrary to Securian’s assertion otherwise, it is thus undisputed that Fernandez’s misstatements were material to Markel’s decision to issue the policy. Because the policy was premised upon a material misrepresentation by the insured, the policy was void at its inception.

LOSS PAYEE’S RIGHTS ARE DERIVATIVE

As a simple loss payee, the rights of Eastern Financial, and thus its subrogee Securian, are derivative of Fernandez’s rights. Because Fernandez lacked any rights under the void insurance policy, Securian likewise has no rights. That would seem to be the end of the analysis. But Securian argues that Markel’s payment of $35,000 to Fernandez to settle the Florida lawsuit (when it was aware of the misrepresentations) was a breach of a contract that existed between Markel and Eastern Financial (and, thus, Securian) as loss payee under the policy.

Because the insurance policy was void at its inception, there was no contract for Markel to breach—either as it relates to Fernandez or Eastern Financial. Markel’s payment to Fernandez to settle the Florida lawsuit does not change this fact. Settlement payments are made for all sorts of reasons unrelated to merits of any particular party’s claim—not the least of which includes avoiding the time and expense of litigation. But Markel’s payment to Fernandez did not result in the creation of rights that Eastern Financial never had under the void insurance policy.

An alleged breach of contract does not amount to unclean hands. A failure to comply with the material terms of a loan document may be a breach of contract, and it may not be nice, but it does not amount to unclean hands.

With respect to Markel’s counterclaim, declaratory judgment in favor of Markel shall be granted as follows:

• Policy No. YH 5065166–60 is void for misrepresentations and/or for nondisclosures of material fact;
• Securian as the subrogee or successor in interest to a simple loss payee has no greater rights than the named insured under Policy No. YH 5065166–60.

• Policy No. YH 5065166–60 does not afford any coverage in any amount to Securian regarding the incident referenced in the complaint in this action.

ZALMA OPINION

This case teaches that a lender should always insist on a standard or union mortgage clause when lending money to avoid the limited protection provided by a simple loss payable provision. In addition, insurers should never settle a claim when it has sufficient evidence to enforce rescission for misrepresentation or concealment of material fact. Trial courts are loathe to grant motions for summary judgment. That does not mean the case is lost. They should have taken the Fernandez case to trial. Both sides lost. Markel paid a fraud and was sued for cost saving decision. Securian obtained nothing because its insured was satisfied with a simple loss payable clause that gives it no greater interest than the insured while a union mortgage clause is considered a separate contract between the insurer and the insured and even if rescinded as to the named insured the mortgagee can still collect up to its interest.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Insurer Not Obligated to Pay High Bid

Limit is What a Reasonable Contractor in The Marketplace Would Charge

When a church roof was damaged by windstorm the church retained a contractor who presented a seriously – in the mind of the insurer – inflated estimate for repair of the church roof. The insurer had hired a professional adjuster and engineer to determine what a reasonable, experienced and professional contractor would charge to complete the repairs. The contractor hired by the church, on the other hand, presented an estimate as to what he would charge to do the repairs more than three times what the insurer’s experts said was reasonable.

In St. Panteleimon Russian Orthodox Church, Inc. v. Church Mut. Ins. Co., Slip Copy, 2015 WL 283044 (D.Minn. 1/22/15) the District Court for the District of Minnesota was called upon to resolve the dispute and whether the insurer’s refusal to pay what the church demanded was an act of bad faith..

BACKGROUND

Plaintiff St. Panteleimon Russian Orthodox Church, Inc. (the “church”) is a Minnesota nonprofit corporation that owns real property located at 2210 Franklin Avenue South, Minneapolis, Minnesota 55414 (the “Property”). Defendant Church Mutual Insurance Company is a mutual insurance company incorporated in, and with its principal place of business located in, the State of Wisconsin. In January 2011, Defendant issued to Plaintiff an insurance policy with a property coverage limit of $1,046,500, effective February 2, 2011 through February 2, 2014.

The Policy provides coverage for loss “caused by or resulting from any Covered Cause of Loss,” which is defined to mean “risks of direct physical loss unless the loss is: 1. Excluded under Exclusions; or 2. Limited under Limitations.” In the event that a covered loss occurs, the Policy provides Defendant with several options for payment, including paying “the cost of repairing or replacing the lost or damaged property.

The Loss and the Initial Inspections and Estimates

On March 19, 2010, there was a wind storm at the Property. Wind is a covered risk of loss under the Policy. Therefore, when Plaintiff sought coverage for damage caused by the storm, Defendant hired an outside professional insurance adjuster, Bill Berscheid, to investigate the claim and calculate the amount of the loss. As part of his investigation, Mr. Berscheid retained Stephen Mayhew, a Senior Associate Engineer with Wiss, Janney, Elstner Associates, Inc., who has approximately two decades of engineering experience involving wood structures, to render a professional opinion as to the scope of damage caused to the Property by the wind storm.

Meanwhile, Plaintiff hired Michael DuPont, a general contractor and owner of United Exteriors Midwest, Inc., who has approximately thirty-five years of experience in the construction industry, to fix the roof of the church. Plaintiff designated Mr. DuPont as its representative for purposes of its insurance claim and Mr. DuPont sent letters to Mr. Berscheid on April 20 and April 24, 2012, estimating the insurance claim at $66,320.37 and $64,565.00, respectively.

In May 2013, Plaintiff demanded an appraisal of the dollar amount of damages. In response, Defendant notified Plaintiff that Plaintiff was required to “submit a proof of loss identifying all covered damages being claimed, along with all supporting documentation for those amounts,” in order to proceed with the appraisal. Consequently, Plaintiff submitted a sworn proof of loss stating that the “whole loss and damage to the described property as a result of this loss,” and the “actual cash value of repairs or replacement being claimed,” was $1,046,500.00—i.e., the Policy’s limit. Defendant rejected the proof of loss, noting that it was not accompanied by supporting documentation and was “without question not consistent with the damages at issue.”

DISCUSSION

Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy, and inexpensive determination of every action

Plaintiff’s claims are based on both its alleged right to an appraisal and Defendant’s alleged failure to pay the amount owed under the Policy to cover Plaintiff’s property loss.

As discussed above, Plaintiff’s Motion to Compel Appraisal failed because Plaintiff did not identify the documents or information that it provided to Defendant in support of its claim, as required by the Policy. Plaintiff did not object to the Court’s denial of the Motion, and as of April 22, 2014, Plaintiff’s representative still could not identify any documents or information that Plaintiff had submitted to Defendant to support the claimed loss. Because Plaintiff failed to set forth specific facts showing that there is a genuine issue for trial regarding Plaintiff’s initiation of the appraisal process, summary judgment is appropriate on Plaintiff’s claims to the extent that they are based on Defendant’s failure to engage in that process.

There is no dispute in this case that the cause of Plaintiff’s loss (i.e., wind) is a covered cause of loss under the Policy. Nor is there a dispute as to the scope of property damage caused by the wind storm (i.e., damage to the Dome, a portion of the roof, several ceiling tiles, and the fence). Rather, the viability of each of Plaintiff’s claims for monetary relief is dependent upon resolution of one disputed issue: the amount of money that Defendant is required to pay Plaintiff to cover the cost to repair the damage. Plaintiff would bear the burden of proof on this issue at trial.

As discussed above, the Policy requires Defendant to pay “the cost of repairing or replacing the lost or damaged property,” but not more than the amount “necessary” to repair or replace the property. According to the Minnesota Court of Appeals, the term “necessary” is not ambiguous.

Plaintiff argues that summary judgment is inappropriate because there are two competing estimates of the cost to repair the damage at issue, and the jury must determine which contractor is correct. Defendant’s designated expert, Mr. Elert, has opined that $78,826.55 is the cost that a reasonable contractor in the Minneapolis–St. Paul area would charge to complete the work necessary to repair the damages caused by the wind storm, and that many contractors in the Minneapolis–St. Paul area who are qualified to do the work would be willing to do so for that price. On the other hand, Plaintiff’s contractor, Mr. DuPont, has estimated the cost of his own services to complete the repair work to be $219,540.00.

Because estimating the amount and cost of materials and labor needed to complete the repairs requires specialized knowledge, the Court doubts whether Mr. DuPont could provide testimony under Rule 701 even regarding his own estimate. Second, even if Mr. DuPont could testify under Rule 701 about what he would charge for the repair work, he could not testify about what a reasonable contractor in the marketplace would charge.

Accordingly, while Defendant could present a jury with Mr. Elert’s testimony as to what a reasonable contractor in the marketplace would charge for the repair work at issue, Plaintiff could—at most—present Mr. DuPont’s testimony regarding the amount that he would charge. However, Defendant is only obligated under the Policy to pay Plaintiff what a reasonable contractor in the marketplace would charge. That evidence is undisputed, and the fact that Mr. DuPont would charge more simply indicates that Plaintiff should not hire him.

 ZALMA OPINION

Disputes over the amount necessary to repair are usually resolved by appraisal. In this case the insured Church demanded appraisal but produced no documentation to support its claim nor information sufficient for the appraisers to resolve the dispute. The court refused to compel appraisal because of that failure. In addition the church allowed its contractor/adjuster to inflate the claim without the appropriate expertise to support his claim. The court gave the church good advice, don’t pay the high bid, pay what a reasonable and professional contractor would charge. Insurance is not a place to make a profit but to gain indemnity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Careful With Applications

Broker’s Misrepresentation Without Knowledge of Insured Is Sufficient for Rescission

Insurance brokers, who represent the insured to transact insurance with, but not on behalf of, an insurers often will try to make the process easy for the insured by filling out the application before asking the insured to sign it. It is a practice fraught with danger that can cause the insured to have no coverage at all and make the broker a defendant in a major lawsuit.

In Douglas v. Fidelity National Insurance Co., 229 Cal.App.4th 392, 177 Cal.Rptr.3d 271, 14 Cal. Daily Op. Serv. 10,315, 2014 Daily Journal D.A.R. 12,127 (2014) the insureds sued a fire insurer for bad faith. The Superior Court, Alameda County, entered judgment on special jury verdict awarding damages to the insureds, but struck the jury’s $1.9 million punitive damages award following the granting, in part, of insurer’s motion for judgment notwithstanding the verdict (JNOV). The insurer appealed.

FACTUAL BACKGROUND

In December 2010, plaintiffs went to a business called Cost–U–Less Insurance (Cost–U–Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowner’s insurance policy with Fidelity. Three months later a fire damaged plaintiffs’ home.

After an investigation, Fidelity rescinded the homeowner’s policy on the grounds that plaintiffs’ insurance application contained material misrepresentations about various facts concerning plaintiffs’ and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.

 PROCEEDINGS AT TRIAL

In December 2010, plaintiffs went to a Cost–U–Less store in Stockton to purchase an insurance policy for the Locust Street home. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost–U–Less did not ask him any questions about the property. Jerry signed the documents and gave the employee a check.

After the fire and investigation by Fidelity, Jerry received a letter dated May 31, 2011 from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insurance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed showing material misrepresentations had been made in connection with plaintiffs’ insurance application. The alleged misrepresentations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel utilized circuit breakers or fuses, (3) whether there were roommates or boarders in the home and/or if the home was used as a rooming or boarding house, and (4) whether a business was conducted on the property. Charlston also stated it did not appear Jerry had ever personally lived in the home, asserting the property was being used either as a halfway house for parolees or as a rehab facility. Jerry testified that these claims were untrue. Finally, Charlston advised that plaintiffs owed Fidelity in excess of $24,000 for benefits already paid.

THE PURCHASE OF INSURANCE AND SUCCEEDING FIRE

Richard Gasparini, Jr., had visited On the Right Path several times. During one such visit, he was setting up his laptop computer when people came through the front door yelling that they had a search warrant. He was handcuffed and taken out to the street. In connection with that visit he created a report dated December 30, 2009. He also visited plaintiffs’ home on February 10, 2011. Later, Betty came to his office and told him about the fire. She said several times that she wanted to relocate the facility to another house.

Bruce LeBlanc evaluates policies to ensure they meet Fidelity’s underwriting guidelines. He confirmed that insurance brokers use Fidelity’s website to complete online applications. The application program is called Fidelity Rating and Internet Service Technology (F.I.R.S.T.). It automatically quotes and underwrites policies in real-time. Some of the questions on the application are underwriting questions and others are rating questions. The rating questions pertain to the quote for the premium on a specific policy. The underwriting questions are intended to qualify the risk for acceptance. The broker obtains the relevant information from the applicant and inputs it into the F.I.R.S.T. system. Once the application is submitted, the broker can print the signature page off the Internet and have the applicant sign it. The system will not approve applications that have unacceptable underwriting responses.

DISCUSSION

It is well established in California that material misrepresentations or concealment of material facts in an application for insurance entitle an insurer to rescind an insurance policy, even if the misrepresentations are not intentionally made. To prevail, the insurer must prove that the insured made a material “false representation” in an insurance application.

The evidence presented at trial would support a finding that plaintiffs were licensed to operate a residential care facility out of their home and that they received money in exchange for providing room and board to mentally ill clients. For example, the unusual incident/injury report that Betty submitted to the licensing agency after the fire states that two male clients were residing in the home at the time of the fire. Plaintiffs’ counsel essentially stipulated, outside the presence of the jury, that Betty was running a business out of her home.

INSZONE’S STATUS AS BROKER OR AGENT

As a matter of law, if an insurance application was prepared by an insurance broker (the agent of the insured), the application’s contents are the insured’s responsibility. Unlike insurance brokers an “insurance agent” is one who represents an insurer under an employment by the insurer.  Brokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insureds tend to be under some duty to each other during the entire length of the relationship.

Insurance agents and insurance brokers must be licensed by the Department of Insurance (DOI) (California Insurance Code § 1631). But a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.

There was evidence, albeit conflicting, that InsZone and Lockefeer acted as plaintiffs’ insurance brokers, and not as agents of Fidelity. The court’s review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict. The instructional errors were exacerbated by plaintiffs’ counsel’s closing arguments. He repeatedly asserted the “application” was the blank form Jerry had signed, emphasizing that this form did not include the disputed underwriting questions. Of course, Fidelity was not necessarily required to prove that the misrepresentations it relied on in issuing the policy were contained within an application. It only needed to prove that there was a misrepresentation or concealment of a material fact in connection with an application for insurance.

None of the questions or accompanying answers are printed on the page Jerry signed. Thus, Jerry’s testimony that he never saw the Fidelity underwriting questionnaire generated by InsZone is not implausible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in Jerry’s “application” because there were no representations at all on the blank pages that he signed.

Importantly, the jury was not asked to consider whether the F.I.R.S.T. application submitted by InsZone on plaintiffs’ behalf via Fidelity’s website contained any material misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresentations were made deliberately in violation of California law that allows for rescission based on an innocent concealment or misrepresentation of material fact.

Fidelity’s affirmative defense was not properly presented to the jury and the court concluded Fidelity was prejudiced thereby, necessitating a new trial.

ZALMA OPINION

Insurance agents and brokers should always advise their clients of how they will market the insurance requested. If they are acting as a broker, that is a person who transacts insurance with but not on behalf of an insurer, the broker should advise the insured that he only works for the insured. If an agent he should advise the insured that he is acting for the insurance company. Regardless, when an application is prepared the prudent agent or broker will always provide a copy of all representations made to the insurer – whether on an application or on a computerized system like FIRST and explain to the insured that the insurer will rely on each statement of fact provided to the insurer by the application process whether on an ACORD form or by e-mail or some other method of transmitting information.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

 

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Workers’ Compensation Is Exclusive Remedy

Tort Judgment Against Employer Is Only Good for Wallpaper

The workers’ compensation system across the United States provides benefits to injured workers without regard to fault. When the injury is serious or results in death the workers’ compensation benefits do not feel sufficient to indemnify the injured worker or his or her estate for the loss incurred. As a result, the injured worker or his estate will attempt a tort action and then try to collect that judgment by means of a suit against the employer’s insurer.

Employers and employes make a bargain: the employer will not require proof of negligence if the employee is injured and the employee agrees that he or his estate will accept the statutory benefits provided by state law and give up the right to sue the employer for tort damages.

In Morales v. Zenith Ins. Co., — F.3d —-, 2015 WL 265445 (C.A.11 (Fla.) 1/22/15) the estate of an injured worker successfully sued an employer and sought to recover by means of a breach of contract claim filed by plaintiff-appellant Leticia Morales, on behalf of herself, the Estate of Santana Morales, Jr., and two minor children  against Zenith Insurance Company (“Zenith”).

FACTS

Santana Morales, Jr. was crushed to death by a palm tree while working as a landscaper for Lawns Nursery and Irrigation Designs, Inc. (“Lawns”). At the time of Morales’s death, his employer Lawns maintained a “Workers’ Compensation and Employers Liability Insurance Policy” with Zenith. The policy contained two types of coverage: (1) workers’ compensation insurance under Part I and (2) employer liability insurance under Part II. After Morales’s death, Zenith began paying workers’ compensation benefits to the Estate in accordance with its obligation under Part I of the policy.

Under Part II, Zenith was obligated: (1) to “pay all sums [Lawns] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance”; and (2) to defend lawsuits for such damages. In relevant part, Part II contained an exclusion barring employer liability insurance coverage for “any obligation imposed by a workers compensation … law” (the “workers’ compensation exclusion”).

On December 3, 1999, the Estate filed a wrongful death action against Lawns in Florida circuit court and obtained a default jury award to the Estate of $9.525 million in damages against Lawns.

While the Estate’s wrongful death lawsuit was still ongoing, Zenith continued to pay workers’ compensation benefits on Lawns’s behalf until August 2003, when Zenith made a final lump sum payment of $20,000 in full settlement of the Estate’s workers’ compensation claim against Lawns. The parties entered a settlement agreement where the Estate waived all rights to any and all benefits under The Florida Workers’ Compensation Act. Further, the settlement and agreement constituted an election of remedies by the Estate with respect to the employer and the carrier as to the coverage provided to the employer.

In all, the Estate received over $100,000 in workers’ compensation benefits from Zenith, pursuant to the Florida Workers’ Compensation Act and Part I of the policy.

After Zenith refused to pay the $9.525 million tort judgment entered against Lawns, the Estate sued Zenith in Florida state court, asserting that Zenith had breached its insurance policy with Lawns. After Zenith removed the case to the Middle District of Florida, Zenith and the Estate cross-moved for summary judgment.

The district court granted Zenith summary judgment on the Estate’s breach of contract claim, ruling that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the employee Estate’s $9.525 million tort judgment against the employer Lawns. Observing that Florida law provides workers’ compensation benefits as the exclusive remedy for an employee injury caused by an employer’s negligence, the district court determined that the Estate’s state court lawsuit alleging Lawns’s negligence triggered an “obligation imposed by” Florida’s Workers’ Compensation Act, and thus the judgment issued in that lawsuit fell within the policy exclusion in Part II.

APPELLATE COURT’S CERTIFIED QUESTIONS TO FLORIDA SUPREME COURT

In the first panel decision in this case, the court certified the following questions to the Florida Supreme Court:

“(1) DOES THE ESTATE HAVE STANDING TO BRING ITS BREACH OF CONTRACT CLAIM AGAINST ZENITH UNDER THE EMPLOYER LIABILITY POLICY?

“(2) IF SO, DOES THE PROVISION IN THE EMPLOYER LIABILITY POLICY WHICH EXCLUDES FROM COVERAGE “ANY OBLIGATION IMPOSED BY WORKERS’ COMPENSATION … LAW” OPERATE TO EXCLUDE COVERAGE OF THE ESTATE’S CLAIM AGAINST ZENITH FOR THE TORT JUDGMENT?

“(3) IF THE ESTATE’S CLAIM IS NOT BARRED BY THE WORKERS’ COMPENSATION EXCLUSION, DOES THE RELEASE IN THE WORKERS’ COMPENSATION SETTLEMENT AGREEMENT OTHERWISE PROHIBIT THE ESTATE’S COLLECTION OF THE TORT JUDGMENT?”

The Florida Supreme Court answered all three certified questions in the affirmative, holding that “under Florida law, the estate has standing, but that the workers’ compensation exclusion and the release prevent it from collecting the tort judgment from Zenith.” Morales v. Zenith Ins. Co., ––– So.3d ––––, 2014 WL 6836320, at *1 (Fla. Dec. 4, 2014).

As to the workers’ compensation exclusion, the Florida Supreme Court stated as follows: “[T]he estate’s tort judgment arises from an injury that plainly falls within the exclusivity of Florida’s Workers’ Compensation Law and therefore within the coverage provided by Lawns’ workers’ compensation policy. Given the mutually exclusive nature of workers’ compensation and employer liability coverages, Zenith has no obligation under the employer liability policy to pay the tort judgment.”  Accordingly, the Florida Supreme Court held that “the workers’ compensation exclusion bars coverage of the estate’s tort judgment under the employer liability policy.”

CONCLUSION

Given the Florida Supreme Court’s resolution of the certified issues, the district court correctly determined that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the $9.525 million tort judgment against Lawns.

ZALMA OPINION

I can have empathy for the plaintiffs who lost a husband and father. I can imagine their joy at receiving a judgment of $9.525 million only to have that joy dashed by a bankrupt employer and the fact that workers’ compensation is an exclusive remedy.  They can frame the judgment and hang it on the wall but they can never collect it.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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The Cost Of Giving Away the Underwriting Pen

Insurer Gave Insured Right to Bind it to Coverage

Underwriting is the process by which an insurer decides which risks it is willing to take and which it is not willing to take. Insurers, attempting to increase business, have given away to others the right to decide who to insurer without even requiring notice to the insurer that the insurance had been effected. Colloquially called “giving away the pen” such an action is rife with danger.

The Supreme Court, Appellate Division, Second Department, New York, in one of its usual succinct opinions, dealt with the question of whether a corporation became an additional insured by reason of a contract between the parties where the insurer gave to the named insured the pen to make anyone it desired to contract with an additional insured. In Pinon v. 99 Lynn Avenue, LLC, -– N.Y.S.2d —-, 2015 WL 249360 (N.Y.A.D. 2 Dept., 1/21/15) it found that all the person claiming to be an additional insured needed to do to gain coverage was to prove a contract existed making such a promise.

FACTS

In 2004, 99 Lynn Avenue, LLC, and 105 Lynn Avenue, LLC (hereinafter together the Lynn LLCs), the respective owners of properties located at 99 Lynn Avenue and 105 Lynn Avenue in Hampton Bays, contracted with George E. Vickers, Jr., Enterprises, Inc. (hereinafter Vickers), a general contractor, for the construction of custom homes on each of their respective properties.

Vickers subcontracted with Paul Michael Contracting Corp. (hereinafter PMC) to perform the masonry work on the projects. On June 25, 2005, the plaintiff Miguel Pinon, an employee of PMC, was injured when, during his lunch break from his work for PMC on the projects, he dove off a bulkhead located on one of the subject properties into shallow waters in Shinnecock Bay.

The plaintiffs commenced this action to recover damages for personal injuries against, among others, the Lynn LLCs, Vickers, and PMC. Vickers commenced a third-party action against Merchants Mutual Insurance Company (hereinafter Merchants) seeking defense, indemnification, and reimbursement of past defense costs in connection with the main action as an additional insured under a commercial liability insurance policy that Merchants issued to PMC. The Lynn LLCs commenced a second third-party action against Merchants and Lexington Insurance Company (hereinafter Lexington) seeking defense, indemnification, and reimbursement of past defense costs as additional insureds under the policy Merchants issued to PMC and as named insureds under separate homeowners’ insurance policies that Lexington issued to them.

Vickers moved for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in connection with the main action. Lexington separately moved for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. Merchants cross-moved for summary judgment declaring that it is not so obligated.

THE POLICY

The policy issued by Merchants to PMC stated that it provided additional insurance coverage for “[a]ny person or organization [PMC was] required by a written contract, agreement or permit to name as an insured” with respect to liability for injuries arising out of PMC’s work for the additional insured “at the location designated in the contract.”

ANALYSIS

Contrary to Merchants’ contention, Vickers and Lexington demonstrated, prima facie, the existence of a written contract expressly requiring PMC to name Vickers and the Lynn LLCs as additional insureds under the commercial liability policy it obtained from Merchants. Vickers and Lexington further demonstrated, prima facie, that the allegations of the complaint in the underlying action suggested a reasonable possibility of coverage in that Pinon’s injuries arose out of PMC’s operations on the Lynn projects, as defined in the policy. Merchants failed to raise a triable issue of fact in opposition to Vickers’ and Lexington’s motions.

Accordingly, the Supreme Court properly granted Vickers’ motion for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in the main action, and Lexington’s motion for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. For the same reasons, the court properly denied that branch of Merchants’ cross motion which was for summary judgment declaring that it is not so obligated.

ZALMA OPINION

Insurance companies get into trouble providing insurance coverage it did not necessarily want to provide by giving its pen away – that is allow someone other than the insurer to bind insurance coverage. In this case the insurer, Merchants, agreed to provide additional insurance coverage for any person or organization required by a written contract, agreement or permit to name as an insured. That provision in the policy gave the decision to insure or not insure a person or entity as an additional insured to the named insured who could cause insurance to be in effect for a person or entity the insurer never would have agreed to insure had it been asked directly.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Investigating Insurance Fraud

The Beginning of an Insurance Fraud Investigation

The following is an excerpt from my book The Insurance Fraud Deskbook, available from the American Bar Association, Tort & Insurance Practice Section at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 .

Insurance Fraud Investigation

After the claims interview with the insured, claimant or witness, indicators of insurance fraud might be discovered. When discovered additional investigation into the potential of an attempted insurance fraud is required.

The purpose of an insurance fraud investigation is to gather evidence to establish whether a suspected fraudulent claim is legitimate or is, in fact, an attempt to defraud the insurer.

If the facts reveal the claim is legitimate, the fraud investigation stops and the claim is paid. If the facts support the suspicion, then further evidence must be gathered to allow the insurer to successfully deny the claim and refuse to pay.
Training the Investigators

The introduction of the tort of bad faith resulted in the insurance industry instructing its claims departments to avoid denying claims for fraud unless evidence of fraud is overwhelming.  Insurers avoided denying claims fearful that they would subsequently be sued for bad faith. Insurers discouraged their adjusters from looking too closely at claims. As a result, knowledgeable personnel either looked for another career or were laid off by companies interested in improving their bottom line by hiring the less experienced personnel.

Insurance fraud investigations are often expensive. The extent of insurance fraud, depending on which of the various estimates are believed, vary from $80 billion to $300 billion dollars every year. The sum is so enormous as to defy understanding. Insurers are finding that they cannot increase premiums to honest insureds fast enough to cover the amounts lost to fraud. They cannot afford to let such an enormous amount of money deplete their assets and destroy their profits without a fight. In addition, state insurance departments, concerned with the amount of fraudulent claims have compelled insurers to create special fraud investigation units (SIU) who exist only to cause insurers to investigate and present evidence to the local prosecutors of factual instances that indicate insurance fraud has been attempted or succeeded.

An insurer that wishes to stop the hemorrhage of billions of dollars to fraud perpetrators will obtain and rely upon the well-trained, knowledgeable and experienced adjusters and investigators.

Although many adjusters will never witness the sorts of frauds described in The Insurance Fraud Deskbook they must be trained to recognize the indicators of fraud. A well trained and experienced claims staff will be equipped with enough knowledge to separate the suspicious from the honest claim and be able to thoroughly investigate the suspicious claim.

The laws and regulations designed to force the victim of the crime, insurers, to investigate and prepare prosecutions for the state, are beginning to show results.

What An Adjuster Must Understand Before Starting a Claims Investigation

To turn a claims person into a fraud trained adjuster, the adjuster must become familiar with all of the following:

1.    all insurance policy contracts used by the insurer;
2.    the rules applied by the courts for the interpretation of insurance contracts;
3.    the Fair Claims Practices Act of the jurisdiction in which they work;
4.    the regulations promulgated by the Department of Insurance in their state to enforce the Fair Claims Practices Act;
5.    The statutes in their state compelling the existence of a Special Investigation Unit (SIU);
6.    The regulations established by their state concerning the training and operation of the SIU and claims personnel;
7.    the law of contracts;
8.    the law of torts;
9.    the law of fraud;
10.    the obligations of an insurer to pursue anti-fraud activities;
11.    interview techniques that facilitate the obtaining of detailed information;
12.    negotiation skills required for obtaining fair, reasonable, and acceptable settlements; and
13.    the red flags of fraudulent claims.

This training does not occur overnight. It is a tall order that requires commitment by the insurer to thoroughly train its adjusters and other claims personnel concerning the indicators of fraud. Fraud training, by computer assisted training programs, is available for minimal costs from private vendors like National Underwriter Company, IRMI, A.D. Banker, and IRMI’s WebCE, The Insurance Fraud Deskbook, and other materials published by the author. In addition various insurer produced programs exist as well as programs by independent adjusting firms and law firms.

Basic class-room type training for insurance personnel is available across the country in local colleges and universities. Local colleges, community colleges, universities and law firms will provide training at little or no cost. The training programs should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce and supplement the information learned.

The insurer should also institute a regular program of auditing claims files to establish compliance with the subjects studied to see how effective the training was to discover and defeat fraudulent claims. Monthly meetings should be held with claims staff to reinforce what was learned in the training sessions and to discuss current investigations where fraud is suspected.

There is no quick and easy way to create insurance claims professionals who are knowledgeable about insurance fraud. The training takes time. The learning takes longer. Those adjusters and other personnel who take the fraud training seriously and apply it to existing claims should be rewarded and honored for their skill. Without applying the training to actual claims the training is wasted.

Red Flags of Fraud

Every claims person and SIU investigator should be aware that suspicious claims have common attributes. Insurers and their anti-fraud organizations have collated the common attributes into lists of indicators or red flags of fraud. The lists were created as training aids and to be used to determine whether further investigation is required to determine if a claim is legitimate or false and fraudulent. Continually growing, these lists are known as the “red flags” or “indicators” of fraud lists. There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit.

If, when assessing a claim, three or more red flags are found the need for further investigation should be considered and evaluated by the claims person, a supervisor and the insurer’s special investigative unit. The existence of red flags does not mean a fraud has occurred. Red flags are only a signal to the adjuster to investigate further so that the suspicion may be either removed or confirmed. It is not any single indicator that alerts the adjuster to the possibility of a fraudulent claim but a combination of the red flag or red flags discovered coupled with the results of the thorough claims investigation.

Although the existence of multiple red flags should trigger an investigation, failure to investigate has been held to be reasonable as long as there are no patent inaccuracies or actual knowledge of false representations. In one case, the following common “red flags” were found to be a reason for an insurer to suspect arson for profit:

•    more than one mortgage,
•    late payments,
•    divorce,
•    prior claims,
•    multiple claims,
•    problems affecting title to the property,
•    over-insurance,
•    an increase in insurance coverage right before the claim,
•    recent cancellations of insurance held with prior insurers,
•    liens,
•    threats of foreclosure on the property,
•    lawsuits, and
•    recent job transfers.

Some other red flags of fraud include:

Red Flags Common to a Claim

A claim occurs:

•    shortly after the issuance of the policy;
•    shortly after the limits of the policy are increased;
•    in an insured’s first insurance;
•    shortly before the expiration of a policy;
•    within days of a notice of cancellation being served; or
•    on a policy acquired from an agent far from the insured’s home or business.

Red Flags Connected with the Insured or Claimant

When the insured or claimant:

1.    retains or is represented by counsel on the day of the loss;
2.    does not want to retain counsel;
3.    is represented by a public adjuster on the day of the loss;

4.    wants a settlement approved quickly;
5.    does not want the claim to go to a supervisor, regional office, or claims committee for authority;
6.    is exceedingly cooperative and undemanding;
7.    is exceedingly demanding and threatens a bad faith suit from the date of first contact;
8.    demands a proof of loss form at the initial meeting;
9.    is familiar with insurance claims terminology;
10.    asks for the claims manager by name;
11.    is familiar with the adjuster’s authority limits, and wants to settle for a sum within those limits;
12.    handles all business in person (thus avoiding mail and potential prosecution for violation of federal mail fraud statutes);
13.    provides an address that is a post office box, mail drop, or hotel; or
14.    reduces the demand for settlement when it is suggested by the adjuster that he or she file suit.

There are many more you can find in The Insurance Fraud Deskbook.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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No Policy Covers Everything

Must Enforce Clear & Unambiguous Exclusion

Insurance companies have the unquestioned right to determine who, and for what risks, they are willing to insure. There is no such thing as an insurance policy that covers everything and excludes nothing. Every automobile liability policy contains insuring agreements and exclusions that limit the insuring agreement. In Meyer v. Hunt, Not Reported in N.W.2d, 2015 WL 213222 (Mich.App., 1/15/15)

FACTS

Defendant Heather Jo Hunt worked as a child care provider for defendant Jennifer Marie Pierce. She stayed at Pierce’s home during weekdays and watched over Pierce’s three children. Hunt returned to her parents’ home on weekends. Pierce paid Hunt approximately $600 per month for her services and had no other source of income.

In June 2009, Hunt was at Pierce’s home when Pierce’s children found a kitten. Pierce did not want the kitten inside and Hunt offered to take the kitten to her parents’ home. Later that afternoon, Hunt drove Pierce to work in Pierce’s car. Hunt brought the children and the kitten along and, after dropping Pierce off, drove toward her parents’ home. On the way there, Hunt was involved in an incident that led to an accident.

Pierce insured her car with State Farm Mutual Automobile Insurance Company. It is undisputed that Hunt was covered under the State Farm policy because she was operating Pierce’s car with Pierce’s knowledge and consent.

In September 2011, Meyer sued Hunt and Pierce and State Farm provided a defense for them. During the course of discovery it was suggested that Hunt was also covered under a policy issued by Farm Bureau to Hunt’s father. In July 2012, Farm Bureau informed Hunt by letter that she was not covered under her father’s policy at the time of the accident because she was driving her employer’s vehicle during the course of her employment.

Meyer later settled with Hunt and Pierce. Meyer agreed to accept $80,000 from State Farm under its policy covering Pierce’s car and, in exchange, Meyer released Pierce from all claims arising out of the accident. In addition, as part of the settlement, Hunt stipulated to the entry of a judgment of $300,000 against her, but Meyer agreed that he would not seek to collect from any source other than the policy issued by Farm Bureau to Hunt’s father. The trial court then dismissed Pierce from the suit and entered the consent judgment against Hunt.

In January 2013, Meyer obtained a writ of garnishment against Farm Bureau for the judgment against Hunt. Farm Bureau objected to the garnishment and later moved to dismiss it on the ground that its insurance policy did not cover Hunt at the time of the accident. The trial court granted the motion.

ANALYSIS

Even assuming that Hunt was domiciled with her father and—for that reason—covered under the no-fault policy issued by Farm Bureau to him, Hunt would nevertheless not be entitled to coverage if, under the undisputed facts, an exclusion applied. The policy issued by Farm Bureau to Hunt’s father specifically excluded coverage if, at the time of the accident, an insured was “using any non-owned auto while employed or otherwise engaged in any business not described in” another exclusion. If a term is not clearly defined in an insurance policy, the term is given its commonly used meaning.

The verb “employ” means to “hire” or “engage the labor or services of (a person or persons).” Random House Webster’s College Dictionary (1997).

The undisputed evidence presented on the motion for summary disposition established that, whether characterized as a formal or informal babysitting arrangement, Hunt was working as a child care provider at the time of the accident. Hunt testified that, at the time of the accident, she was “caring for the children of Jennifer Pierce, and was being compensated for providing that care,” which was her usual or principal work.

Moreover, the evidence showed that she drove her employer to work and was transporting her employer’s children, who were under her immediate care, and that she was doing so to resolve an issue involving the children namely, to find a home for the kitten that they found earlier that day. Because there was no evidence from which a reasonable jury could find that Hunt was not working at the time of the accident, the work exclusion applied and precluded coverage.

ZALMA OPINION

Another case where a plaintiffs lawyer thought, by getting a stipulated judgment from the defendant, he could bludgeon an insurer into paying a claim it does not owe to avoid the cost of defense. It didn’t happen because the decision to deny coverage was based upon a clear and unambiguous exclusion that fit the facts of the accident.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 2 Comments

Self-Insured Retention Is Not Insurance

Insurance Requires a Promise to Indemnify Another

Insurance is defined as a contract whereby one agrees to indemnify another against a contingent or unknown event for consideration.

In State Farm Fire & Cas. Co. v. Corporation of President of Church of Jesus Christ of Latter-Day Saints, Not Reported in F.Supp.3d, 2015 WL 222323 (D.Utah, 1/14/15) the Defendant Corporation of the President of the Church of Jesus Christ of Latter-day Saints’ (“the Church”) Motion for Summary Judgment and Plaintiff State Farm Fire & Casualty Company’s Motion for Partial Summary Judgment. The Church claimed it had accepted its own risk for the first $15 million and then had an umbrella policy coverings risks over $15 million.

BACKGROUND

In 2008, Kyrt Nay, a bishop of a young single adult ward in the Church, held a ward event at his home. Nay and his son set up a zip line as an activity, and a member of his ward, Martha Miller, was injured. In 2010, Miller sued Nay for alleged negligence related to a zip line accident that occurred at his home and also sued the Corporation of the President of the Church of Jesus Christ of Latter-day Saints (“COP”) for alleged negligence. The parties to that action stipulated to the fact that Nay was acting in the course and scope of his calling as a bishop at the time of Miller’s accident.

At the time of the accident, Nay was insured by State Farm under a homeowner’s policy for $100,000, and a personal liability umbrella policy for $1,000,000. COP retained its own risk for claims up to $15 million and had an umbrella policy for claims in excess of $15 million. The umbrella policy covered COP’s agents or volunteers for acts within the scope of his or her acts while performing duties and services related to COP’s church. Miller sought $6 million in damages, which was well below the threshold for COP’s umbrella policy.

The Church Handbook of Instructions tells leaders that such insurance may be available through homeowners or other policies. When Church leaders fail to obtain insurance or when their insurance is exhausted, it is COP’s policy to voluntarily protect them from personal liability if they were acting in good faith at the time of the incident.

When Miller filed her lawsuit, Nay notified State Farm and State Farm retained defense counsel for Nay. During the litigation of Miller’s claims, counsel for both Nay and COP worked together and coordinated discovery and costs for experts. COP, however, made it clear to State Farm that COP had no intention of defending, indemnifying, or settling Ms. Miller’s claims against Nay until and unless Nay’s insurance with State Farm was exhausted.

Two years into the Miller Lawsuit, State Farm disclosed the existence of Nay’s umbrella policy. Miller moved to strike Nay’s Answer and State Farm responded that it was justified in not disclosing the umbrella policy because it believed that COP should be primarily responsible for Nay’s personal liability and that State Farm should not have to provide any insurance coverage under either of the policies Nay held with it.

When the coverage dispute arose in the Miller Lawsuit and there appeared to be a conflict between State Farm and Nay, COP helped Nay retain individual counsel to represent his own interests. Nay’s individual counsel contacted State Farm. Shortly thereafter, State Farm agreed to settle with Miller for the full amount of Nay’s policies, $1.1 million. COP also settled with Miller on her claims against it for a confidential amount.

State Farm brought the present lawsuit, arguing that it was not responsible for paying Nay’s settlement in the Miller lawsuit.

DISCUSSION

COP moves for summary judgment on State Farm’s policy-related claims for declaratory relief, equitable subrogation, and equitable indemnity, arguing that State Farm cannot prove that Nay was an insured under COP’s self-insured retention for purposes of his own personal negligence or that COP’s self-insured retention constitutes “other insurance” or “self insurance” as those terms are used in State Farm’s policies.

The language of an insurance policy should be construed pursuant to the same rules as are applied to other ordinary contracts. In general, an “other insurance” clause is an insurance contract provision designed to avoid liability for an insurer by declaring either that another insurer provides primary coverage or that the insurance contract containing the clause provides no coverage when another insurance coverage applies to the loss.

In order for State Farm to prove that what it paid to settle Miller’s claims against Nay should have been covered by COP, State Farm has to show that COP insured Nay with respect to the risks at issue in the Miller lawsuit. COP contends that its $15 million self-retained risk does not constitute insurance and asserts that it is a lack of insurance.

Several courts have recognized that a portion of self-retained risk, such as COP’s, is not insurance. In the context of “other insurance” disputes, court have recognized that “[b]ecause ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance.” State v. Cont’l Cas. Co., 879 P.2d 111,1116 (Idaho 1994). “It is axiomatic that self-insurance is not insurance. An allegation of self-insurance, which is equivalent to no insurance, is repugnant to the concept of insurance which fundamentally involves the shifting to a thrid party, by contract, for a consideration, the risk of loss as a result of an incident or event.” Chambi v. Regents of Univ. of Cal., 95 Cal.App. 4th 822, 826 (2002).

In this case, there is no contract between COP and Nay that obligates COP to protect Nay from personal liability. There is no evidence that COP insured Nay. There is no contract or agreement between the parties stating that Nay was covered under COP’s self-insured retention for personal liability up to $15 million. Even though Nay was covered under the umbrella policy for amounts over $15 million, it does not follow that he was covered for amounts under $15 million as well.

COP’s self-insured retention is not insurance at all. COP has chosen not to obtain insurance for less than $15 million. Rather, it retains its own risks for that amount. A retained limit simply establishes the point at which the umbrella insurer, not the insured, agrees it will provide coverage.

State Farm further argues that the term “self insurance” in Nay’s personal umbrella policy would refer to COP’s self-retained risk. But the term “self insurance” in Nay’s policy could only refer to Nay’s own self-retained amount—not the self-retained risk of another “self,” such as COP.

The contract between State Farm and Nay cannot create a relationship between COP and Nay. This is particularly true where, as here, COP (as Nay’s principal) would be entitled to be indemnified by Nay had COP had to pay for Nay’s negligent acts in the course and scope of his actions as an agent for COP.
For these reasons, the court concludes that State Farm’s contractual insurance with Nay was Nay’s primary insurance for the Miller lawsuit and State Farm properly paid the limits of both policies to settle the Miller lawsuit. COP’s self-insured retention does not constitute “other insurance” or “self insurance” as those terms are used in Nay’s State Farm insurance policies.

ZALMA OPINION

State Farm, as a major and well respected insurer, should have recognized the difference between insurance and a self-insured retention, a common insurance device where a major entity, like the Church, decides it is more economical to accept risks of loss without insurance up to a limit decided to be within the financial ability of the church. It then insures the risks in excess of the self-insured retention. Since insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event a refusal to acquire insurance can never be “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 Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

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

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

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

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Statute of Limitation Tolled by Partial Payment

A Defendant’s Voluntary Assumption of the Cost of Providing Treatment Is the Advance Payment of Damages

The State of California enacted a statute many years ago to require potential litigants to avoid lulling a potential plaintiff into a sense of security by making a partial payment. The purpose of the partial payment in such situations was designed to keep the injured person from filing suit until after the statute of limitations ran. What was the moral and right thing to do before the statute became the only thing to do or the statute of limitations never began to run.

California Insurance Code section 11583 provides that the applicable statute of limitations is tolled when advance or partial payment is made to an injured and unrepresented person without notifying him of the applicable limitations period.

Coastal Surgical Institute appeals from the judgment entered in Blevin v. Coastal Surgical Institute, — Cal.Rptr.3d —-, 2015 WL 138218 (Cal.App. 2 Dist., 1/12/15) after a jury returned a verdict in favor of respondent. It contended that the trial court erroneously determined that section 11583 tolled the one-year statute of limitations for medical malpractice actions.

FACTUAL BACKGROUND

On September 1, 2010, a doctor performed surgery on respondent’s knee at appellant’s surgical facility. After the surgery, respondent’s knee became infected. The infection was caused by pseudomonas aeruginosa bacteria. This bacteria was subsequently found on a sponge manufactured by Ruhof Corporation (Ruhof) that had been used to clean surgical equipment prior to respondent’s surgery. The bacteria that infected respondent’s knee had apparently “survived the sterilization process” performed by appellant’s employees.

On October 12, 2010, appellant paid respondent $4,118.23 for the medical expenses he had incurred in treating the knee infection. Respondent did not sign an agreement releasing appellant from liability. Appellant concedes that, at the time of payment, respondent was not represented by counsel and it did not give him written notice of the applicable statute of limitations for a medical malpractice action.

On January 24, 2012, more than 15 months after respondent’s receipt of appellant’s payment, respondent filed suit against appellant.

The trial court, relying on section 11583, ruled that the one-year limitations period of Code of Civil Procedure section 340.5 was tolled by appellant’s payment of respondent’s medical expenses. It denied appellant’s motion to conduct a bifurcated jury trial on the statute of limitations issue.

In a special verdict, the jury found that appellant was negligent and that its negligence was a substantial factor in causing harm to respondent. It awarded damages of $543,034. The trial court reduced the damages to $285,114.

SECTION 11583 APPLIES TO MEDICAL MALPRACTICE ACTIONS

Section 11583 provides in relevant part: “No advance payment or partial payment of damages made by any person, … Failure to provide such written notice shall operate to toll any such applicable statute of limitations or time limitations from the time of such advance or partial payment until such written notice is actually given….”

The legislative purpose of the written notice requirement is to prevent an injury victim from being lulled into a false sense of complacency about the need to sue because an advance or partial payment by the defendant or his insurer shows their apparent cooperativeness.

Appellant asserts that, if section 11583 applies to medical malpractice actions, it was required “to advise [respondent] when the statute [of limitations would] expire[ ].” Such a requirement, appellant argues, “would open up ‘a can of worms.’ ” But section 11583 requires no more than that the payor notify the payee in writing of the applicable statute of limitations, not the actual expiration date. Thus, it would have been sufficient if appellant had informed respondent in writing of the three-year and one-year periods as provided in section 340.5.

APPELLANT WAS NOT ENTITLED TO A JURY TRIAL ON ITS STATUTE OF LIMITATIONS AFFIRMATIVE DEFENSE

The surgical institute claimed that it did not consider the payment of the medical bills to be an advance payment against future litigation because they were never aware of any additional claims or that respondent intended on pursuing additional claims. Rather, the Surgical institute believed that the payment was a complete reimbursement for his then out-of-pocket costs and that this would be the end of it.”

Section 11583 does not contain a scienter requirement. As a matter of law, a defendant’s voluntary assumption of the cost of providing treatment is the advance payment of damages under Insurance Code section 11583. The Surgical institute’s construction of Section 11583 is at variance with the time-honored rule that remedial legislation must be liberally construed to effectuate its object and purpose, and to suppress the mischief at which it is directed.

Based on the undisputed facts, the trial court correctly decided that, pursuant to section 11583, the one-year statute was tolled and therefore did not bar respondent’s action.

ZALMA OPINION

The statute of limitations is designed to prevent stale claims. However, it is a protection not a weapon. Immoral or devious tortfeasors or their less than reputable insurers in the past would make small payments to injured parties to keep them away from lawyers prevent the filing of suit only to reject the remaining damages because the statute of limitations had run. The statute, 11583, did not do away with the statute, it only tolled it until the injured person was advised in writing that it would run. Honest and honorable tortfeasors and their hones and honorable insurers always told the claimant about the statute and even entered into written tolling agreements to avoid suit. The statute merely codified what most insurers believing in the covenant of good faith and fair dealing had always done when making partial payments to injured people.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Martin Luther King, Jr. Day & Insurance

No Damage Is There Coverage for  Loss of Business Due to Riot?

Today the United States commemorate the life and untimely death of Dr. Martin Luther King. Dr. King did many things for the nation and had little or no contact with insurance. However, events following his untimely death brought to the fore issues relating to insurance.

I found an interesting  dissent by the Michigan Court of Appeal, presiding justice, that provides a look at insurance coverage for loss of business due to an order of government forcing the plaintiffs in Allen Park Theatre Co., Inc. v. Michigan Millers Mut. Ins. Co., 48 Mich.App. 199, 210 N.W.2d 402 (1973) to close their theaters after the assassination of Dr. Martin Luther King, Jr. The trial court and court of appeals awarded benefits to the theatres but the dissent, although in the minority, gives useful insight into the interpretation of an insurance policy after a riot.

THE DISSENT

Defendant insurance companies appealed a decision permitting plaintiff theatre owners to recover damages for business losses. Plaintiffs were forced to cease operation pursuant to an executive order closing all places of amusement within Wayne County due to the civil disturbance which occurred subsequent to the death of Martin Luther King, Jr.

There is no dispute regarding the facts of the case. Defendants issued their standard fire insurance policy to plaintiffs, including extended coverage and business interruption endorsements.  The plaintiffs were engaged in business as the owners and operators of the theaters described in the original complaint. On that date, following the death of Martin Luther King, Jr., civil disturbance occurred in various areas of metropolitan Detroit, accompanied by vandalism to real and personal property, although there was no damage in, upon or adjacent to the theatres operated by the plaintiffs. The Governor of the State of Michigan declared that a state of public emergency existed in Wayne County. By Executive Order No. 1968-1, effective Friday, April 5, 1968, at 7:30 p.m., all places of amusement within Wayne County were closed until further notice.

The theatres operated by the plaintiffs were customarily open daily from 5:30 p.m. to midnight in addition to weekend matinee performances. During the period of April 5 through April 10, 1968, in compliance with the Governor’s proclamations and executive orders, the theatres were closed for a six-day period.

The extended coverage endorsement, attached to each of the policies involved, states: “In consideration of the premium for this coverage and subject to the provisions herein and in the policy to which this endorsement is attached, including endorsements thereon, the policy is extended to insure against direct loss by * * * riot * * *.”

In addition the policies contained “Provisions Applicable Only To Riot, Riot Attending A Strike And Civil Commotion: Loss by riot * * * shall include * * * direct loss from pillage and looting occurring during and at the immediate place of a riot * * *.” ¶ “Provisions Applicable Only When This Endorsement Is Attached To A Policy Covering Business Interruption, Tuition Fees, Extra Expense, Rent or Rental Value, Leasehold Interest Or Other Consequential Loss: The term ‘direct’, as applied to loss, means loss, as limited and conditioned in such policy, resulting from direct loss to described property from the peril(s) insured against; and, while the business of the owner or tenant(s) of the described building(s) is interrupted by a strike at the described location, this Company shall not be liable for any loss due to interference by any person(s) with rebuilding, repairing or replacing the property damaged or destroyed or with the resumption or continuation of business.’” (Emphasis added.)

An additional rider, Business Interruption Form No. 3, provides as follows: “‘7. Interruption By Civil Authority: This policy is extended to include the actual loss As covered hereunder, during the period of time, not exceeding 2 consecutive weeks, When as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.”

ISSUE

The central issue presented in construing the above-mentioned provisions is whether actual damage to or destruction of the insured premises as a direct result of riot is required under the interruption by civil authority clause in order for owners to be reimbursed for losses suffered.

ANALYSIS

Addressing first the matter of interpreting the insurance agreement on its face, it appears it was not within the contemplation of the contract to provide business interruption insurance coverage to policy holders without damage to or destruction of the premises. The extended coverage endorsement of the standard policy delineated perils which could result in Direct loss to the insured. Direct loss was defined in the endorsement as a ‘loss limited and conditioned in such policy, resulting from Direct loss to described property from the peril(s) insured against’.

The majority of the court ruled that the requirement of physical damage to or destruction of the insured property was too technical a theory upon which to fulfill the purposes of the parties. Further, it was thought incongruous to deny recovery for business losses where adjacent property was destroyed, yet reimburse the owners of premises who suffered minor dollar damage to property.

The word “direct” is not susceptible to ambiguous interpretation. Loss limited and conditioned in such policy, resulting from direct loss to property from the perils insured against can mean only that direct loss to property must occur as a condition precedent for recovery under the policy.

The fact of the matter is that denial of access to premises without property damage was not one of the risks insured against. This insurance coverage is in no way related to damages, however severe, that may occur to the premises of adjacent property owners.

Access to the premises was prohibited by order of civil authorities as a direct result of riot or civil commotion.  There was no direct damage to the property of the theatres. The dissent would prevent coverage.

ZALMA OPINION

I think Dr. King, if he had been asked, would agree that insurance is not a device to provide social justice. Insurance is merely an indemnity contract where the insurer agrees to provide indemnity to the insured if a risk the insurer agreed to take occurs. It is not designed to protect against risks where the insurer did not agree to provide indemnity. The riots that followed the death of Dr. King were terrible and states, like Michigan, issued orders to limit the effect of the riots, including forcing the closure of the theatres. But, as the dissent clearly points out, if there is no damage to the theatres then there is no coverage for loss of use.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

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Sexual Abuse of Minor Not an Occurrence

Abuse of a Minor Is Always Intentional

Insurance, by definition, only insures against contingent or unknown events. Insurers, faced with an occasional odd decision of a state or federal court, decided to not rely on the definition of insurance and added to their policies exclusions and policy language to protect against the rare odd decision of a trial court or an appellate court.

In Allstate Indem. Co. v. Pacheco, Slip Copy, 2015 WL 164091 (W.D.Wash., 1/12/15) the District Court for the Western District of Washington, was asked to rule on a motion for summary judgment by plaintiff Allstate Indemnity Company (“Allstate”) who claimed that there was no occurrence that required it to defend and indemnify its insured’s homeowners policy.

FACTUAL HISTORY

On November 1, 2013, an amended complaint for personal injuries, negligence, abuse, exploitation, and sexual assault was filed by defendant Karyssa Marie Pacheco (“Pacheco”) in Kitsap County Superior Court. In that complaint, Pacheco alleged that on or between January 2005 through January 2007, Davalos “did have repeated intentional unwanted sexual contact with” her “while she was in her home and while in the [Kitsap County] Sheriffs’ [sic] vehicle provided to … Davalos,” and that such contact constituted sexual assaults. Pacheco also alleged that she “was sexually assaulted by … Davalos, as least once while he was taking her home from school,” and that defendant Kitsap School District # 402—for which Davalos “was the school resource officer”—“allowed [him] to take [Pacheco] home, even after [her] mother and … Davalos started a dissolution action.”

During the period at issue in Pacheco’s complaint, January 2005 through January 2007, three homeowners insurance policies Allstate issued to Davalos were in effect.

Allstate filed its motion for summary judgment, arguing the Court should declare “that there is no coverage or duty to defend for the claims made by … Pacheco,” because Davalos’s alleged acts of sexual assault “do not constitute an ‘occurrence’ as required by” the insurance policies, and because those acts “are intentional or criminal acts for which no coverage is provided.”

DISCUSSION

Under Washington law, as in every other state, insurance policies are to be construed as contracts, and interpretation is a matter of law. The entire contract must be construed together in order to give force and effect to each clause, and be enforced as written if the language is clear and unambiguous. If insurance contract language is clear and unambiguous, the court may not modify the contract or create ambiguity where none exists. If, on the other hand, a policy provision on its face is fairly susceptible to two different but reasonable interpretations, the policy is ambiguous and the court must attempt to discern and enforce the contract as the parties intended.

An insurer has a duty to defend when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy’s coverage.

Allstate argues there has been no “occurrence” under the insurance policies. As  defined in those policies, “occurrence” means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions during the policy period, resulting in bodily injury.” Because the insurance policies do not define the term “accident”, however, it must be given its popular and ordinary meaning.

Where the insured acts intentionally but claims that the result was unintended the incident is not an accident if the insured knew or should have known facts from which a prudent person would have concluded that the harm was reasonably foreseeable.

In Washington, deliberate acts of sexual abuse and/or intercourse are not accidents so long as the abuser intended the act. The intent to injure, while normally a subjective determination should be inferred to the insured in sex abuse cases. This is particularly so in child sexual abuse cases, because children inevitably sustain injury from sexual abuse. Washington courts infer an intent to cause emotional distress as well a physical injury from acts of sexual abuse.

Pacheco’s amended complaint alleges that at the time the insurance policies were in effect, Davolos had repeated intentional unwanted sexual contact with her, and that she was sexually assaulted by him at least once while being taking home from school. The acts Davalos allegedly committed, therefore, were intentional, and even if he did not subjectively intend to injure Pacheco, under Washington law that intent is inferred. Accordingly, none of the alleged acts of sexual assault can be said to be an “accident” under the common sense definition of that term used by Washington courts.

As such, there has been no “occurrence” as that term is defined in the insurance policies that Allstate would be required to cover or defend. For the same reasons, Allstate has no duty to cover or defend pursuant to the insurance policies’ exclusionary clause, because, as also noted above, that clause clearly states that bodily injury “intended by, or which may reasonably be expected to result from the intentional or criminal acts” of any insured person is excluded.

ZALMA OPINION

The District Court had no choice but to conclude that the acts Allstate’s insured were intentional abuse of a minor and not accidental. A person cannot force sexual intercourse on a minor accidentally and not cause damage to the minor even if the abuser had no subjective intent to harm the child. No insurer should be obligated to defend a child abuser anywhere.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 4 Comments

Fraud Continues Apace

Zalma’s Insurance Fraud Letter

January 15, 2015

In the second  issue of its 19th  year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on January 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.    New California Insurance Law
2.    New from Barry Zalma – The Zalma Insurance Library
3.    Arson Doesn’t Pay – Defendant Must Make Restitution
4.    New Insurance Regulations – Is it a Free Lunch?
5.    Allianz to Pay $4.7 Million Re Death Master File
6.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com
7.    Insurance Companies Charged With Fraud

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Failure of Condition Precedent – January 14, 2015
2.    $225 Trip & Fall Verdict Affirmed – January 13, 2015
3.    Additional Insured Breached Policy Condition – January 12, 2015
4.    Construction Defect – January 9, 2015
5.    No Loss – No Duty To Indemnify – January 8, 2015
6.    Litigation Requires Grown-Ups In Charge – January 8, 2015
7.    Can There be Coverage by Estoppel? – January 7, 2015
8.    Workers’ Compensation is a Social Contract – January 6, 2015
9.    Investigating Mold Claims – January 6, 2015
10.    Don’t Try to Create Ambiguity When One Doesn’t Exist – January 5, 2015
11.    When Poop Is a Contaminant – January 2, 2015
12.    Zalma’s Insurance Fraud Letter – 1/1/2015 January 1, 2015
13.    Cooperate in Defense or Lose Everything – December 31, 2014
14.    Report Promptly, Sue Quickly or Else – December 30, 2014
15.    Insurer May Litigate Coverage Dispute – December 29, 2014
16.    Brothers Shouldn’t Fight – December 29, 2014
17.    Notice of Claim is When the Insurer Receives It – December 26, 2014
18.    ERISA Bars Jury Trial Against Health Insurer – December 24, 2014
19.    Arson-for-Profit Doesn’t Pay – December 23, 2014
20.    Biased Judge Disqualified – December 22, 2014

 New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Failure of Condition Precedent

It’s Not Nice To Lie To Your Insurance Company

When a life insurer issues a policy based upon false information and learns of the misrepresentation before the expiration of the two-year incontestability period, the insurer will deny coverage, claim the policy never came into effect and that it is entitled to rescind the policy from its inception. In just such a case, American General Life Insurance Company (“American General”) moved for Summary Judgment in the Eastern District of Tennessee to rescind a policy issued in favor of Brenda Underwood (“Underwood”). In American General Life Ins. Co. v. Underwood, Slip Copy, 2015 WL 137529 (E.D.Tenn., 1/9/15) the District Court  was called upon to resolve the dispute and determine if there existed a valid and enforceable policy.

American General filed suit to rescind a life insurance policy or in the alternative for a declaratory judgment that insurance coverage under the policy never became effective. Underwood has filed a counterclaim for breach of contract or in the alternative for a declaratory judgment finding that insurance coverage was in existence at the time of the death of Underwood’s husband, David Underwood (“Decedent”).

BACKGROUND

On September 8, 2008, Decedent executed Part A of an application for a term life insurance policy with American General. Decedent executed Part B of the application on September 24, 2008. Parts A and B are considered the “Application.” The policy is a twenty-year term policy with a death benefit of $300,000, with Underwood as the primary beneficiary.

At delivery of the policy on January 24, 2009, Underwood executed a document titled Health Statement Policy Acceptance Acknowledgement American General Life Insurance Company by signing Decedent’s name.

On January 26, 2009, Decedent again saw Dr. Morton who found on examination bilateral axillary lymphadenopathy masses and noted, “Findings are suspicious for development of lymphoma.” He requested a referral to surgery for a biopsy.  A biopsy of Decedent’s neck lymph nodes revealed he had a lymphoproliferative disorder. On October 4, 2009, Decedent died from angioimmunoblastic lymphoma and hemolytic anemia.

On November 9, 2009, Underwood submitted a claim for benefits under the policy. Because Decedent had died within the two-year contestability period, American General conducted a contestability investigation. During the course of the investigation, American General received the records from Dr. Morton showing that Decedent had seen him on January 19, 2009, and January 26, 2009.

In a letter dated February 17, 2010, American General denied benefits under the policy. The denial was based on misrepresentation of pertinent information on the Health Statement. The letter also stated that American General was rescinding the policy, “making coverage null and void from the inception date.” American General represented that it would make a full refund of the premiums paid plus interest.

ANALYSIS

American General contends that no insurance ever took effect because the conditions precedent for the creation of coverage were not met. The Application provides that insurance does not exist unless there have been no changes in the proposed insured’s health that would change the answers to any questions in the Application before delivery and acceptance of the policy and payment of the first premium.

Underwood contends that the change in Decedent’s health was not a material change because he thought he was suffering from a cold or flu, not a serious condition. The Health Statement directly asks whether since the date of the Application the proposed insured has “[c]onsulted a doctor or other practitioner or received medical or surgical advice or treatment.” It does not qualify the inquiry by asking whether the consultation was for a minor illness. The request is a blanket inquiry. It obviously sought information about any doctor visit or treatment, regardless of the severity.

The application made clear that even if a premium has been paid, no coverage will begin until all three enumerated conditions are met: (1) the policy has been delivered and accepted; and (2) the full first modal premium for the issued policy has been paid; and (3) there has been no change in the health of the Proposed Insured(s) that would change the answers to any questions in the application before items (1) and (2) in this paragraph have occurred.

The health of the Decedent changed before delivery of the policy and payment of the premium that changed the answers to three questions in the application. Decedent was experiencing symptoms that warranted seeing his physician who placed him on three medications.   If the conditions precedent were not met as identified in the Application, no insurance would come into effect, which is what transpired in this case, and no agent had the authority to waive any policy requirements or American General’s rights under the policy. Thus, the court concluded that insurance coverage did not come into effect.

IF COVERAGE EXISTED IS AMERICAN NATIONAL IS ENTITLED TO RESCISSION?

Not wishing to leave a stone unturned the court, after concluding that no policy came into effect, it found it necessary to deal with the rescission issue raised by American General.  Misrepresentations on the Health Statement, American General argued, increased its risk of loss so it is entitled to rescission of the policy.

In Tennessee, it is well settled that “[t]he law presumes that persons who sign documents, having been given the opportunity to read them, are bound by their signatures.” [Baker v. Johnson, No. M2007–01992–COA–R3–CV, 2009 WL 167204, at *5 (Tenn.Ct.App. Jan. 23, 2009); Solomon v. First American Nat’l Bank of Nashville, 774 S.W.2d 935, 943 (Tenn.Ct.App.1989)]  Ordinarily, one having the ability and opportunity to inform himself of the contents of a writing before he executes it will not be allowed to avoid it by showing that he was ignorant of its contents or that he failed to read it.

Whether Underwood read the Health Statement or not, she is charged with knowledge of its contents. In signing the Health Statement on her husband’s behalf, Underwood represented that since the date of the application there had been no change in the health or condition of her husband and that her husband had not “[c]onsulted a doctor or other practitioner or received medical or surgical advice or treatment.” She also represented that since the date of the application no knowledge or belief had been acquired such that “any statements made in the application are now inaccurate or incomplete.”

Underwood admitted in her deposition that she knew her husband had seen a doctor recently and that he was taking medication as a result.

The language in the Health Statement is clear, direct and straightforward. It is more than just a receipt; it is also a verification regarding information given in the application and whether circumstances have changed since the date of the application, like whether the proposed insured had consulted a doctor and was receiving medical treatment.  The court concluded that the misrepresentations in the Health Statement that were directly related and integral to the application were such that they were likely to influence the judgment of the insurer in forming the contract.

The Health Statement was delivered with the Policy. The Health Statement plainly seeks to update the information provided in the application; thus it is supplementing the application. Also, the Health Statement provides that the proposed insured “agree[s] that this Acknowledgement will be made a part of the policy,” and the policy provides that the insurance contract includes the application.

American General’s motion for summary judgment was granted on all grounds, including the dismissal of Underwood’s counterclaim. American General’s only obligation to Underwood is the return of the premiums paid, the amount of which has been on deposit with the Clerk. Underwood shall be paid the amount on deposit plus interest to the date of entry of the court’s opinion and order.

ZALMA OPINION

Ms. Underwood signed the health statement for her husband with full knowledge that the statement was false. She intended that the insurer rely on the facts she represented. American General relied on the statements and issued a policy only to find that the Decedent died shortly thereafter from an aggressive form of Lymphoma. Had she told the truth, that the Decedent had visited his doctor for flu-like symptoms there is a good possibility the policy would have been issued after the insurer did some additional review of his medical records or would have refused the coverage because an early death of the Decedent was no longer a contingency but a certainty.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

$225 Trip & Fall Verdict Affirmed

Lack of Health Insurance Not Appropriate In Tort Action

Evidence of the existence or lack of insurance usually has no place in a tort action. It can easily prejudice a jury to give more or less damages than a plaintiff is entitled to receive based solely on the evidence presented.

Sometimes it becomes appropriate to mention insurance or the lack of it to prove parts of a tort action and damages resulting from the tort. In Williams v. Sidhu, Not Reported in Cal.Rptr.3d, 2015 WL 109887 (Cal.App. 1 Dist., 1/7/15) Kendall Williams sued a gas station and its owner for negligence and premises liability. A jury awarded Williams $225 and the court denied his new trial motion. Williams appealed. He contends the court erred by: (1) excluding evidence of subsequent remedial measures taken by defendants; (2) limiting testimony about his lack of insurance coverage; and (3) denying his new trial motion. We will limit the discussion to the insurance issues.

FACTS

In July 2011, Williams was a 35–year–old big rig truck driver. He often stopped at Gill Sidhu Chevron (gas station). On July 11, 2011, Williams parked his truck at the gas station. He purchased coffee at the gas station’s convenience store and was returning to his truck when he claimed he fell into a “two-foot deep cement hole” (hole or storm drain) “obscured” by a “Plexiglas sign” and suffered “injuries including bruises, contusions, shock, leg and back injuries.” He sued defendants for negligence and premises liability, seeking over $25,000 in damages.

Before trial, defendants moved to “prohibit any evidence or reference to insurance coverage[ ]” pursuant to Evidence Code section 1155. Williams’s counsel said “I’m not going to bring up insurance” and the court granted the motion. Defendants also moved to “prohibit any evidence or reference to the parties’ wealth or financial status” and the court granted the motion.

TRIAL

Williams testified he parked his truck at defendants’ gas station and purchased a cup of coffee in the gas station’s convenience store. As he walked from the convenience store to his truck, he noticed an oil truck had pulled into the gas station and blocked his path to his truck. Williams thought the oil truck was preparing to leave the gas station, so he stepped up onto a curb to get out of the way. Williams was focused more on the oil truck than on where he was walking.

After signaling to the driver he was out of the way, Williams turned back toward his truck, took a few steps “at full stride” on the curb, and stepped onto a Plexiglas sign on the ground. Williams did not see the sign until he stepped on it, nor an orange construction cone near the Plexiglas sign. Beneath the sign was a two-foot-deep storm drain. Williams’s foot went through the sign, to the bottom of the storm drain. He felt a “shock” when he “hit” the bottom; then Williams “couldn’t feel [his] legs” and “started to panic.” He hoisted himself out of the hole but could not get up because he “couldn’t move [his] legs.”

The oil truck driver approached Williams and told him to stay on the ground. The driver called 911. Using a disposable camera, the driver took a picture of Williams. He gave the camera to Williams and said, “ ‘you better take a few photos of this.’ ” Williams took pictures of himself while he waited for help. As paramedics arrived, the feeling in Williams’s legs returned. He had “intense pain” in his left thigh and told the paramedics his left leg was “ ‘hurting pretty bad.’ ”

Paramedics took Williams to the hospital, where he was told he was “banged up” and “was going to be sore” but “all right.” Hospital staff gave Williams pain medication and antibiotics, and discharged him. He did not complain about back pain at the hospital. Williams’s wife took Williams back to the gas station so he could “get [his] truck” and “finish [his] route.” Williams finished his three-hour shift; he felt the injury “wasn’t really that serious” and he was “kind of more interested in getting back there on the road” even though he was “banged up[.]”

Dr. David C. Bradshaw testified as an expert for Williams. Dr. Bradshaw did not treat Williams after the incident and did not examine him until shortly before trial. He opined Williams herniated a disk in his back and pinched a nerve in his leg when he fell. Dr. Bradshaw conceded, however, “[t]ruck driving is actually hazardous to your back. Truck drivers have a lot of back pain[.] … Truck driving is hard on your back[.]” He also admitted Williams had previously sought disability status, claiming he could not perform a sedentary job because of knee pain.

Defendants conceded the storm drain was a dangerous condition but argued it was unreasonable for Williams to walk on the curb, ignore an orange cone, and step on an unfamiliar Plexiglas object. They also argued the only injury Williams suffered was a leg bruise and emphasized the length of time Williams waited to see a doctor.

A jury determined defendants’ negligence was a substantial factor in causing Williams’s injuries and awarded him $1,500 in past noneconomic loss. The jury also determined, however, Williams was 85 percent at fault, reducing his damages award to $225. The court entered and served the judgment.

Williams moved for a new trial on the grounds of jury misconduct, inadequate damages, and insufficiency of the evidence to justify the verdict (Code Civ. Proc., § 657).

DISCUSSION

The Court Did Not Err by Limiting Testimony About Williams’s Lack of Medical Insurance and Any Assumed Error Was Harmless

Williams argues the court erred by excluding evidence of his “gap in insurance coverage[.]” He claims the court precluded him from “explaining lack of medical coverage and his attempts to obtain coverage as the reason for a delay in his treatment.” This argument fails for several reasons. First, the court allowed Williams to testify about his lack of medical insurance and the reason for his delay in seeking treatment. Details about what Williams did after the incident to obtain medical insurance were not relevant, nor was Williams’s “medical coverage situation” over the years. What was relevant was why Williams did not seek treatment before August 1, 2011 and the court allowed him to testify about how his financial condition and lack of medical insurance precluded him from seeking treatment before that date. However, the appellate court concluded that excluding additional testimony regarding Williams’s efforts to obtain medical insurance after the incident was not an abuse of discretion.

Williams’s argument fails because he could not establish any assumed error was prejudicial. Williams testified he did not seek medical treatment before August 1, 2011 because he did not have medical insurance or the “money to pay to go to a doctor[.]”

ZALMA OPINION

Williams wanted the jury to care about his problems by showing that he was unable to buy health insurance after his accident. The court refused to allow him to do so because that testimony was neither probative about the cause of the injury or the reasons why he stopped treatment after the court allowed him to testify that he delayed treatment because of a lack of insurance. The appellate court concluded the trial court allowed the necessary amount of evidence of insurance but properly refused to allow Williams to present too much information just to pull at the jury’s heartstrings.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Additional Insured Breached Policy Condition

Additional Insured Has Duty to Provide Policy to Insurer

When more than one insurer provides liability insurance protection to an insured they often dispute which is obligated to provide defense and indemnity to the insured. Prudent insurers faced with such a dispute will agree to split the cost of defense and indemnity subject to a reservation of rights and then resolve their differences in a separate declaratory relief action that does not involve the insured. In Pennsylvania Nat. Mut. Cas. Ins. Co. v. J.F. Morgan General Contractors, Inc., Slip Copy, 2015 WL 82891 (N.D.Ala., 1/7/15) the District Court for the Northern District of Alabama was called upon to resolve the dispute between two insurers.

FACTS

This declaratory judgment case arises from a dispute over insurance coverage for the underlying case of Miranda McFry v. J.F. Morgan Contractors, Inc., Civil Action No. CV–2009900346, in the Circuit Court of Calhoun County, Alabama. To resolve that case against their purported insured, J.F. Morgan General Contractors, Penn National and Nationwide agreed to each pay half of a settlement and ask this court to resolve ultimate responsibility in this case. So here we are.

On September 1, 2007, Anniston Concrete Company entered into a commercial general liability policy with Penn National. Anniston Concrete purchased its Penn National policy through Jim Garmon’s insurance agency, Insurance Planning Services (“IPS”).

On March 28, 2008, Jacksonville City Schools awarded J.F. Morgan a contract to remodel Jacksonville High School who, in turn, sub-contracted with Anniston Concrete to perform site and grading work at Jacksonville High School. The sub-contract required Anniston Concrete to have a commercial general liability policy and to name J.F. Morgan as an “additional insured” under the policy.

Upon entering into the sub-contract, J.F. Morgan became an “additional insured” to Anniston Concrete’s Penn National policy by operation of the policy’s “Automatic Additional Insureds—Owners, Contractors and Subcontractors (Ongoing Operations)” endorsement.

Harleysville Mutual Insurance Company (Nationwide’s predecessor) also directly insured J.F. Morgan through a commercial general liability policy.
On June 2, 2008, Ricky Smith, an employee of Anniston Concrete, died while performing soil compaction work at Jacksonville High School.

J.F. Morgan immediately learned about the accident, which occurred on its job site, and informed Harleysville. Additionally, J.F. Morgan told Anniston Concrete that it needed to notify its insurance carrier of the accident.
One day after the accident, on June 3, 2008, Anniston Concrete informed IPS about Smith’s accident. IPS notified Anniston Concrete’s workers compensation insurance carrier of the accident, but not Penn National.

About 15 months after the accident, on October 29, 2009, Miranda McFry, Smith’s daughter, filed a lawsuit against J.F. Morgan. J.F. Morgan notified Harleysville of McFry’s lawsuit on the same day, but did not notify Penn National. J.F. Morgan also told Anniston Concrete about McFry’s lawsuit.

On November 12, 2009, Anniston Concrete informed IPS about McFry’s lawsuit. Anniston Concrete had a copy of the complaint, but did not give the complaint to IPS and IPS did not ask for the complaint. IPS reviewed copies of the certificates of insurance it provided to J.F. Morgan and incorrectly determined that Anniston Concrete’s Penn National policy did not include J.F. Morgan as an additional insured. Neither IPS nor Anniston Concrete contacted Penn National about McFry’s lawsuit or forwarded the complaint to Penn National.

On December 15, 2010, J.F. Morgan asked IPS, by letter, to provide a defense and indemnity for McFry’s lawsuit. IPS forwarded the letter to Penn National on December 20, 2010, 13 months after McFry filed her lawsuit and two-and-a-half years after Smith’s accident.

McFry’s lawsuit settled on August 6, 2012 and Penn National and Nationwide each paid one half of the settlement under a reservation of rights. Penn National subsequently amended its complaint to reflect settlement of McFry’s underlying lawsuit.

The only issue for the court is which insurance company has to pay for the settlement of McFry’s lawsuit.

ANALYSIS

Penn National argues that it is not required to pay for the settlement of McFry’s lawsuit because J.F. Morgan failed to timely notify Penn National of Smith’s accident or McFry’s lawsuit and failed to timely forward suit papers from McFry’s lawsuit as required by the Penn National policy.

Failure to comply with the Penn National policy’s notice provisions is a defense to coverage. To determine whether J.F. Morgan failed to notify Penn National, the court must determine who at Penn National J.F. Morgan could have notified, what J.F. Morgan had to tell Penn National, and whether J.F. Morgan’s delay in notifying Penn National was reasonable.

IPS is Penn National’s agent able to receive notice of Smith’s accident and McFry’s lawsuit. Notice to IPS is imputed to Penn National.

NOTICE OF WHAT

The court agreed that the policy did not require J.F. Morgan to notify Penn National of Smith’s accident or McFry’s lawsuit because Anniston Concrete did so. However, the Penn National policy did require J.F. Morgan to “immediately” forward suit papers from McFry’s lawsuit to Penn National. J.F. Morgan failed to do so.

Alabama law controls interpretation of the policy’s notice provisions because Penn National issued the policy in Alabama. When an insured fails to timely notify its insurer about an accident or a lawsuit or fails to forward suit papers as required by the policy, the insurer may deny coverage. The insurer need not show prejudice. [Am. Fire & Cas. Co. v. Tankersley, 116 So.2d 579, 582 (Ala.1959); Am. Liberty Ins. Co. v. Soules, 258 So.2d 872, 878 (Ala.1972); S. Guar. Ins. Co. v. Thomas, 334 So.2d 879, 882 (Ala.1976).

The Penn National policy required J.F. Morgan as “any other involved insured” to send the suit papers from McFry’s lawsuit to Penn National. J.F. Morgan failed to send the suit papers. Under the Penn National policy, “You [Anniston Concrete] and any other involved insured [J.F. Morgan] must … [i]mmediately send us copies of any demands, notices, summonses, or legal papers received in connection with the claim or ‘suit.’” (emphasis added)).

An additional insured with knowledge of insurance coverage does indeed have a duty to notify the insurer of a potentially covered event in accordance with the terms of the notice clause in the named insured’s policy. Under the unambiguous language of the Penn National policy, J.F. Morgan had to “immediately” send suit papers to Penn National. J.F. Morgan’s failure to comply with the Penn National policy’s terms abrogates J.F. Morgan’s coverage.

J.F. Morgan had constructive knowledge of the Penn National policy and its notice requirements. J.F. Morgan requested coverage in the sub-contract with Anniston Concrete, which J.F. Morgan drafted. Further, J.F. Morgan had an employee who oversaw its insurance coverages. At the very least, J.F. Morgan had constructive knowledge of the Penn National policy’s notice requirements because it requested to be covered by the Penn National policy as an additional insured.

The Penn National policy did not require J.F. Morgan to notify Penn National of Smith’s accident or McFry’s lawsuit, but did require J.F. Morgan to “immediately” forward suit papers from McFry’s lawsuit. J.F. Morgan failed to forward the suit papers for 13 months.

When no legitimate reason is offered for the delay courts can find delays unreasonable as a matter of law. J.F. Morgan had constructive knowledge of the policy. Further, J.F. Morgan employed someone to oversee its insurance coverages.

J.F. Morgan failed to “immediately” send suit papers from McFry’s lawsuit to Penn National. J.F. Morgan could have sent the suit papers to either Penn National or its agent IPS.  J.F. Morgan failed to forward the suit papers to anyone for 13 months. J .F. Morgan provided no legitimate excuse for its delay and, thus, the delay is unreasonable as a matter of law.

Because J.F. Morgan violated the Penn National policy’s terms, Penn National is not required to indemnify J.F. Morgan or Nationwide for the cost to settle McFry’s lawsuit; instead Nationwide is required to indemnify Penn National for the cost to settle McFry’s lawsuit.

ZALMA OPINION

This case teaches lessons to contractors who insist on being made an additional insured of policies issued to subcontractors that they must comply with the material conditions of the policy that made them an additional insured. In this case the general contractor failed to comply with a simple, clear and unambiguous condition of the policy making it an additional insured. The person in charge of J. F. Morgan’s insurance program failed to protect it and as a result cost its primary insurer who will either severely raise its rates for the next year or refuse to renew insurance in its favor.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Construction Defect

The Structure

The following was excepted from my book, “Construction Defect Coverage Guide,” available from the  National Underwriter Company for the new Zalma Insurance Claims Library, available at www.nationalunderwriter.com/ZalmaLibrary.

The existence of a structure is essential to the construction defect claim or suit.

A structure is “that which is built or constructed, an edifice or building of any kind, or any piece of work artificially built up or composed of parts joined together in some definite manner.” [Uniform Building Code (UBC), 1985, Part II, Chapter 4, Section 417 – 420.]

Structures range from a dog house for a Chihuahua to skyscrapers more than a mile high. A structure should be safe for occupancy and pose no danger to the property of others. Structures in North America are built using various materials and designs; from wood frame to steel, concrete block to adobe to brick. Some have been built of straw while others are constructed of pressed earth, old tires, used bottles and concrete. Almost every known substance is used to create structures. Building codes allow such creative choices for building materials, but control construction for the safety of the public.

If a structure is constructed in such a manner that damage is caused to the occupants, the structure itself, or other property, it is defective and can be the subject of litigation. Structural failures can impose a danger to life, limb, health, property, or public welfare.

When a defective structure causes harm to its occupant or property, litigation will likely occur. Structural failures can impose a danger to life, health, or property. The Texas Residential Construction Commission Act defines “construction defect” as:

  1. the failure of the design, construction, or repair of a home, an alteration of or a repair, addition, orimprovement to an existing home, or an appurtenance to a home to meet the applicable warranty and building and performance standards during the applicable warranty period; and
  2. any physical damage to the home, an appurtenance to the home, or real property on which the home or appurtenance is affixed that is proximately caused by that failure. [Primary Plumbing Services, Inc. v. Certain Underwriters at Lloyd’s London, No. 01-05-00135-CV (Tex. App. Dist.1 01/26/2006); Tex. Prop. Code Ann. § 27.001(4) and § 401.004(a).]

It is important to note that construction defects are not always caused by the structure. They can include failures of the underlying land or foundation on which the structure is built.

Building Codes

To prevent defects in structures and the injuries that result from them, every jurisdiction has enacted building codes. The purpose of a building code is to set the parameters within which structures must be built, in order to protect the life, health, and welfare of the public.

Concern over the deterioration of the environment has prompted an increasing number of people to use natural materials not normally used in frame and stucco construction. “Natural building” is a term than connotes any sort of building that is accomplished by primarily using natural materials, as opposed to man-made or industrial materials. The objective is to build with simple techniques that do not pollute the environment, consume more fossil fuel, or require major manufacturing efforts. “Natural buildings” are rare, since the expense of construction usually exceeds the cost using standard frame or steel construction.

The requirements of the Uniform Building Code (UBC) can cause a builder to incur expenses not expected at the time the structure was designed. A great deal of money can be added because many simple, effective means of construction, such as rubble trench foundations, and the use of used or ungraded lumber are not permitted.

History

The first known building codes were found in the laws of Hammurabi, ruler of Mesopotamia (2285-2242 B.C.) Hammurabi’s code was a simple performance law that provided:

If a builder has built a house for a man and has not made strong his work, and the house he built has fallen and he has caused the death of the owner of the house, that builder shall be put to death.  [The Oldest Code of Laws, Translated by C.H.W. Johns, M.A. and T & T Clark, Edinburgh, 1903.]

More modern codes describe their purpose as:

The purpose of this code is to provide minimum standards to safeguard life or limb, health, property and public welfare by regulating and controlling the design, construction, quality of materials, use and occupancy, location and maintenance of all buildings and structures within this jurisdiction and certain equipment specifically regulated herein.

* * *

[T]he purpose of this code is to protect the health, safety and welfare of the public and employees by establishing minimum standards for the design, construction, maintenance and inspection of public buildings, including multifamily dwellings, and places of employment. [ UBC, 1985, Part I, Section 102.]

Modern building codes do not provide for penalties as severe as those required by Hammurabi. Now, rather than facing death, the builder is faced with fines and suits for construction defects that will deplete the builder’s bank account and all of his or her available insurance but will allow the builder to keep his life.

The purpose of a building code as described by the California Court of Appeal in Oakland Heritage Alliance v. City of Oakland, 195 Cal.App.4th 884, 2011.CA.0003875,  (Cal.App. Dist.1 05/19/2011) is to protect the public safety.

Basic Construction

To understand the construction defect claim and the litigation surrounding construction defects, it is necessary to first have a basic understanding of construction, what is proper and prudent and what can go wrong. Building codes prescribe basic standards. When these standards are not followed, or not followed carefully enough, a building can fail. It may leak or lean or even fall down. The following discussion offers a brief overview of the component parts of a standard dwelling built of wood framing using common construction methods used over the last century, and the problems that can arise when any part of the building fails.

The Construction Consultant

There are few schools that teach construction except those that assist individuals to become licensed general contractors. Consequently, a construction consultant develops his or her expertise by a combination of education, training, and experience as a general contractor in the state where the property is located. He or she also usually has experience in evaluating the work of people in the construction trades. The construction consultant can also establish his or her credentials by earning a license to construct buildings (and in fact doing so), and by being well-read in the field of construction, publishing peer-reviewed articles and books in his or her fields of expertise, and testifying in court on the subject. A construction expert is a person with practical experience, rather than one whose knowledge comes from schooling alone. Such experts are considered to be the most effective in providing advice, and in convincing a jury of the correctness of their advice and stated conclusions.

The construction consultant acts as an authority in the evaluation of damages to improvements to real property. He or she should be able to effectively:

  • evaluate damages resulting from delay, claims, change orders, and other actions during construction;
  • determine who did damage;
  • determine what was done to cause damage;
  • determine when the damage was done;
  • determine how the damage occurred; and
  • produce an honest and verifiable evidence chain.

The consultant should be prepared to provide the following information about the project:

  • analysis of the original plans and specifications as compared to the structure as built;
  • analysis of the project record in detail, including a relational database of all relevant documents;
  • identification of changes to the scope of work;
  • identification of individual contractor conformance to the schedule, plans, and specifications; and
  • documentary evidence of the effect of failure to comply with plans and specifications on the project and structure.

A consultant should be prepared to provide the following information about defects:

  • analysis of all of the defects claimed or established;
  • identification of party or parties responsible for defects in the as-built structure; and
  • identification of compensable and non-compensable components of the defects in construction or deviation from plans and specifications.

The consultant should also be prepared to provide the following information on scheduling:

  • analysis of the original as-planned schedule for contract conformance;
  • analysis of the construction schedule to determine if it had any impact on the claimed or actual defects;
  • identification of out-of-sequence work;
  • identification of adverse weather impacts to the schedule;
  • identification of party or parties responsible for a delay or impact to the schedule;
  • documentation of the effect of schedule changes on the project; and
  • graphic representation of impacts to the schedule.

The construction consultant must be ready and able to provide the following financial information to allow the property owner to prove damage:

  • a narrative report outlining the actual damages sustained, actual impact to the work, and changes in contract time as a result;
  • a narrative report identifying the difference in overhead costs as a result of the damage or defect;
  • documents that are evidence of loss of productivity as a result of the defect or damage;
  • evidence of actual damages incurred by:
  • the owner;
  • the structure; and
  • the occupants;
  • evidence of the cost to bring the structure into line with the design plans and specifications;
  • identification of compensable and non-compensable parts of delay; and
  • accurate and provable reports of damage for presentation to the court or defendant to prove the amount of the claim.

The consultant must be available to provide sworn testimony at trial or arbitration sufficient to convince the trier of fact in language understandable to lay jury members who have no experience in construction. When a trial must be held the construction consultant and expert is essential to proving the case and convincing the jury that the consultant’s client is correct.

A construction consultant typically works for a consulting firm or construction organization, assisting commercial or residential construction projects by offering expertise and best practices to ensure projects are completed safely and efficiently. Some, when construction business is slow, are working construction professionals who serve as consultants and experts as a sideline. They are often considered more credible than persons whose only work is consulting.

The construction consultants must be capable of designing construction strategies that allow for successful construction planning, while providing consultation and overseeing construction project teams. They also oversee and assist with construction budget planning.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

No Loss – No Duty To Indemnify

There Must Be The Happening of a Particular Event or Contingency To Recover on an Insurance Policy

Frank and Sheri Monteleone, upset that they did not receive the $100,000 they claimed under their homeowner’s policy for water damage in their finished basement, filed suit for themselves and every person similarly situated.

Jurisdiction, in Monteleone v. Auto Club Group, Slip Copy, 2015 WL 71915 (E.D.Mich., 1/6/15), was based on the Class Action Fairness Act (“CAFA”), pursuant to 28 U.S.C. § 1332(d), because the amount in controversy allegedly exceeds $5 million and at least one member is a citizen of a different state than defendant. Defendants are insurance companies collectively referred to as defendants. Plaintiffs seek to proceed as a class action under the theory that defendants categorically denied valid claims based on an erroneous application of the policy terms, and that all individuals who merely purchased insurance, even those who never filed claims, are entitled to a partial refund of premiums, or like measure of damages, because certain coverage was allegedly illusory.

Plaintiffs filed a three count complaint. Before the court is defendants’ joint motion to dismiss Count II, breach of contract, of the Amended Complaint and to deny class certification.

BACKGROUND

On January, 17, 2013, plaintiffs suffered water damage in their finished basement of their Clinton Township home which caused significant harm, including loss of personal property, and structural damage to their home.

Plaintiffs claim they paid for coverage of water damage claims where water originating from within the home is prevented from leaving the premises.  Defendants denied coverage under the policies’ exclusion ¶ 3.b which provides no coverage exists for: “water or water-borne material which backs up through sewers or drains or water which enters into and overflows from within a sump pump, sump pump well or other type system designed to remove subsurface water which is drained from the foundation area.”

Optional endorsements are available to surplant this exclusion which provide limits usually between $5,000 to $25,000. Named plaintiffs had purchased such an endorsement in this case, and under this option, defendants disclaimed liability and coverage above the $5,000 provided on the endorsement.

There is no dispute that under the policies, claims for “backups” were not covered. “Backups” occur when water originates from an external source, like a municipal sewer system.

Plaintiffs claim that beginning in 2009, defendants began conflating all “overflow” losses as “backups” and wrongfully denied claims for “overflow” losses.

In a written order dated April 23, 2014, the District Court denied class certification as to the above described “property damage” plaintiffs, because issues of liability and damages as to each individual policyholder would predominate over any common questions. The “premium” subclass was described as all individuals who merely purchased homeowners’ insurance from the defendants since March, 2009, regardless of whether these individuals filed any loss claims.

ANALYSIS

Defendants seek to dismiss Count II that alleges breach of contract arising out of defendants’ alleged policy of denying certain legitimate “overflow” claims. Count II is brought on behalf of the “premium class”— that is, on behalf of all policyholders, regardless of whether they sought coverage for water damage.

Plaintiffs claim they paid for “phantom coverage,” and seek damages for “the value of basement and floor drain overflow coverage and protection that policyholders were never going to receive.”

Under Michigan law, the elements of breach of contract claim are: (1) the existence of a contract between the parties, (2) the terms of the contract require performance of certain actions, (3) a party breached the contract, and (4) the breach caused the other party injury. Once the plaintiff establishes the elements of a contract, it must then establish that the contract was breached and damages resulting from the breach. Non-performance is not a breach unless performance is due.

The District Court noted that even taking all of the allegations of the Amended Complaint as true, plaintiffs have failed to state a claim for breach of contract arising out of the theory that all homeowners paid for certain coverage for which they did not receive. Unless plaintiffs filed a claim with their insurer, performance was not due and plaintiffs cannot establish a breach under the policy.

Unless the insured can demonstrate that it suffered a covered loss under the policy, the insurer has no duty to indemnify whatsoever.

Insurance is a contract to pay a sum of money upon the happening of a particular event or contingency. Put another way, the essence of an insurance policy is a promise by the insurer to compensate the insured for the loss of something of value that is covered under the policy, thereby shifting the risk of loss from the insured to the insurer. If defendants’ method of reviewing water damage claims relied on an improper interpretation of policy provisions, this alleged error does not give rise to a cognizable claim.

For those plaintiffs who never suffered water damage, no covered loss occurred and defendants owed no duty to them. Defendants’ duty to perform under the insurance contracts does not arise unless a homeowner submits a valid claim. Moreover, as to the plaintiffs who never filed property loss claims, they can show no actual injury.

The transfer of risk from insured to insurer is effected by means of the contract between the parties-the insurance policy-and that transfer is complete at the time that the contract is entered. Petitioner’s argument contains the unspoken premise that the transfer of risk from an insured to his insurer actually takes place not when the contract between those parties is completed, but rather only when the insured’s claim is settled. This premise is contrary to the fundamental principle of insurance that the insurance policy defines the scope of risk assumed by the insurer from the insured.

Once the insurance contract is executed, the insurer is on the hook for all of the risks delineated in the policy. An insurance company cannot avoid its duty to pay legitimate claims by an internal scheme to violate the terms of the policy. The policyholder retains the right to have the policy enforced according to its written terms and to pursue the denial of a legitimate claim in court. An insurance contract must be enforced in accordance with its terms. Only once a claim is wrongfully denied, does an insured have a breach of contract claim.

Defendants Assumed the Risk; Thus, Policyholders May Not Recover Premiums

In addition, defendants are entitled to dismissal of Count II because they assumed the risks stated in the insurance policies, thus making plaintiffs’ premiums non-refundable. Whether the insurers had an internal policy of denying claims in contravention of the policy language is irrelevant, as in any coverage dispute, it is the court that will ultimately construe the policy language and determine its meaning.  It is a general rule of insurance law that an insured may not have any part of his or her premium returned once the risk attaches, even if it eventually turns out that the premium was in part unearned.

Because defendant-insurers were at risk for any legitimate claims once the insurance contract was executed, there is no basis for the return of any premiums.  Once an insurer’s legal risk has attached the insured is not entitled to a return of any part of the premiums paid. For the reasons stated above, defendants’ motion to dismiss Count II of the Amended Complaint shall be granted.

Denial of Class Certification

Having dismissed Count II of the Amended Complaint, defendants’ motion to deny certification of the “premium” class is now moot as stated in their written reply brief. For the reasons stated in this court’s April 23, 2014 opinion denying class certification of the “property damage subclass,” defendants’ motion to deny class certification of the “property damage and appraisal subclass” shall be granted.

ZALMA OPINION

The plaintiffs were attempting to reduce their premium because they thought they were sold an illusory policy because of the manner in which the defendant insurers handled claims. Since the lead plaintiffs’ claim was paid and the class of plaintiffs had no claim at all, there was no way for the court to assess damages for the class. Some had no claims and some, who had claims, were each different. The attempt to obtain major class action damages based upon a false premise, failed because they sought coverage for claims not made and premium returned for risks actually taken.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Litigation Requires Grown-Ups In Charge

Not Worth The Expense to Fight on Every Issue

Philadelphia Indemnity Insurance Company (“Philadelphia”) sought certiorari review of a non-final order which denied its motion for a protective order and required an individual who resides and works in Pennsylvania to be deposed in Broward County, Florida.

In 2008, Donald Carlton applied for insurance on a collectible vehicle with Grundy Worldwide Collector Vehicle Program (“Grundy Worldwide”), a division of Philadelphia Insurance Companies. Philadelphia issued the policy. The vehicle allegedly was stolen in 2013, while a policy between Carlton and Philadelphia continued to be in effect. Carlton filed a claim for the loss, but Philadelphia rescinded the policy ab initio and filed a petition for a declaratory judgment in the circuit court in Broward County that it had no duty to provide coverage. Within the petition, it described Grundy Worldwide as its subsidiary.

The Florida Court of Appeal, in Philadelphia Indem. Ins. Co. v. Carlton, — So.3d —-, 2015 WL 71669 (Fla.App. 4 Dist., 1/7/15), reviewed the facts and Florida law to determine whether the trial court was correct or erred.

FACTS

In the course of discovery, Carlton noticed the deposition of an individual, Doug Hostvedt, to be taken in Broward County, Florida. Philadelphia moved for a protective order based on Florida Rule of Civil Procedure 1.410(e)(2), which provides, “A person may be required to attend an examination only in the county wherein the person resides or is employed or transacts business in person or at such other convenient place as may be fixed by an order of court.” It explained that Hostvedt was not Philadelphia’s employee, but was Vice President of “Grundy Insurance,” and that he resides and is employed in Pennsylvania.

Carlton responded that in 2009, Hostvedt attended a show in Boca Raton, Florida, in which Carlton’s vehicle was displayed. At the show, Hostvedt identified himself as a vice president of Grundy Worldwide, gave Carlton a business card to that effect (a copy of which Carlton attached), solicited Carlton to continue his insurance coverage with Grundy Worldwide, and discussed with Carlton and his son how they might obtain an increase in the coverage limit. They followed his instructions, and Grundy Worldwide increased the coverage.

ANALYSIS

Carlton explained he sought to depose Philadelphia’s corporate officer in the forum in which Philadelphia chose to litigate, citing Ormond Beach First National Bank v. J.M. Montgomery Roofing Co., 189 So.2d 239, 243 (Fla. 1st DCA 1966). In that case, the court held that, pursuant to the general rule that plaintiffs are required to give their depositions in the forum where the action is pending, a corporate plaintiff’s officers or managing agents generally may be deposed in the county where the corporation instituted its action, though they reside and transact business in another.  For purposes of the instant action, he argued, Philadelphia and Grundy Worldwide were the same.

At the hearing on the motion, Philadelphia represented that Hostvedt was not its employee; instead, he was the employee of a closely related but wholly separate corporation, James A. Grundy Agency, which does not deal with specialty automobiles. The trial court denied Philadelphia’s motion for protective order.

The Court of Appeal granted the petition because neither Hostvedt, James A. Grundy Agency, nor Grundy Worldwide is a party to the underlying lawsuit, which was filed against Carlton by Philadelphia. The party seeking to take the deposition bears the burden of establishing the capacity of the employee sought to be examined. Here, Carlton failed to demonstrate that Hostvedt was an officer, director, or managing agent of the petitioning corporation-Philadelphia-so as to fall within Ormond Beach First National Bank. Accordingly, Rule 1.410(e)(2) applies and Hostvedt cannot be required to attend a deposition in Broward County, Florida, but is entitled to be subpoenaed for deposition where he resides, is employed, or transacts business.

The trial court departed from the essential requirements of law when it denied Philadelphia’s motion for protective order.

ZALMA OPINION

Insurance litigation is never easy. Rather than working together to allow the deposition of Hostvedt to be taken the defendant moved to compel the deposition; the insurer sought a protective order, and they both went to the court of appeal because the insurer was not happy with the trial court order. The Court of Appeal concluded that the insurer was correct and allowed for the deposition to be taken where Hostvedt lives or works by subpoena. It would have been easier and much less expensive if the two parties got together, met and conferred, and arranged for the the deposition to be taken by either paying to bring him to Florida or agreeing to depose him in Pennsylvania. Litigation requires grown-ups rather than a fight to the death on every issue.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Can There be Coverage by Estoppel?

Providing a Defense When Facts Exist to Deny Coverage Can Create Coverage That is not There

In an amazingly succinct opinion, a Florida appellate court made a decision that could raise serious concerns to the insurance industry. The appellate court concluded that undertaking communication, conduct, and steps in defense of an underlying action, heavily dependent upon the circumstances, may rise a coverage by estoppel claim. That is, the conduct of the insurer would prevent it from asserting coverage defenses that it would otherwise have had.

The appeal in Bishop v. Progressive Exp. Ins. Co.— So.3d —-, 2015 WL 63648 (Fla.App. 1 Dist. 1/6/15) involved an allegation that an insurer made statements and undertook actions which led a business owner to believe she had insurance coverage for the underlying action despite the insurer’s knowledge of facts which would have permitted it to deny coverage.

When an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage. This “coverage by estoppel” claim requires a representation of material fact, reasonable reliance, and a detrimental change in position (i.e., prejudice) as a result of the reliance.

The trial court entered summary judgment for the insurer. The appellate court, returned the case to the trial court and ruled only that a cause of action existed that could possibly be proved. The appellate court concluded that it was up to the trier of fact to determine whether the facts were sufficient to support the claim of coverage by estoppel.

ZALMA OPINION

Insurers, at least those operating in Florida, must be careful when they take on the defense of an insured when coverage issues exist. First, the insurer must provide a thorough reservation of rights letter to the insured pointing out each and every possible defense to defense and/or indemnity the facts raise when applied to the policy language. Second, all communications with the insured must comport with the reservations. Third, the insurer must do nothing to give the insured the impression that the facts, policy language and analysis in the reservation of rights letter, were not the true position of the insurer. Finally, the insurer should do nothing that would allow an insured to claim a misrepresentation of material fact by the insurer to the insured, reasonable reliance by the insured on the misrepresentation, and claim a detrimental change in position (i.e., prejudice) as a result of the reliance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

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Workers’ Compensation is a Social Contract

Wrap Up Policy Limits Workers’ Compensation Immunity to Injuries to Employees Only

Defendant Messer Construction Co.’s motion for summary judgment, Defendants D.A.G. Construction Co., Inc.’s and Triversity Construction Co., LLC’s motion for summary judgment, Defendant J & B Steel Erectors, Inc.’s motion for summary judgment, and the parties’ responsive memoranda were before the District Court for the Southern District of Ohio in Stolz v. J & B Steel Erectors, Inc., Slip Copy, 2014 WL 7409917 (S.D.Ohio, 12/31/14).

BACKGROUND

Plaintiff was injured while working as a concrete finisher for Jostin Construction, Inc. (“Jostin”) at the Horseshoe Casino construction project in Cincinnati. Plaintiff brings this civil action against Defendants Messer Construction Co. (“Messer”), D.A.G. Construction Co., Inc. (“D.A.G.”), Triversity Construction Co., LLC (“Triversity”), J & B Steel Erectors, Inc. (“J & B Steel”), Terracon Consultants, Inc., and Pendleton Construction Group, LLC, each of whom allegedly had responsibilities related to the construction project.

Defendant Messer moves for summary judgment on the grounds that (1) it is entitled to immunity under Ohio’s workers’ compensation laws as a self-insuring employer and (2) the election of remedies doctrine bars Plaintiff from pursuing his claim against Defendant Messer. Defendants D.A.G., Triversity, and J & B Steel argue that they are entitled to immunity under Ohio’s workers’ compensation laws as enrolled subcontractors under Defendant Messer’s workers’ compensation program.

UNDISPUTED FACTS

1.    At the time of his alleged injuries, Plaintiff Daniel Stolz was working for Jostin as a concrete finisher at the construction project for the Horseshoe Casino in Cincinnati, Ohio (“Casino Project”).

2.    Defendant Messer was the general contractor for the Casino Project and Jostin was one of its subcontractors.

3.    Prior to Plaintiff’s accident, Messer had obtained authority from the Ohio Bureau of Workers’ Compensation (“BWC”) to self-administer the workers’ compensation program for all of the enrolled subcontractors on the Casino Project.

4.    Plaintiff’s employer, Jostin, was an enrolled subcontractor participating in Messer’s workers’ compensation program under the certificate of authority issued by the BWC to Messer.

5.   J & B Steel was an enrolled subcontractor participating in Messer’s workers’ compensation program for the Casino Project under the certificate of authority issued by the BWC to Messer.

ANALYSIS

Workers’ compensation represents a social bargain in which employers and employees exchange their respective common-law rights and duties for a more certain and uniform set of statutory benefits and obligations. In the event an employee is injured in a work-related incident, he is entitled to workers’ compensation benefits, even if the employer is not to blame for the employee’s injury. In exchange, the employer receives tort immunity for work-related injuries.

The “exclusivity rule” dictates that an employee who is injured in the course of his employment must accept workers’ compensation benefits as his exclusive remedy vis-à-vis his employer. On most projects, contractors and subcontractors provide their own liability and workers’ compensation coverage. However, under certain circumstances, contractors on large-scale construction projects may self-insure the project, whereby the employees of subcontractors enrolled in the self-insurer’s plan for that project are treated as employees of the self-insuring contractor for purposes of workers’ compensation.

The Ohio Bureau of Workers’ Compensation (“BWC”) issued a “Certificate of Employer’s Right to Pay Compensation Directly” for “Subs 2000 4170–2 Horseshoe Casino–Cincinnati Wrap Up” (“certificate of authority”) to Defendant Messer, effective March 1, 2011 to March 1, 2012. The list of “subs” identified under this “Wrap Up” included Plaintiff’s employer, Jostin.  It is undisputed that Plaintiff was Jostin’s employee and that Jostin was an enrolled subcontractor under Defendant Messer’s workers’ compensation plan. Accordingly statutes impart workers’ compensation immunity upon Defendant Messer for any injuries sustained by Plaintiff while working on the Casino Project, since he was an employee of enrolled subcontractor Jostin.

Defendant Messer became liable for providing workers’ compensation for injured employees of enrolled subcontractors at the Casino Project upon approval of the application, regardless of whether the rules and statutes had been strictly followed. Defendant Messer’s risk manager testified that Defendant Messer would not have paid Plaintiff’s claims if the certificate of self-insurance being challenged by Plaintiff had not been issued. Plaintiff seeks to retain the benefits he received under the workers’ compensation system, the assurance of recovery, while simultaneously seeking to avoid his own obligations by denying Defendant Messer immunity.

Defendant Messer is entitled to immunity from Plaintiff’s negligence claim pursuant to O.R.C. §§ 4123.35 and 4123.74.

Dual Capacity Doctrine

Plaintiff also argues that Defendant Messer is liable pursuant to the dual capacity doctrine.The dual capacity doctrine is a narrow exception to the general rule of employer statutory immunity in negligence suits brought by employees. In order for the dual-capacity doctrine to apply, there must be an allegation and showing that the employer occupied two independent and unrelated relationships with the employee, that at the time of these roles of the employer there were occasioned two different obligations to this employee, and that the employer had during such time assumed a role other than that of employer.

Here, Defendant Messer is not Plaintiff’s actual employer. Although the statute provides that Defendant Messer is treated as if it were Plaintiff’s employer for the purposes of determining immunity, it does not create an actual employment relationship. In fact, the statute specifically states that employees of covered subcontractors are not considered employees of the self-insuring employer for any purpose other than immunity and self-insuring employers have no authority under the statute to control the means, manner, or method of the subcontractor employee’s work.

Plaintiff has failed to raise a genuine issue of material fact related to the applicability of the dual capacity doctrine, and the Court finds that the dual capacity doctrine does not apply.

WORKERS’ COMPENSATION IMMUNITY

The Court’s paramount concern in construing a statute is legislative intent. To discern legislative intent, the Court first considers the statutory language, reading words and phrases in context and in accordance with rules of grammar and common usage. If the meaning of the statute is unambiguous and definite, it must be applied as written and no further interpretation is necessary.

To read section 4123.35(O) in a manner which grants tort immunity to Subcontractor Defendants for injuries sustained by another subcontractor’s employee is contrary to the plain language of the statute. Section 4123.35(O) states, “the contractors and subcontractors included under a certificate … are entitled to the protections provided under this chapter and Chapter 4121 of the Revised Code with respect to the contractor’s or subcontractor’s employees ….“ (emphasis added).

As the statute is written, each subcontractor is only protected from liability for injuries to one of the subcontractor’s employees-its own. Even though the subcontractor is not providing the workers’ compensation coverage on the job to their own employees, the Ohio General Assembly pronounced that the subcontractors are still entitled to tort immunity from their own employees. If the General Assembly intended for immunity to extend to all subcontractors for injuries sustained by the employees of all the subcontractors, it would have written the statute in a manner that indicated such.

To grant blanket immunity to Subcontractor Defendants, the Court would have to read protections into the statute that are not there.   It contravenes the workers’ compensation scheme to provide Subcontractor Defendants immunity when they have not earned it. To do so would not uphold the social bargain, rather, it would constitute a “free pass” on their alleged liability for their role in the injuries sustained by Plaintiff.

The fact that Ohio’s workers’ compensation statutes do not expressly state that one who receives workers’ compensation is entitled to bring a claim against a third party tortfeasor, does not mean that they do not have the right to do so. The relevant fact is not that the Ohio workers’ compensation act does not grant this right to plaintiffs; the relevant fact is that section 4123.35(O) does not take this right away from plaintiffs.  In light of the fact that the plain language of the statute does not grant the broad immunity the Subcontractor Defendants seek. Plaintiff maintains the right to bring suit against them.

ZALMA OPINION

Wrap-up schemes that allow a general contractor to provide insurance, including workers’ compensation insurance for all of the contractors and subcontractors who are employed on a particular construction project. It does not, however, make each contractor and subcontractor to be an employer of all of the people working on the project. It only provides workers’ compensation benefits to the employee of the particular subcontractor. The statute allows the actual employer and the general contractor who obtained the wrap up privilege to be protected by the exclusivity provision of the workers’ compensation law.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Investigating Mold Claims

Dealing With a Claim Where Mold is Suspected

The following was excerpted from my book the Mold Claims Coverage Guide available from the National Underwriter Company as part of the Zalma Insurance Claims Library.

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

The initiation of an investigation of a claim is the notice of loss. This is a document from the insured or the insured’s agent or broker advising the insurer that a loss has occurred that the insured believes is covered by the policy. The notice of loss will tell the adjuster:

  • the name of the insured;
  • the location of the loss;
  • the date the loss occurred;
  • what the insured believes was the cause of the loss;
  • the policy number, the policy’s effective period, the policy limits, and the standard forms used in the policy; and
  • how to contact the insured.

Once the notice of loss is received from the insured, the adjuster reads the policy wording as it applies to the claim reported and then makes immediate (within 24 hours) contact with the insured to arrange for an inspection of the property.

After making first contact and establishing rapport with the insured, the adjuster should request a recorded statement from the insured. A recorded statement is a conversation between the insured and the adjuster recorded on an audiotape or a digital recorder. The statement is in question-and-answer format and is usually transcribed so that the insured can read, correct, and sign the transcript. The insured should agree to the statement and provide the adjuster with all of the information requested.

When the recorded statement is completed, but before the tape is turned off, the adjuster should advise the insured that a copy of the tape or the transcript of the statement will be provided to the insured for his or her files if requested. The insured should be asked to sign and date the tape’s label. The adjuster should request documents from the insured about the dwelling or structure, such as:

  • the deed;
  • purchase documents;
  • title insurance policies;
  • homeowners insurance policies;
  • permits for additions or modifications;
  • reports of building inspectors;
  • reports or estimates from contractors or workmen already hired by the insured;
  • contracts for recent repair work on the premises;
  • invoices from the plumber or roofer who repaired the leak, or any vendor who may have worked at the house in or near the location of the mold;
  • any notes secured by deeds of trust and the property;
  • reports of police, fire, or other governmental agency; and
  • reports prepared by architects or engineers who have inspected the property.

The adjuster should also request that the insured sign an authorization to obtain confidential documents such as water bills, bank records, and tax records. The authorization should be read with caution by the insured and signed after consultation with a professional public insurance adjuster or lawyer. The insured is obligated to cooperate with the insurer’s investigation but not to the point of sacrificing important rights. Some believe tax returns are privileged personal documents that an insurer cannot compel an insured to produce. California Insurance Code Section 2071 states: “The insurer shall inform the insured that tax returns are privileged against disclosure under applicable law but may be necessary to process or determine the claim.” If an insured resists the production of tax returns, the prudent adjuster should accept the claim of privilege and advise the insured that the tax returns may be necessary to process the claim. At the end of the first meeting the adjuster will advise the insured of the following:

  • his or her next course of action;
  • what the insured can expect until the claims investigation is completed;
  • the type of investigation that will be conducted; and
  • the experts or tradesmen the adjuster will call in to help determine the extent of loss and the amounts needed to repair.

If the adjuster does not provide this information to the insured, the insured must demand such information from the adjuster orally and, after the meeting, in writing. The adjuster will keep a log of all phone calls and correspondence, and make or keep copies of all correspondence the adjuster sends to, or receives from, the insured.

The investigation of a claim where mold is suspected requires a thorough review of the facts of the loss, the actions of the insured, and causation. The investigation must be conducted with the knowledge that “under normal conditions, fungal mold spores exist at safe levels on the exterior and the interior of virtually all homes and businesses.” [“What Coverage Attorneys Need to Know About Mold,” Tort and Insurance Practice Law Journal, Fall 2002 (38:1): page 30.]

Since mold is ubiquitous, almost any property that provides an environment for its growth (water and warmth) will result in mold growth and will usually result in a claim to remediate mold. Before mold claims became a subject of litigation, homeowners and property owners simply removed the source of the problem by spraying mold with chlorine bleach.

Some homeowners and property owners now see mold infestation, mold growth, and the resulting damage to property as a means to remodel their homes with an insurer’s money. Insureds, if turned down, often file bad faith suits that will allow them the opportunity to take advantage of the insurer’s funds by claiming tort and punitive damages because of a bad faith denial of a covered claim. It is prudent for an adjuster and the insurer he or she represents to have a complete record of all communications between the insured and the insured’s representatives to be able to prove later the reasonableness of its decision to reject a mold claim and to prove that there was a genuine dispute between the insurer and insured and that the issue of coverage was fairly debatable.

To avoid multiple bad faith suits and claims for punitive damages, each claims file with a potential mold claim should include the following:

  • confirmation that the insured had insurance against the risk of loss of the property that is the subject of the claim;
  • evidence that establishes that the insured has an insurable interest in the property that is the subject of the claim;
  • documents or other evidence that show that the loss occurred, or was first discovered, during the policy period;
  • documents or statements of the insured that reflect the date when the insured first became aware that a loss of any kind had damaged his or her property, whether mold was suspected or not;
  • documents or statements of the insured or independent witnesses that reflect the date when the insured first became aware that mold was present and growing on the property that is the subject of the claim;
  • documents or statements of the insured that establish where the mold was first observed;
  • documents or statements of the insured, independent witnesses, current and former occupants, property management personnel, maintenance personnel, contractors, designers, architects, or experts that can explain how the loss was caused;
  • documents or statements of the insured that establish the steps the insured took, or intends to take, to prevent further loss;
  • information and copies of reports prepared by experts that can establish the cause of loss;
  • information on whether any experts were retained to establish the proper remediation of the mold situation and the reports of those experts;
  • documents and statements of the insured or of independent witnesses that explain who or what was responsible for the presence of water that facilitated the growth of mold;
  • photographs taken to record the presence and extent of the spread of mold at the time of the first inspection;
  • a detailed inspection of the structure. The inspection should concentrate on those areas with known or suspected water impact or other mold-related problems indicated during the interviews of the insured and independent witnesses;
  • inspection by the investigator of hidden areas behind walls and above ceilings. Often, mold growth can be seen by naked eye. Samples should also be collected for closer inspection in an appropriate laboratory;
  • inspection of the air-conditioning or heating systems for the presence of visible mold and conditions likely to lead to mold growth;
  • measurement of moisture levels using appropriate moisture meters;
  • measurement of temperature and humidity in the occupied space;
  • a complete scope of loss;
  • a recorded statement of the insured detailing all aspects of the claimed loss—the who, what, when, where, why, and how of it; and
  • a recorded statement of any witnesses who can explain the existence of the mold or its cause.

The investigation should be designed to first determine the cause of the mold infestation. Second, the investigation should determine the extent of the damage. Third, it should develop a method to correct the problem. Finally, the investigation should determine methods to prevent further occurrences of the mold infestation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

 

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Don’t Try to Create Ambiguity When One Doesn’t Exist

Multiple Insurers Fight Over Who Owes What to Whom

When more than one insurer could arguably provide coverage for an automobile accident, the insurers work to protect their insured and then litigate with each other over who should pay and in what proportion of the total loss. In American Nat. Prop. and Cas. Co. v. United Specialty Ins. Co. — Fed.Appx. —-, 2014 WL 7399053 (C.A.10 (N.M.) 12/31/14) the Tenth Circuit, applying New Mexico law, was faced with such a case.

FACTS

At the time of the underlying events, Endeavor Services, Inc. (“Endeavor”) was in the business of transporting water to oil fields. Jimmy Cooper financed the company at its inception and served as its director while his children jointly owned 51% of its shares and Virgil Woods owned the other 49%. To assist the company, Mr. Cooper provided it the use of his Lincoln Navigator (“the Navigator”). The Coopers used the Navigator as a family vehicle from 2004 until 2010. At that time, Mr. Woods informed Mr. Cooper that Edward De La Paz, an Endeavor salesman, needed a vehicle to perform his duties, and Mr. Cooper offered the Navigator. There was no discussion of Endeavor purchasing the vehicle when Mr. Cooper first provided it, but approximately a month later Messrs. Woods and Cooper agreed that Endeavor would buy the Navigator at fair market value as soon as the company had the funds to do so.

While it had possession of the Navigator, Endeavor paid for all gas and maintenance. Mr. Cooper continued to pay the premiums on the car’s insurance and retained title to the vehicle, but he and his wife never used it.

On June 11, 2010, Mr. De La Paz was driving the Navigator to pick up a check that would have allowed Endeavor to pay Mr. Cooper for the vehicle. Mr. De La Paz crashed into a truck, killing both himself and Roland Judson, the truck driver. The accident occurred approximately fifty miles from Mr. De La Paz’s house—where he began his drive—during daylight, with clear conditions, on a dry, straight, level road. A police report characterized “[d]river inattention” as “a contributing factor in the crash.” An autopsy of Mr. De La Paz found methamphetamine in his system in an amount sufficient to cause death by overdose. In the opinion of Dr. Richard Morrisett, a neuropharmacologist retained by American, drugs “rendered [Mr. De La Paz] incapable of safe operation of a motor vehicle [and] substantially contributed to the motor vehicle accident.”

Mr. Judson’s estate sued Mr. De La Paz’s for wrongful death. A settlement was reached between the insurance companies, Mr. Judson’s estate, and Mr. De La Paz’s estate, whereby Mr. Judson’s estate would be paid $1,650,000 to resolve its wrongful-death claim. Of this amount, American paid $650,000, Great West paid $1,000,000, and United—which issued an excess-liability policy to Endeavor—paid nothing. The insurance companies each reserved their right to contest the claims amongst themselves.

THE POLICIES

There are three different insurance policies relevant to the appeal: (1) a family auto policy issued by American to Mr. Cooper; (2) a commercial umbrella policy issued by American to Mr. Cooper; and (3) a commercial auto policy issued by Great West Casualty Company (“Great West”) to Endeavor.  Mr. Cooper’s family policy with American excluded coverage for damages incurred “while any insured vehicle is rented, leased, or subleased or under any purchase agreement or conditional sale to others.”

As for the commercial umbrella policy American issued to Mr. Cooper, its pertinent provision excluded coverage for damages “[a]rising out of the use … or possession by any person of a controlled substance.” Finally, the commercial auto policy Great West issued to Endeavor indicated, notably, that it applied only to “covered autos,” which included “hired autos” and “nonowned autos.”

THE DECLARATORY JUDGMENT ACTION

American exercised the right to seek a declaratory judgment and equitable subrogation on the ground that United owed it $650,000 (“the loss”) for the money it paid to settle the wrongful-death lawsuit based on the excess-liability policy it issued to Endeavor. Both parties filed motions for summary judgment.

Ruling on the dueling motions for summary judgment, the district court granted United’s, denied American’s, and dismissed the complaint with prejudice. In so doing, it declared that American’s auto and umbrella policies covered the loss and that Great West’s and United’s policies did not. The district court reasoned that the conditional-sale exclusion ambiguous and thus properly construed against American, the insurer. The district court explained that “[a]t most,” the arrangement “amounted to an expression of a plan for Endeavor to purchase the vehicle at some undefined time and for an unstated sales price, rather than a contractual agreement.”  As such, the terms were insufficiently definite to constitute a contract, and the conditional-sale exclusion was not implicated.

As for the Great West policy, the district court found that Great West was not obligated to cover the loss because the Navigator was borrowed, and was therefore not a “hired auto” or a “nonowned auto” within the meaning of the policy. In view of those findings, the district court granted United’s motion for summary judgment, denied American’s motion for summary judgment, and dismissed the complaint with prejudice.

ANALYSIS

In New Mexico, like almost every state, insurance contracts are construed by the same principles which govern the interpretation of all contracts. Where a policy term is unambiguous, the court’s duty is simply to apply it to the facts of the case.  The question of whether an ambiguity in an insurance policy exists is a question of law to be decided by the court.

In short, the conditional sale is a well-established concept, both within and outside the law, and both within and outside New Mexico. It is a simple, straightforward idea with clear, comprehensible terms. We see nothing facially ambiguous about it.

The context of the policy as a whole strengthens the conclusion that the provision is unambiguous. Analysis of the insurance policy proceeds with the primary goal of ascertaining the intentions of the contracting parties with respect to the challenged terms at the time they executed the contract. In sum, the exclusion is unambiguous, both facially and as applied.

A conditional sale is one in which (1) the buyer gets immediate possession, and (2) the seller keeps title, until (3) the buyer pays in full. Applying the more specific language of the policy, i.e., the word “under,” the question is whether the agreement to enter such an arrangement had been reached.The answer is yes. There is no dispute that Endeavor acquired immediate possession of the Navigator while Mr. Cooper retained title until Endeavor paid him the full purchase price. Under the plain language of the insurance policy, the Navigator was subject to a conditional sale on the day of the accident.

To be sure, a court might not have a surefire means to know exactly how much funds were enough to hold that Endeavor had a duty to pay for the Navigator. Nevertheless, such a determination is not so dissimilar to the sort of reasonableness calculations courts make on a daily basis.

For summary-judgment purposes, it cannot be said that the conditional-sale agreement was void for indefiniteness simply because its time for performance was tied to Endeavor’s ability to pay for the vehicle. Therefore, the district court erred in granting summary judgment to United on its claim that the exclusion did not apply.

The district court ruled that the umbrella policy covered the accident and that its exclusion for damages arising from the use of controlled substances was inapplicable.

American’s umbrella policy excluded coverage for damages “[a]rising out of the use … or possession by any person of a controlled substance.” Applying the unambiguous definition of the phrase, the court concluded that United was not entitled to a summary-judgment resolution of the issue in its favor.
The vehicle was unquestionably being used in connection with the business of the insured, Endeavor: it was being driven by an Endeavor salesman to pick up an Endeavor check.

Endeavor exclusively used the car during the relevant period and paid for all of the gas and maintenance for it, even though Mr. Cooper retained the title. Moreover, while Endeavor had not yet paid for the vehicle, the conditional-sales agreement clearly evinced the parties’ intention that it ultimately would do so. The Tenth Circuit concluded that the district court erred in granting summary judgment to United on the ground that Great West’s policy did not—as a matter of law—provide coverage to Endeavor.

ZALMA OPINION

Summary judgment closes down a case totally. Appellate courts will set aside a summary judgment if it believes the trial court erred in application of the law or facts. Here, there was no ambiguity and, as a result, the case will go back to the trial court and will have to allow the parties to present evidence at trial to give it sufficient information to rule now that it has direction from the Tenth Circuit as to the lack of ambiguity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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When Poop Is a Contaminant

Septage, When It Enters a Water Supply, is an Excluded Pollutant

Courts of Appeal are required to deal with cases presented to them, even when they deal with factors as unusual as human excrement and urine. Such cases are seldom the subject of insurance disputes. However, in Preisler v. General Cas. Ins. Co., — N.W.2d —-, 2014 WL 7373070 (Wis.), 2014 WI 135 (12/30/2014), the Wisconsin Supreme Court reviewed a decision of the court of appeals that granted summary judgment to insurers applying their pollution exclusions.

ISSUE

The issue to be decided was whether a reasonable insured would understand that decomposing septage (primarily composed of human urine and fecal material, as well as other materials disposed of in septic tanks, grease interceptors and portable restrooms) is a “contaminant” and therefore, a “pollutant” as defined in the liability insurance policies issued by the insurers and whether it is a pollutant when it has decomposed and seeps into a water supply.

BACKGROUND

Fred and Tina Preisler operate a dairy farm and raise cattle. A well drilled in 1972 supplied water for the Preislers’ household and farm uses until 2008.
Duke, Doug, Dale, and Cheryl Kuettel live on a farm across the road from the Preislers’ farm. From that property, the Kuettels run a farming operation, 4–DK Farm, and a septic pumping service, Kuettel’s Septic Service, LLC. Kuettel’s Septic hauls, stores, and disposes of the waste it pumps from customers’ septic tanks. Kuettel’s Septic also collects waste from grease traps, floor pits, and car washes, which it combines with the human waste from septic tanks.

Septage contains nitrogen, and when septage is introduced into soil, it decomposes. During that biological process nitrates are formed. The presence of nitrates in water supplies is a concern for human health as it may cause health problems in infants and may be implicated as a risk factor associated with chronic health and reproductive problems.

Fred Preisler and Duke Kuettel discussed applying septage on the Preislers’ farm as fertilizer. Kuettel’s Septic received permission from the Wisconsin Department of Natural Resources (DNR) to apply it. Kuettel’s Septic applied septage to the Preislers’ farm fields for several years.

In 2008, the Preislers experienced problems with their well water. The Preislers’ cattle that drank the water began to die at an uncharacteristic rate. The Preislers further noted a decrease in milk production. August 2008 testing showed the Preislers’ well water contained elevated levels of nitrates, which are produced as septage decomposes. The cattle deaths subsided later in 2008 after the Preislers drilled a new well.

The Preislers sued alleging negligence in storing and in applying septage resulting in nuisance and trespass.

The Preislers added the parties’ insurers to the suit.

The Rural and Regent policies include similarly worded pollution exclusion clauses. They exclude harm “arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’….” The Rural and Regent policies also define “pollutants” similarly as: “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 .”

The circuit court concluded that the pollution exclusion clause applies to preclude coverage for alleged losses arising out of storage of septage and application of septage to farm fields that is alleged to have caused contamination of the water supply resulting in harm to the Preislers.

DISCUSSION

Policy Interpretation

The Supreme Court was asked to interpret the pollution exclusion clause as it applies to decomposing septage that entered a water supply.  Policy language is not ambiguous merely because more than one dictionary definition exists or the parties disagree about its meaning. Policy language also is not ambiguous because different courts have come to differing interpretations.

First a court must examine the facts of the insured’s claim to decide whether the policy makes an initial grant of coverage for the claim set out in the complaint. The analysis ends there if the policy clearly does not cover the claim.

The parties did not argue the Preislers’ claims fall outside the policies’ grant of coverage. Due to the fact that most policies define an “occurrence” to mean an “accident,” the pollution coverage issue often turns upon the intent of the insured.  Most courts have focused on the damage caused by the pollution and have concluded that there is an occurrence when the insured did not expect or intend the resultant damage.

The facts of this case, if proved, present an “occurrence” triggering an initial grant of coverage. Here, the “accident” was the seepage of decomposing septage into the Preislers’ water supply. Seepage into the water supply was not “intended, anticipated, or expected. Seepage of decomposing septage into the water supply is an occurrence. Here, the resulting harm is water with elevated nitrate levels.

Pollution Exclusion

Typically, to resolve whether a pollution exclusion applies, the court must first determine whether the substance in question falls unambiguously within the policy’s definition of pollutants. Then, if the substance fits within the policy’s definition of pollutants, it must determine whether the alleged loss resulted from the “discharge, dispersal, seepage, migration, release or escape” of the substance under the plain terms of the policy’s pollution exclusion clause.

However, the parties do not appeal the circuit court’s ruling that the Preislers’ alleged damage resulted from the “discharge, dispersal, seepage, migration, release or escape of” decomposing septage within the meaning of the terms in the pollution exclusion clause. Therefore, in this case, the sole inquiry before the Supreme Court was whether, at the time of the occurrence that triggered coverage, the decomposing septage is a pollutant within the policies’ definition.

It is a rare substance that is always a pollutant. The most noxious of materials have their appropriate and non-polluting uses.  The Supreme Court used the following definition of contaminant: “to make impure or unclean by contact or mixture.”  quoting from the American Heritage Dictionary of the English Language 406 (3d ed.1992).

Determining whether a substance is a contaminant and therefore a pollutant, the focus is on the event causing harm because that is the occurrence triggering coverage. Here, the event causing harm is decomposing septage seeping into the water supply. A reasonable insured would understand decomposing septage to be a contaminant when it seeps into a water supply.

Individual components of septage are common. Septage is a waste product with use as a farm fertilizer. Application of septage comes with risks to water supplies because decomposing septage can release high levels of nitrates, which can be dangerous to humans and cattle if they reach water supplies. A second limiting principle is that if the harm results from “everyday activities gone slightly, but not surprisingly, awry,” a reasonable insured would not necessarily understand the substance to be a pollutant. Exposure of decomposing septage to the Preislers’ water supply is not an everyday activity gone slightly, but not surprisingly, awry.

Septage fits the ordinary meaning of waste, which the policies expressly list as a pollutant, and supports the conclusion that septage is a pollutant when it seeps into a water supply. Septage is primarily composed of human urine and feces.  Therefore, decomposing septage is a pollutant when it seeps into a water supply.

The policies’ use of “contaminant” in defining “pollutant” should have been clear notice to the Kuettels that their policies would not cover claims involving decomposing septage’s seepage into water supplies.  The key terms of the policies are unambiguous.

The Supreme Court concluded that a reasonable insured would understand that decomposing septage is a “contaminant” and therefore, a “pollutant” as defined in the policies when it has decomposed and seeps into a water supply.

ZALMA OPINION

To the Wisconsin Supreme Court, and to insurers across the country, human feces and urine fit clearly within the definition of contaminant and pollutant sufficient to allow an insurer to refuse defense and indemnity under the pollution exclusion. Although not a pollutant when properly handled and treated septage, when applied to the soil and allowed to decompose and cause nitrates to enter a water supply, it becomes a pollutant. When dealing with a pollution exclusion it is important that the insurer, and courts interpreting the decision of an insurer to refuse defense and indemnity, it is important to go through the analysis by determining whether the material is a contaminant and that the contaminant that pollutes a water supply or otherwise causes damage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

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Zalma’s Insurance Fraud Letter – 1/1/2015

Happy New Year

In the First issue of its 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on January 1, 2015, continues the effort to reduce the effect of insurance fraud around the world while wishing all its readers a very happy and prosperous new year.

The issue continues to establish that, regardless of some success, the efforts to defeat fraud must be increased. The current issue of ZIFL reports on:

1.   Failure to Appear for EUO May Not Be Enough to Deny Claim.

2. New From Barry Zalma a. National Underwriter Publishes:

i. “Insurance Claims: A Comprehensive Guide;

ii. “Construction Defects Coverage Guide; and

iii. “Mold Claims Coverage Guide” b. Part of the Zalma Insurance Claims Library.

c.     The ABA Tort & Insurance Practice Section publishes:

i. “The Insurance Fraud Deskbook”

3.     The Loss in Progress Rule

4.     Arson-for-Profit Doesn’t Pay

5.     Barry Zalma is on http://WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER 

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

THE “ZALMA ON INSURANCE” BLOG

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

  1. Cooperate in Defense or Lose Everything – December 31, 2014
  2. Report Promptly, Sue Quickly or Else – December 30, 2014
  3. Insurer May Litigate Coverage Dispute – December 29, 2014
  4. Brothers Shouldn’t Fight – December 29, 2014
  5. Notice of Claim is When the Insurer Receives It – December 26, 2014
  6. ERISA Bars Jury Trial Against Health Insurer – December 24, 2014
  7. Arson-for-Profit Doesn’t Pay – December 23, 2014
  8. Biased Judge Disqualified – December 22, 2014
  9. Insurance Lawyer Expert Striken – December 19, 2014
  10. A Christmas Story of Fraud – December 18, 2014
  11. Failure of Contract to Provide Indemnity – December 17, 2014
  12. You Only Get What You Pay For – December 16, 2014
  13. Zalma’s Insurance Fraud Letter — December 15, 2014
  14. Infrared Detection of Mold – December 12, 2014
  15. The Eight Corners Rule Defeats Right to Defense – December 12, 2014
  16. Insurance Fraud – December 11, 2014
  17. A Dam Case – December 10, 2014
  18. Doubt About Exclusion Requires Coverage – December 9, 2014
  19. What is Liability Insurance? – December 8, 2014
  20. Business Risks Never Insurable – December 8, 2014

New From the ABA:

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case. Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624 ; or orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL: http://www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL: http://www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL: www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant. He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase e-books written and published by Mr. Zalma and ClaimSchool, Inc.

Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog . You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

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Cooperate in Defense or Lose Everything

Insured Hurts Itself and Its Victims

A third party liability insurance policy promises the insured to defend and indemnify it if the loss is due to a risk of loss insured against. The insured of a third party liability insurance policy promises to cooperate with the insurer and assist in the presentation of the defense. If either fails to fulfill the promises made litigation usually ensues. In Auto-Owners Ins. Co. v. Premiere Restoration & Remodeling, Inc., Slip Copy, 2014 WL 7369391 (N.D.Ala., 12/29/2014) the District Court for the Northern District of Alabama was faced with an unusual suit where an insurer sought relief because its insured failed to keep any of its promises and deprived the insurer of the right to mount a defense in favor of its insured.

Auto–Owners alleged Premiere violated the terms and conditions of the policy when Premiere failed to cooperate with Auto–Owners and the attorney Auto–Owners provided to represent Premiere in the state court action that the Sheridan family filed.  Auto–Owners seeks judgment against Premiere for Premiere’s failure to answer or otherwise defend this action and judgment as a matter of law against the Sheridans.

DEFAULT JUDGMENT

Auto–Owners filed a motion for entry of default against the defendants accompanied by proof of service and an affidavit. The Clerk entered default against Premiere on September 25, 2014.

The entry of default does not by itself warrant an entry of default judgment. Rather, there must be a sufficient basis in the pleadings for the judgment.  Although a defaulted defendant is deemed to admit the plaintiff’s well-pleaded allegations the Court has an obligation to assure that there is a legitimate basis for the judgment

UNDERLYING STATE COURT ACTION

On March 2, 2011, the Sheridans sued Premiere, Jerry Sulzby, Rodney Bates, and Gary Thompson in the Circuit Court of Jefferson County, Alabama. The Sheridans alleged that in July 2010, they entered into a contract with Premiere. In the contract, Premiere agreed to construct a new home for the Sheridans after a fire destroyed their previous residence. The contract obligated Premiere to construct the new home for the amount the Sheridan’s insurance company had agreed to pay for reconstruction. Despite being paid half the contract price, Premiere did not complete construction of the home in compliance with the contract specifications.  The Sheridans contend it would cost more than $185,000.00 to finish construction of the house to meet the contract specifications and to repair the faulty construction that Premiere had performed to date.

The Sheridan’s state court complaint asserted claims for: (1) breach of contract; (2) negligent construction; (3) wantonness; (4) fraudulent misrepresentation; (5) fraudulent suppression; (6) breach of warranty; and (7) bad faith.  The Sheridans sought compensatory and punitive damages.

Auto–Owners sent Premiere multiple letters requesting Premiere’s assistance in responding to the Sheridans’ discovery requests after accepting its defense under a reservation of rights. Premiere ignored Auto-Owners requests.

On April 30, 2013, the Sheridans filed a motion to compel discovery responses from Premiere. The state court granted the Sheridans’ motion to compel on May 1, 2013, and ordered Premiere to answer the discovery within 21 days. When Premiere failed to respond to the discovery requests, the Sheirdans filed a motion for sanctions. The state court granted the motion and entered default judgment against Premiere.After a hearing on damages, the state court awarded the Sheridans a $125,051.00 judgment.

THE DECLARATORY RELIEF ACTION

Auto–Owners alleges that Premiere has breached the insurance policy contract and is no longer entitled to any indemnity or defense from Auto–Owners. Auto–Owners served the Sheridans with a copy of the summons and complaint on Otcober 28, 2013. The Sheridans answered the complaint and filed a counterclaim against Auto–Owners.  To date, Premiere has not answered the complaint. On August 13, 2014, Auto–Owners moved for Clerk’s entry of default against Premiere, and the Clerk entered default against Premiere on September 19, 2014.

Auto–Owners also filed a motion for summary judgment.  The Sheridans do not respond substantively to Auto–Owners’s motion for summary judgment.

THE ISSUE

The question for the Court is whether or not during the original case was there sufficient non assistance to render the insurance policy null and void thus preventing the Sheridans from recovering.

ANALYSIS

Because Premiere failed to cooperate with Auto–Owners in the underlying state court action, the Court decided to enter default judgment against Premiere and judgment as a matter of law in favor of Auto–Owners on its coverage claim against the Sheridans.

The insurance policy Auto–Owners provided to Premiere places certain duties upon Premiere in the event of an occurrence, offense, claim, or suit for which the policy might provide coverage. The policy requires that Premiere “[c]ooperate with [Auto–Owners] in the investigation or settlement of the claim or defense against the ‘suit.’”

Auto–Owners sent Premiere an initial reservation of rights letter on December 28, 2011.  Premiere’s participation in the defense was a requirement set forth in the policy conditions. Premiere’s failure to adhere to conditions of the policy compromised coverage being provided for defense as a breach of the conditions set forth in the policy.

As the insurer, Auto–Owners has the burden of proof to establish noncooperation In order for Premiere’s noncooperation to constitute a breach of insurance coverage, the lack of cooperation must be both material and substantial. The test for determining what is material and substantial amounts to a requirement of prejudice to the insurer. Alberson v. Nationwide Assurance Co., 2003 WL 23335453, (M.D.Ala. Oct. 24, 2003) quoting Williams v. Alabama Farm Bureau Mut. Cas. Ins. Co., 416 So.2d 744, 746 (Ala.1982));

What constitutes a failure of cooperation by the insured is usually a question of fact. Non-cooperation is deemed prejudicial if the failure to cooperate negates the only evidence the insurer could offer in defense. The insurer is deprived of the opportunity to conduct an investigation and mount a defense. Premiere’s failure to respond to multiple requests from Auto–Owners and the attorney Auto–Owners hired to represent Premiere in the underlying state court action amounts to material and substantial non-cooperation that prejudiced Auto–Owners.

The Court, outside the requirement placed upon it by the declaratory judgment action,  felt it necessary to express its sympathy to the Sheridans’ position. Due to no fault of their own, the Sherdans likely have no recourse against Premiere or any way to enforce the state court default judgment.

Premiere’s failure to answer or respond to the declaratory judgment complaint before this Court impacts only the Court’s determination of whether Auto–Owners is entitled to default judgment against Premiere; Premiere’s failure to answer or respond to the declaratory judgment action does not impact the Court’s analysis of the merits of Auto–Owners’s motion for summary judgment regarding its coverage claims against the Sheridans.

Premiere’s noncooperation relieves Auto–Owners of its duty to further defend or indemnify Premiere against the state court default judgment. Accordingly, Auto–Owners is entitled to default judgment against Premiere, and Auto–Owners is entitled to judgment as matter of law against the Sheridans on its duty to defend and indemnify claims.

ZALMA OPINION

Although I, like the court, feel for the Sheridans’ who were dealt a serious and financially expensive blow by Premiere, their chosen contractor, the court was correct finding that the insurer owed nothing to Premiere or the Sheridans. The policy issued by Auto-Owners was a contract that was clearly breached by Premiere. The only avenue of recovery available to the Sheridans is if they can convince a local prosecutor to prosecute Premiere and its principals for fraud and if convicted to obtain orders of restitution.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Report Promptly, Sue Quickly or Else

Private Limitations of Action Provision Enforceable

First-party property insurance policies always include a prompt reporting requirement and a private limitations of action provision. Even if the claim is reported promptly once it is denied the insured should never sit on his/her/its rights before filing suit ignoring the private limitation of action provision in the policy.

In Northpointe Commerce Park, LLC v. Cincinnati Ins. Co., Slip Copy, 2014 WL 7365931 (W.D.N.Y., 12/24/2014) Cincinnati asked that the court dismiss the Northpointe complaint dismissed for one or more of several layered reasons:

1)     The policy in question requires legal actions to be filed within two years of direct physical loss, and Northpointe did not file its complaint within two years of its loss on May 1, 2011;

2)     Even if a second loss occurred on May 3, 2012, as Northpointe claims, the damage duplicated the damage from the first loss and thus falls under the deadline for the first loss; and

3)     Northpointe never filed a formal loss notice for the alleged second loss of May 3, 2012, as required by the policy.

BACKGROUND

This case concerns two windstorms that damaged one of Northpointe’s commercial buildings and Northpointe’s attempt to claim insurance coverage for the damage. Northpointe is a New York corporation that manages a commercial property (the “Property”) at 60 Northpointe Parkway in Amherst, New York. The Property features exterior walls fitted, at least in part, with a skin of Thermolite™ aluminum composite wall panels.

On May 1, 2011, a windstorm blew through the area where the Property sits. . On March 3, 2012, a second windstorm blew through the area with wind gusts as high as 63 mph. These two windstorms prompted Northpointe to invoke an insurance policy that it bought from Cincinnati, an Ohio corporation, on June 8, 2009.

The policy in question contains several provisions that potentially affect the pending motion and the case in general.  The policy does not appear to require any particular method of notice or deadline to so. Northpointe must cooperate with Cincinnati during the ensuing investigation, which includes furnishing information to Cincinnati as requested.  Finally, the policy contains a limitations provision concerning litigation: “No one may bring a legal action against us under this Coverage Part unless: ¶ 1. There has been full compliance with all of the terms of this Coverage Part; and ¶ 2. The action is brought within 2 years after the date on which the direct physical ‘loss’ occurred.”

The parties do not dispute the basic chronology of events concerning the first windstorm. As noted above, the first windstorm occurred on May 1, 2011. The record contains no information about any action that Northpointe took, including providing notice, for approximately the next nine months. On February 8, 2012, a commercial roofing contractor named CentiMark gave Northpointe a proposal for assessing and repairing the Property. Among other information, the proposal includes photographs of the damaged portions of the Property along with a conclusion that the Property has suffered high wind damage on all 4 sides of building.

Based on the CentiMark proposal, Northpointe gave its insurance agent a formal loss notice on February 22, 2012. The loss notice listed May 1, 2011 as the date of loss. The insurance agent forwarded the loss notice to Cincinnati, and Cincinnati acknowledged receipt of the loss notice through a letter dated February 29, 2012. On May 25, 2012, Cincinnati sent Northpointe a letter denying coverage for the loss date of May 1, 2011. Cincinnati invoked the exclusion for defects, claiming that “the reported damages were not caused by an isolated wind event but, rather, the system-wide failure of perimeter sealant joints which has caused extensive delamination. This failure was caused by numerous design defects and improper installation of sealant joints.”

While events concerning the first windstorm were running their course, a second windstorm hit the Property on March 3, 2012. Northpointe never filed a formal loss notice as it did with the first windstorm. In contrast to the first windstorm, however, Northpointe appears to have provided informal notice to Cincinnati almost immediately.

On March 5, 2012, Northpointe retained National Fire Adjustment Co., Inc. (“NFA”), a Licensed Public Adjuster, to facilitate communications with Cincinnati and to estimate damage from the second windstorm. On March 6, 2012, representatives from Northpointe, Cincinnati, and NFA met at the Property to inspect the extent of damages. The denial letter concerning the first windstorm contains no information suggesting that the denial covered the second windstorm.

Northpointe filed a complaint on February 28, 2014, in New York State Supreme Court, Erie County. The complaint mentions the second windstorm of March 3, 2012 and then the denial of coverage on May 25, 2012, implying that the denial of coverage pertained to the second windstorm.

DISCUSSION

The First Windstorm

The parties do not dispute that, meteorologically, a windstorm occurred both on May 1, 2011 and March 3, 2012. For policy purposes, though, does this case present one “loss” or “occurrence,” or two?

Under these circumstances, “the parties here must have intended to provide coverage for property damage each time it occurred unexpectedly and without design, unless the damage occurring at one point in time was merely part of a single, continuous event that already had caused other damage. Another case that gives the Court some guidance is World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir.2003). In World Trade, the Second Circuit grappled with an unfortunately necessary and practical question stemming from the September 11, 2001 terrorist attacks: Was there a question of fact regarding whether those attacks constituted one insurance occurrence or two? The Court understood that the number of insurance events or “occurrences” will be ambiguous when either 1) one generating event spawns multiple, potentially independent damage events; or 2) the generating event is “multi-layered,” that is, it can be assessed at multiple levels of planning, coordination, and execution (the World Trade case).

No such ambiguity presents itself here. Here, two windstorms hit the Property about 10 months apart. The time between the two windstorms renders any causal relationship between them meteorologically impossible.  These circumstances warrant treating the two windstorms as independent causes of direct physical loss and applying Cincinnati’s motion to each windstorm separately.

Having resolved the independence of each windstorm, the Court addressed Cincinnati’s core argument against the first windstorm—that the complaint is untimely relative to that storm. “The parties to a contract of insurance may provide for a shorter limitation of actions than that provided in the general Statute of Limitations.” Brandyce v. Globe & Rutgers Fire Ins. Co., 168 N .E. 832, 833 (N.Y.1929). Additionally, when parties use the phrase “direct physical loss,” the shorter limitations period will run from the date of the physical event that causes property damage. Under New York law, the loss date is the date of the occurrence of the casualty or event insured against.

Here, the language in the policy setting a two-year limit for litigation is identical to the language that courts have affirmed as sufficiently specific. As noted above, Cincinnati’s policy requires that any litigation related to coverage, or denial of coverage, occur “within 2 years after the date on which the direct physical ‘loss’ occurred.” The specificity of that language avoids the ambiguities that courts have found from the use of the term “loss” or “date of loss” by itself.

Under these circumstances, the parties contractually agreed to cut off any litigation about coverage of the first windstorm two years after the date of the windstorm. The first windstorm occurred May 1, 2011, and Northpointe did not file its complaint until February 28, 2014. Any causes of action concerning the first windstorm are untimely.

The Second Windstorm

Compared to the relatively straightforward situation concerning the first windstorm, the situation concerning the second windstorm raises many factual questions that should await further discovery. The parties do not dispute that the second windstorm occurred on March 3, 2012. The parties also do not dispute that they inspected the Property on March 6, 2012 and that Northpointe, through its public adjuster, submitted some kind of loss estimate on May 24, 2012.

Further, although it is not disputed that the windstorm was the direct cause of the initial damage to the plaintiff’s property, since the plaintiff allowed the roof to remain in disrepair for several months, there exists a question of fact as to the extent of the damages which were directly caused by the windstorm.

ZALMA OPINION

Northpointe and its advisors sat on their rights and, at least partially, lost the right to sue for the first storm and serious questions arose concerning the viability of the claim for the second loss because of the failure to protect the property from further loss after the first windstorm damaged the property. New York applies the clear and unambiguous language as written and since suit was filed more than two years after the first windstorm the suit was to be dismissed as untimely.  Had the loss been in California, the limitation period would have been tolled between the report of loss and the denial in accordance with the California Supreme Court decision, PrudentialLMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230 Northpoint’s suit would have been timely. Neither rule is perfect.  It is essential that claims professionals know which rule applies in their jurisdiction.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

Insurer May Litigate Coverage Dispute

No Coverage – No Suit Against Insurer

In Quihuis v. State Farm Mut. Auto. Ins. Co., — Fed.Appx. —-, 2014 WL 7331247 (C.A.9 (Ariz.) 12/24/14) the Ninth Circuit Court of Appeal, tracking Arizona law, was asked to allow an insured to sue its insurer for improper claims handling and bad faith, after the court found there was no coverage. Unsure of Arizona law the Ninth Circuit referred the question to the Arizaona Supreme Court since the answer was so obvious it had not been litigated before.

The full facts and procedural history of this case can be found in Quihuis v. State Farm Mut. Auto. Ins. Co., 748 F.3d 911 (9th Cir.2014). This appeal stems from an insurance-coverage dispute. In the Ninth Circuits previous order, it agreed with the district court that the undisputed facts establish that the Coxes were not the owners of the Jeep, and therefore were not covered under State Farm’s policy, at the time of the accident. Plaintiffs argued State Farm was precluded from litigating coverage under the circumstances of this case. These circumstances include:

(1) [State Farm’s] refusal to defend its insured against a third-party tort claim after [it] determined its policy did not cover the accident; a stipulated default judgment against the insured under a Damron agreement; and (3) a question of ownership, which is both an element of liability for the underlying negligent entrustment tort claim against the insured and a requirement of coverage under the insurance policy. [Quihuis v. State Farm Mut. Auto. Ins. Co., 334 P.3d 719, 723 (Ariz.2014).]

Existing Arizona cases were unclear as to whether State Farm is precluded from litigating coverage under these circumstances, so the Ninth Circuit certified a question to the Arizona Supreme Court.

The Arizona Supreme Court accepted review of our question, and answered by holding that State Farm is not precluded from litigating its coverage dispute. Quihuis, 334 P.3d at 730. In that case the Arizona Supreme Court statedL=: “State Farm refused to defend the Coxes in the Quihuises‘ tort action, even under a reservation of rights. The Quihuises contend that “State Farm’s choice not to defend its insured precludes it from collaterally attacking a default judgment against its insured.  In sum, consistent with prior cases decided by the Arizona Supreme Court, it hold that when an injured party obtains a default judgment against an insured pursuant to a Damron or Morris agreement, that judgment will bind the insurer in a coverage case as to the existence and extent of the insured’s liability. The judgment will not preclude the insurer from litigating its identified basis for contesting coverage, irrespective of any fault or damages assessed against the insured. More specifically, it concluded that on the facts presented having determined that coverage on the Jeep ceased to exist before the accident (and thus there was no coverage regardless of any fault or liability of the insureds), State Farm is not bound by the stipulation between the Coxes and the Quihuises as to a fact essential to establishing coverage, despite State Farm’s refusal to defend and the entry of a default judgment pursuant to the Damron agreement.

State Farm may litigate coverage, and because we have determined no coverage existed at the time of the plaintiffs’ injuries, we affirm the District Court’s decision granting summary judgment in favor of State Farm.

ZALMA OPINION

The Ninth Circuit is not noted for brief opinions. This is the exception to the rule. Since the plaintiffs were not the owner of the vehicle – a jeep – there was no coverage available. Since the Arizona Supreme Court concluded that the insurer could litigate coverage because it neither owed defense no indemnity, that decision confirmed the correctness of the Ninth Circuit’s conclusion that there was no coverage under the policy and State Farm was entitled to Summary Judgment.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Brothers Shouldn’t Fight

Intentional Acts Not Covered

Disputes between relatives are never happy if they come to court and litigation. Families who should love each other turn love to hate over jointly owned property. The disputes between relatives ofter appear more like war than a family dispute. In Guillot v. Guillot, — So.3d —-, 2014 WL 7264510 (La.App. 3 Cir.), 2014-364 (La.App. 3 Cir. 12/23/14) suits by brother against brother kept Louisiana Courts busy and resulted in two trips to the Court of Appeal.

FACTS

After farming for over thirty years, Plaintiff, Wayne Guillot, left the family farming partnership in February 2006. Wayne and his brother, defendant Reece Guillot, had jointly farmed rice and crawfish, first with their father, and, when he retired, with their own sons. The brothers had grown up and worked together all of their lives, had served as best man at each other’s weddings, and had raised their sons together. When Wayne’s son left the farming partnership, tension in the family began to escalate. Wayne eventually also left the farming partnership to pursue a career as a crop duster and, at the time of the incident in question, Wayne owned a crop dusting service.

With tensions rising between the brothers and their sons, a partition of the real estate owned by the partnership was finalized only months before the incident in question. However, the ownership of all moveables and farm equipment was still highly contested, and would not be settled until after the incident prompting this lawsuit.

While the partition of the farm equipment was still in litigation, on March 16, 2008, Wayne went onto the farm property and, using his own trailer, loaded a crawfish boat used in Reece’s crawfish farming operation onto his trailer and then proceeded to leave the property. March 16, 2008 was Palm Sunday, the start of the busiest week of crawfish season, a fact Wayne acknowledged. At the time the crawfish boat was taken from the farm property, Wayne did not yet have his own crawfish pond and would not have been able to use the crawfish boat in crawfish farming operations until the following season. Wayne acknowledged that crawfish farming was one of the main sources of income for Reece’s farm at that time.

A neighbor alerted Reece that Wayne was removing the crawfish boat from the farm property. Reece tried to stop Wayne from taking the boat but Wayne drove around Reece’s truck. At some point in the sequence of events, Wayne called his wife, who was at their house, and told her to call the police because he was on his way home with the crawfish boat and Reece was following him. Wayne told her that “[t]here’s going to be trouble.”

While in pursuit of Wayne, Reece alerted his son, Benjamin, his partner in the farming operations and codefendant herein, and told him that Wayne was taking a boat they needed for crawfishing. Benjamin left his house and went in the direction that Wayne and Reece were travelling. Benjamin then blocked the road with his truck to try to stop Wayne from going to his house with the crawfish boat. Wayne went off of the road to get around Benjamin’s truck and Benjamin’s and Wayne’s trucks collided in the process. Wayne was able to get around Benjamin’s truck and continue travelling to his home with the boat. Reece and Benjamin followed in close pursuit.

When Wayne arrived home, he parked his truck on his driveway with the crawfish boat in tow. Reece was right behind him and parked on Wayne’s driveway in the vicinity of the rear of Wayne’s truck and the boat. A fight then ensued near the back of Wayne’s truck and the front of Reece’s truck. The evidence is in dispute as to the exact location of the men in relation to their trucks and who threw the first punch. Wayne claimed that Reece charged him and hit him first. Reece claimed that Wayne aggressively charged him and hit him first. There is no dispute that Reece struck Wayne in the eye, and Wayne went down. The fight ended with Reece on top of Wayne, and Reece pummeling Wayne until he tired of swinging.

Wayne was hit in the eye and the surrounding area immediately became swollen and discolored. Reece had a bit of blood around his ear. Benjamin arrived as the two brothers were on the ground, with Reece on top, hitting Wayne. Benjamin was not involved in the fight, except as to allegedly egg his father on. Benjamin was sued only for damages to Wayne’s truck.

The police arrived and questioned witnesses. Reece left to get a trailer, returned to Wayne’s house, put the boat on his trailer, and returned to the farm property with the crawfish boat in tow.

It was later confirmed by Dr. Casanova, Wayne’s treating physician, that Wayne suffered from a fracture to the orbital bones around his left eye, requiring surgery. Wayne claims he now has permanent double vision and can no longer perform the duties of a pilot in his crop dusting business. In his brief to this court, Wayne is claiming that he has $7,363.60 in medical bills, $680,000.00 in past lost income at the time of trial, and an annual loss of future earning capacity equal to $130,000.00 in pilot fees because he can no longer fly and has been forced to pay substitute pilots. Wayne claimed that pursuing a flying career was one of the main reasons he left the family farming operation in the first place and also claims past and future mental anguish, pain and suffering.

Wayne filed suit against Reece for his personal injuries, Benjamin for his property damage, and Farm Bureau Insurance Company, as insurer of Reece and Benjamin. Farm Bureau filed a motion for summary judgment stating that the conduct committed by Reece and Benjamin was excluded under their policy because their actions were intentional. The trial court granted Farm Bureau’s motion, dismissing the insurance company from the suit. The district court’s grant of summary judgment was later upheld by a panel of this court In Guillot v. Guillot, 12–109, P. 9(La.App. 3 Cir. 6/6/12), 92 So.3d 1212, 1217 this court held “The Farm Bureau homeowner’s and farm liability policies unambiguously excluded coverage for Wayne’s injuries resulting from the intentional actions of Reece and Benjamin.”.

Wayne’s case against Reece and Benjamin proceeded to trial by jury. Using special interrogatories, the jury found that Wayne had “consented” to the intentional battery by Reece, and that Reece was not liable for the injuries to Wayne. Additionally, the jury found Benjamin liable for all damages to Wayne’s vehicle due to Benjamin blocking the roadway. Judgment was signed dismissing Wayne’s suit against Reece and this timely appeal followed. There was no appeal from the judgment for property damages to Wayne’s truck in favor of Wayne against Benjamin, and that issue is not before us.

DISCUSSION

Louisiana is a comparative fault state that allows an injured party to recover that proportion of his injuries not due to his own fault. However, comparative fault does not apply when one “consents” to a battery. The law of consent is well-established in Louisiana. The Louisiana supreme court stated, “Consent may be expressed or implied; if implied, it must be determined on the basis of reasonable appearances.” Cole v. State Dep’t of Pub. Safety & Corr., 01–2123, p. 11 (La.9/4/02), 825 So.2d 1134, 1142. Further, “When a person voluntarily participates in an altercation, he may not recover for the injuries which he incurs, unless force in excess of that necessary is used and its use is not reasonably anticipated.”

Because the jury found, based on the evidence presented, that both parties either expressly or impliedly agreed to fight, the consent of one is not vitiated merely because the other strikes the first blow. The two brothers were intent on fighting and neither deserved to collect damages for the results of the fight.

ZALMA OPINION

It appears clear that these brothers will not join together for Thanksgiving for many years, if at all. They clearly intended their actions, had multiple opportunities to avoid the physical altercation, and refused to avoid fisticuffs. Families should not fight. No one should pummel a person sufficiently to break his occipital bone. This type of intentional conduct should never be covered by an insurance policy and was properly found to be not covered in this situation.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | 1 Comment

Notice of Claim is When the Insurer Receives It

Claims Made and Reported After Premium Finance Cancellation

Claims made and reported policies provide limited coverage by requiring that the claim against the insured must be made and reported to the insurance company before the expiration of the policy. Arguments often follow as to the date when the claim was made. When the notice is late insureds will argue notice was made when the notice is mailed. Insurers, and the Eleventh Circuit conclude notice is made when it is received by the insurer.

In Lake Buena Vista Vacation Resort, L.C. v. Gotham Ins. Co.— Fed.Appx. —-, 2014 WL 7234825 (C.A.11 (Fla.) 12/19/2014) the Eleventh Circuit Court of Appeal was called upon to decide whether an attempt to recover under a professional services liability insurance policy issued by Gotham Insurance Company (“Insurance Company” or “Company”) to Coastal Title Services, Inc. was made before the policy was effectively cancelled.

Coastal worked with Lake Buena Vista Resort, L.C. (“LBV”) in developing a planned luxury resort (San Marco) in Orange County, Florida. Coastal performed a title search, closing, escrow and other professional services for the project. As part of the arrangements among the parties, prospective purchasers of condominium units made escrow deposits which were held by Coastal. Some of the deposits were stolen from the Coastal escrow account, and the San Marco project failed.

THE UNDERLYING SUIT

The Matthews, purchasers of condominium units, filed suit against Coastal, Hatch, and LBV (the underlying suit). LBV filed cross-claims against Coastal and Hatch. With respect to Coastal, LBV alleged in its cross-claim that Coastal (along with Hatch) “intentionally and fraudulently defalcated, converted and/or misappropriated … deposits from [Coastal’s] escrow trust account.” Coastal defaulted in the underlying suit and LBV obtained a large default damage judgment as well as all of Coastal’s property, including any rights Coastal might have to recover under the liability insurance policy issued by Insurance Company (the “Policy”). LBV sued the Insurance Company to recover on the basis of the tortious acts of Coastal (acting through Hatch).

THE POLICY

The Policy provided a type of coverage known as “claims made and reported.” It covered acts, errors and omissions that occurred “[d]uring the Policy Period, and then only if [a] claim is first made against [Coastal] during the Policy Period and is reported to [Insurance Company] in writing during the Policy Period.” The Policy Period was originally scheduled to run from March 1, 2007, to March 1, 2008. Coastal financed the Policy through Premium Assignment Corporation (“PAC”), which paid Insurance Company the entire annual premium in exchange for monthly payments from Coastal. PAC was given a power of attorney to cancel the Policy if it did not receive the monthly payments from Coastal.

Because Coastal did not pay the monthly premiums to PAC, PAC, after due notice to Coastal, sent a “Notice of Cancellation” to the Insurance Company on October 3, 2007. The Notice of Cancellation stated in conspicuous print at the top “Cancellation Date 10/03/2007.” The Notice of Cancellation also stated in its text: “This cancellation is effective one day after the above captioned date, at the hour indicated in the policy as the effective time.” The relevant provision in the Policy indicates that 12:01 a.m. is the effective time.

ISSUE: WHEN WAS POLICY CANCELLED?

The crucial issue for our resolution of this appeal is a determination of the effective date of the foregoing Notice of Cancellation, and whether a claim was made against the insured—Coastal—and also reported to the Insurance Company during the Policy Period and before the effective date of PAC’s Notice of Cancellation.

The only relevant communication to the Insurance Company that might arguably constitute a claim upon which LBV could rely in seeking coverage was a note from Ira Hatch on behalf of Coastal dated October 4, 2007, and received by the Insurance Company on October 10, 2007.

The cancellation provision of the policy provided “A. This Policy may be cancelled by the NAMED INSURED by surrender thereof to the Company or any of its authorized representatives, or by mailing to the Company written notice stating when thereafter cancellation shall be effective. ¶  … ¶ C. The time of the surrender or the effective date and hour of cancellation stated in the notice shall terminate the Policy Period. The mailing of such notice as aforesaid, whether by ordinary mail or by certified mail, shall be sufficient proof of such notice.”

Moreover, the relevant Florida statute § 627.848 expressly provides for cancellation on behalf of the insured by a premium finance company possessing a power of attorney.

Thus, both the Policy itself and the statute expressly provide that Notice of Cancellation can fix the effective date and hour of cancellation, whether the cancellation be by the insured or by a premium finance company with appropriate power of attorney.

LBV argues in the alternative that the effective date of the instant Notice of Cancellation was October 5, 2007, at 12:01 a.m. Then, LBV argues, because Hatch’s note was dated October 4, 2007, the claim was made and reported to the Insurance Company during the Policy Period.

WHEN WAS THE NOTICE GIVEN?

Although the Eleventh Circuit believed that the most plausible construction of the Notice of Cancellation is that it intended October 3, 2007, to be the last day of coverage (and it was so construed by the endorsement issued by the Company pursuant to the Cancellation Notice), the court had no need to so decide. Even if the effective cancellation date were October 5, 2007, at 12:01 a.m., the Eleventh Circuit concluded that the claim (Hatch’s note) was not reported to the Insurance Company until October 10, 2007, when the Company received it.

WAS THERE A WAIVER?

Finally, LBV argues that the Insurance Company has waived the right to assert the defense that Coastal cancelled the Policy before Hatch’s claim was made and reported. LBV points out that the Company’s October 18, 2007, response to Hatch’s note denied coverage on the basis of exclusions for intentional, fraudulent actions, and did not mention a defense that the Policy had been cancelled. LBV argues that the cancellation defense is precluded by common law estoppel and by the Florida Claims Administration Statute (“FCAS”), Fla. Stat. § 627.426.

However, the Florida Supreme Court has held that estoppel may not be used to create or extend coverage, and has held that the FCAS is in the nature of an estoppel and that expiration of a policy or express exclusion of coverage under a policy are not “coverage defenses” to which the statute applies. AIU Ins. Co. v. Block Marina Inv., Inc., 544 So.2d 998 (Fla.1989).

There, the Supreme Court of Florida held that the statute, by its express terms, applies only to a denial of coverage, “based on a particular coverage defense,” and in effect works an estoppel. Term “coverage defense,” as used in § 627.426(2), means a defense to coverage that otherwise exists. The Florida Supreme Court refused to construe the term “coverage defense” to include a disclaimer of liability based on a complete lack of coverage for the loss sustained.

As a result of the cancellation of the Policy in this case, before Hatch’s note was received by the Insurance Company, there was simply a lack of coverage in this case. In light of our decision that there was a complete lack of coverage, we need not address the other issues about which the parties debate.

ZALMA OPINION

Anyone with a professional liability policy that requires a claim be made and reported to the insurer within the policy period should report any claim made against them immediately to the insurer. Had the notice been sent to the insurer by messenger, fax, or e-mail this case might have had a different result and the issue would have been hours rather than several days.  The insurer might have saved some of this litigation and argument had it disclaimed coverage for failure to make claim within the policy period and not just the coverage defenses used. Regardless, the policy expired before the claim was received and the insurer owes nothing.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

ERISA Bars Jury Trial Against Health Insurer

Must Prove Private Limitations of Action Provision

The Employee Retirement Income Security Act (ERISA) was designed to, among other things, limit the remedies available to people enrolled in an ERISA plan to those remedies allowed by the statute. By so doing Congress expected that the insurers would provide insurance benefits for less money.

In  Ibson v. United Healthcare Services, Inc., — F.3d —-, 2014 WL 7181226 (C.A.8 (Iowa) 12/18/14) the Eighth Circuit Court of Appeal was called upon to resolve disputes over an ERISA health plan for a law firm.

FACTS

CeCelia Catherine Ibson and her family were insured by United Healthcare Services, Inc. (UHS) through a policy available to her to as a member of her law firm. Due to an error, UHS began informing Ibson’s medical providers that Ibson and her family no longer had insurance coverage. Although UHS eventually paid the claims it should have paid all along, Ibson initiated suit against UHS raising state law claims of breach of contract, negligence, and bad faith, and seeking punitive damages. UHS responded that Ibson’s claims were preempted by the Employee Retirement Income Security Act (ERISA) and barred by the policy’s three-year contractual limitations period. The district court agreed with UHS and entered summary judgment against Ibson. Ibson appeals, asserting the same arguments presented below.

In 2003, Ibson became a shareholder in the firm. On March 6, 2004, Ibson applied to UHS for health insurance coverage for herself and her family under the law firm’s group health coverage. Each shareholder of the law firm was responsible for his or her own premium payments, however the firm paid 90% of its covered employees’ premiums for single coverage. The law firm remitted payment to the insurance company and distributed information from UHS to the members and employees of the law firm, but performed no other administration relating to the insurance.

From 2006 through 2008, Ibson and her family received extensive medical care for numerous aliments including cancer and a seizure disorder. In January 2008, the doctor treating Ibson’s children notified her that UHS was rejecting the claims the doctor submitted on Ibson’s behalf, saying to the providers that Ibson had “no coverage.”

On April 4, 2008, UHS sent Ibson an e-mail stating: (1) it would change the incorrect social security number UHS had on file for Ibson back to her correct social security number, (2) it would notify the department in charge of recouping monies of the correction and direct them to stop recoupment proceedings, (3) it would run a report for all prior claims that had been subjected to recoupment and reprocess those claims, and (4) it would contact all of Ibson’s medical providers to explain UHS’s error and to promise that Ibson’s claims would be correctly processed. UHS failed to follow through on all of these promises. Even as late as January 2010, Ibson continued to receive notice that her claims were not being processed and UHS continued recoupment actions. The district court noted that UHS’s behavior, “if true, is shocking.”

On September 27, 2012, Ibson brought suit against UHS, alleging state law claims of breach of contract, negligence, and bad faith, and seeking punitive damages. UHS moved to strike Ibson’s jury demand, arguing that her state law claims were preempted under the complete preemption clause of ERISA and, as such, a jury trial was unavailable. While that motion was pending, UHS also moved for summary judgment, arguing Ibson’s claims were barred by a three-year limitations period in the contract. The district court granted the motion to strike and later summary judgment to UHS. In granting summary judgment, the district court held the claims were time-barred under the policy’s three-year contractual limitations period for bringing suit.

ANALYSIS

For coverage under ERISA, a plan must be an “employee benefit plan,” defined as either an “employee pension benefit plan” or an “employee welfare benefit plan.” An “employee welfare benefit plan” is defined as any plan, fund, or program, established or maintained by an employer or an employee organization for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise.  The plan at issue was an “employee benefit plan.”

Certain group or group-type insurance programs offered by an insurer to employees are explicitly exempted from ERISA governance under the safe harbor provision.  Because of the first element—that no contributions be made by the employer—the plan fails to qualify for the safe harbor exemption. It is uncontested that the law firm paid part of the premium costs for the employees of the firm. Thus the plan does not meet all of the elements for exemption under the ERISA safe harbor provision.

Ibson argues that her state-law claims concern UHS’s improper cancellation of her insurance policy and are not related to ERISA or the terms of the policy. This argument ignores the essence of her claim—that UHS should have paid medical benefits under the ERISA-regulated plan and failed to do so—a claim that could be brought under ERISA.

Ibson’s claims are completely preempted by ERISA.

THE SUMMARY JUDGMENT

Under Section 9 of the Policy, which is entitled “General Legal Provisions,” the policy gives two limitations periods for bringing legal actions against UHS. The first limitations period states:

You cannot bring any legal action against us to recover reimbursement until 60 days after you have properly submitted a request for reimbursement as described in (Section 5: How to File a Claim). If you want to bring a legal action against us you must do so within three years from the expiration of the time period in which a request for reimbursement must be submitted or you lose any rights to bring such an action against us.

The second limitations serves as a catch-all provision and provides:
You cannot bring any legal action against us for any other reason unless you first complete all the steps in the complaint process described in (Section 6: Questions, Complaints, Appeals). After completing that process, if you want to bring a legal action against us you must do so within three years of the date we notified you of our final decision on your complaint or you lose any rights to bring such an action against us.

Ibson and UHS were permitted to impose contractual limitations periods, like those found in the However, at oral argument, UHS dropped the majority of its limitations argument. UHS argues that its April 4, 2008 email constituted a “final decision” under the second paragraph, and therefore Ibson had until April 4, 2011, to file her complaint.

UHS now asks this court to find that its April 4, 2008 email to Ibson constituted a final decision for purposes of the second limitations paragraph. The Eighth Circuit found that the record had not been fully developed as to the issue, and declined UHS’s invitation. Further, it noted that the district court found that “Ibson attempted to resolve coverage issues with UHS up until 2010,” suggesting that the district court would not have found UHS’s April 4, 2008 email to be a final decision. In any event, construing the facts in the light most favorable to Ibson, the Eighth Circuit could not say that, as a matter of law, UHS is entitled to summary judgment based on the plain language of the policy limitations period in the insurance contract.

ZALMA OPINION

The April 4, 2008 letter relied upon by the insurer was a final decision to pay all claims and solve all of the problems it had created by poorly handling Ibon’s claims. At no time did the insurer tell Ibson that her claims would not be paid and they were, eventually paid. As the trial court, even ruling in favor of the insurer, said that UHS’s behavior, “if true, is shocking.” This ruling will give the District Court the direction to find that Ms. Ibson is entitled to the damages allowed by ERISA.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Arson-for-Profit Doesn’t Pay

Go Directly to Jail, Do Not Pass Go

Arson is probably the dumbest form of insurance fraud. With modern municipal fire departments arson fires seldom totally destroy the premises, evidence is always left for arson investigators to review, and firefighters and the public are exposed to danger of injury and death and, as a result, judges have little mercy for an arsonist. Arsonists hoping to make a  profit from a fire seldom sit back and accept their punishment when they are convicted.

In State v. Jones, Slip Copy, 2014 WL 6977259 (Iowa App., 12/10/14), the Iowa Court of Appeal was faced with a convicted arsonist who claimed there was insufficient evidence to convict her and that the punishment handed down was too severe.

FACTS

Donna Jones appealed from the judgment and sentence entered following her convictions for second-degree arson and two counts of insurance fraud.

On May 6, 2012, a fire began in a bedroom of Jones’s Davenport home. The fire was contained to the bedroom, though smoke and heat damaged the rest of the house. At the time of the fire, Jones owed approximately $53,338.15 on the home and there was a $17,095.60 judgment lien against it. Although Jones was nine months behind on her house payments and owed the IRS approximately $4000, she was current on her homeowner’s insurance policy payments to Allied Nationwide Insurance (Allied).

On the day of the fire, Jones attempted to drop off her step-grandson, who lived with her, at a bowling alley. After learning the bowling alley was closed, Jones dropped him off at her daughter’s house. She claimed to have soiled her clothes on her way home and changed them when she returned. She told investigators she put the clothes in the laundry and lit a candle in the bedroom to cover the odor. Jones then left the house without extinguishing the candle taking her dog with her.

While at a retail establishment Jones received multiple calls from her neighbor, who was attempting to inform her of the fire. Jones did not answer her phone initially. Surveillance video shows she left the store two minutes after receiving the call her house was on fire. Jones appeared to be wearing the same clothes during a visit to the store earlier that day, even though she claimed to have changed between visits.

During his investigation, Davenport Fire Department Lieutenant Robb Macdougall observed a partially-melted candle on the floor on the right side of the bed. Items near the candle were not burned. However, the top of the bed was extensively damaged, and the posts above the bed were also damaged. Based on his observations, Lieutenant Macdougall determined the fire began in the northwest corner of the bedroom. He was unable to determine a cause but ruled out the possibility of an electrical fire or an accelerant fire.

Chief Fire Marshall Mike Hayman also investigated the fire. Based on the burn patterns, mattress damage, and charring, he determined the fire began on top of the mattress on the northwest corner of the bed. Chief Hayman ruled out the candle as the source of the fire because it was found almost fully intact and the dresser near it had limited damage. Chief Hayman determined the fire was intentionally set.

Allied hired Terry Brown, a fire investigator, to determine the cause of the fire. Brown also determined the fire originated on the northwest corner of the bed given the charring patterns on the bedposts. He also found charring underneath the candle found on the opposite side of the bed, which indicated the candle was not on the floor when the fire began. Because the melting temperature of carpet is well above the melting temperature of the candle, Brown concluded it would have been “scientifically impossible” for the candle to have burned the floor underneath it.Had the fire originated with the candle, Brown would not have expected to find any of the candle remaining.

Brown also determined two smoke detectors in the home had working batteries that were disconnected at the time of the fire. He concluded the fire was set intentionally when “an open flame ignition device” was used to ignite the bed. A butane lighter was found on the nightstand next to the bed.

In the days following the fire, Jones rented a house and submitted paperwork to Allied to be reimbursed for the rent and security deposit on the house. However, she never lived in the house. Instead, Jones lived in an RV.

Following a jury trial, Jones was found guilty on all three counts. She was sentenced to an indeterminate term for no more than ten years in prison and fined $1000 on the arson charge. She was sentenced to indeterminate terms for no more than five years in prison and fined $750 on each of the insurance fraud charges. The sentences were ordered to run concurrently.

SUFFICIENCY OF THE EVIDENCE

Jones first contends there is insufficient evidence to establish she committed arson. Because she argues she did not commit arson, Jones also contends the evidence is insufficient to show she committed fraud by submitting to Allied a sworn statement that swears she did not cause the loss by an act, design, or procurement.

Substantial evidence revealed that the fire was intentionally set. Both Chief Hayman and Brown reached the same conclusion: the fire was intentionally set and began in the northwest corner of the bedroom, rather than on the floor on the opposite side of the bed where the candle was found.

There is also substantial evidence to indicate Jones caused the fire. Jones made sure the house was empty on the day of the fire, taking her step-grandson to her daughter’s house earlier in the day and bringing her dog to the grocery store with her. Jones was the last person in the home before the fire began and left shortly before the fire was discovered. Her financial difficulties provide a motive for the fire.

In sentencing Jones, the court noted the pre-sentence investigation report recommended probation. It then stated, “The problem the Court has is, these were deliberate bad acts that put other people at risk.” The court went on to generally discuss the dangers involved in setting fires and defrauding insurance companies. It then addressed Jones’s specific situation, noting her financial situation, and opined that she committed the arson as “an easy way out to solve it” even though it put lives in danger. The court found “that prison is the most appropriate sentence here because of the dangerousness of what your deliberate bad act was.”

The Court of Appeal agreed these statements indicate the court placed considerable emphasis on the serious nature of the crimes.

However, other statements show the court considered other factors in sentencing Jones. After sentencing, the court added, “I don’t see you as a good person that’s likely to change,” opining that Jones blamed others for her problems and “that isn’t the best frame of mind to rehabilitate.” It added that in addition to sending the community a message that serious consequences will be given to those who set houses on fire, the prison sentence was also intended to put Jones in a frame of mind to rehabilitate.

Because all of the court’s statements indicate it considered multiple factors in determining the appropriate sentence, we find no abuse of discretion.

ZALMA OPINION

Insurance fraud is a serious crime and a felony in most states. Arson is more serious and akin to attempted murder. The sentence Jones received was appropriate and could have been longer. Jones left behind every red flag indicator of an arson-for-profit: (1) Financial difficulties and far behind on mortgage payments, but insurance premiums paid in full; (2) she removed child and dog from the home; (3) she defrauded insurer by claiming she rented a replacement dwelling but, instead, lived in an RV.  Although the insurer did not have to pay Jones her conviction would have no effect on the claim of her mortgagee.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Biased Judge Disqualified

Judges Ought to be More Learned Than Witty

It has long been said in the courts of this state that “every litigant is entitled to nothing less than the cold neutrality of an impartial judge.”   State ex rel. Davis v. Parks, 194 So. 613, 615 (Fla.1939). Insurance defense lawyers often believe that judges and juries are biased against them Usually the assumption of bias is wrong. However, on occasion,  a judge is truly biased and needs to be disqualified.

In Great American Ins. Co. of New York v. 2000 Island Blvd. Condominium Ass’n, Inc., — So.3d —-, 2014 WL 7156894 (Fla.App. 3 Dist., 12/17/14) the Florida Court of Appeal was faced with a trial judge  who abandoned his post as a neutral overseer of the dispute between the parties and was called upon to deal with Great American Insurance Company’s Petition for a Writ of Prohibition.

FACTS

This case arises out of an insurance coverage dispute between 2000 Island Boulevard Condominium Association, Inc. and Great American Insurance Company of New York over whether a policy issued by Great American affords the Association coverage for falling concrete and slab deflection, alleged to have occurred in the condominium parking garage. The Association sued and the case was assigned to Miami–Dade Circuit Court Judge David C. Miller. Great American filed its Answer and Affirmative Defenses. The affirmative defenses raised various exclusions and conditions contained in the insurance policy, including that Great American was unable to finalize its coverage position because the Association had failed to provide documents and refused to appear for an examination under oath.

Operating on an “expedited” case management schedule, the trial court struck Great American’s legal defenses three weeks later as “legally invalid.” The remarks upon which Great American relies in support of disqualification of the trial judge were made at the hearing, and at a hearing held one week earlier on Great American’s motion for a protective order to limit discovery of its pre-litigation, engineering consultant.

At the time of these hearings no discovery of any kind had been performed.

THE COURT’S COMMENTS

THE COURT: Well, it doesn’t feel like we’re in an abandonment situation. We’ve got a lawsuit filed. We’ve got an insurance company that’s not paying a claim. We’ve got them basing that decision, in part, upon this expert that went out there, and I imagine he was maybe perhaps even involved in putting together the list of things they still needed. You said you would give them a report when they got all of that information to you. It strains all credulity for me to believe that your carrier has not denied coverage based on the information they know now.
        
[DEFENSE COUNSEL]: But they have not.        

THE COURT: Then fork over the money. (Emphasis added.)

The court of appeal opined that this startling remark, in and of itself, is sufficient to compel disqualification. Whether Great American is required to “fork over the money” is the entirety of what is at issue in this case. While a trial judge may form mental impressions and opinions during the course of the case, the judge is not permitted to pre-judge the case.

Anexchange took place after Great American’s counsel stated that Great American did not have an opportunity to complete its investigation before the Association filed suit. Regardless of whether the court believed or disbelieved this statement, it had an obligation to remain impartial. Yet, bias was again displayed in the following exchange:

THE COURT: You can’t read the June 26, 2012 letter without saying this is a denial letter. “We’re not sure,” you can “we’re not sure” until the cows come home. And, in fact, you won’t be sure until the jury speaks, and then you won’t be sure until the Appellate Court rules, and then you won’t be sure until the Supreme Court rules after that. Then even if they rule against you, you won’t be sure that they’re right. You’ll claim that they’re wrong. That’s just the nature of litigation. That’s how it works.

Listen, if it were—if I were being asked, I would sanction you for making a specious argument that this person shouldn’t be deposed and opinions fully addressed. You’ve taken a position, you’re involved in litigation, you’ve denied coverage, you’ve stated and specified things. It’s doggone concrete spalling, up or down. This is not rocket science. This is something that construction’s been dealing with for many, many, many years. Ever since they put a piece of steel inside concrete they’ve been having these issues. It’s not a big deal….

In addition to the trial judge’s palpable distrust of Great American’s willingness to render a coverage determination, the court here goes a step further by expressing a contemptuous view of Great American (or its counsel’s) willingness to accept judicial pronouncements.

The Court casually states, “That’s just the nature of litigation. That’s how it works.” A court of law should not be in the business of casting aspersions on the ability of a party or its counsel to accept the wisdom of this state’s appellate courts and make unsubstantiated predictions of how that party will process those decisions.

The court then went further still in offering legal advice to the plaintiff by stating “If it were me, I would still ask questions of an opinion nature and get the statements regarding privilege on the record.” Such legal advice, standing alone, is sufficient to compel disqualification. disqualification.”).

At the October 22 hearing, the court continued improperly to make unsupported factual findings based upon a barren record. For example, the court made statement that “we all know that the spalling is caused by moisture getting into the rebar and the rebar rusting and expanding and cracking the concrete off.”

Regrettably, these statements, which sound more like they are coming from a party who is arguing the case rather than from a judge who has not taken a single piece of evidence, lend further credence to Great American’s belief that this court has pre-judged the facts of this case, is injecting his personal opinions on causation into the case, and has a bias in favor of the plaintiff.

Finally, at the October 22 hearing, the court again took up the issue of whether a June 26, 2012, letter sent by Great American was (as Great American contends) a reservation of rights letter or (as plaintiff contends) a denial letter.

On this issue, the court stated, “I think it’s a denial. I mean, the absence of anything else—well, it’s an unkept promise of a denial after explaining why it’s not giving coverage. How is that for fancy talk for we’re not paying you. To me, it’s the same thing, we’re not giving you money.” The “fancy talk” comment is yet another display of the court’s animosity towards Great American or its counsel. But this comment reasonably also may be interpreted as something even more problematic—a suggestion that Great American was somehow being deceptive by using “fancy talk” to disguise a “denial letter” as a “reservation of rights letter.”

ANALYSIS

The question of disqualification focuses not on what the judge intended, even if a poor attempt at wit, but rather how the message is received and the basis of the feeling. In the words of the sixteenth century statesman and jurist, Sir Francis Bacon (1561–1626):

Judges ought to be more learned than witty; more reverend (sic) than plausible; and more advised than confident. * * * Patience and gravity of hearing is an essential part of justice; and an overspeaking judge is no well tuned cymbal. “Of Judicature,” Francis Bacon Essays, pub. by J.M. Dent & Sons, 1958, Essay LVI, pp. 162, 163.

A judge who is not fair and impartial, who rules without evidence based solely upon plaintiff’s pleadings and his own prejudice violates exactly what what he was appointed to do. Great American should be commended for bringing this abuse of judicial discretion to the appellate court and the appellate court should be commended for disqualifying a judge who was obviously prejudiced and prejudged the case without evidence.

ZALMA OPINION

Although a biased judge is rare insurers must recognize that, like George Orwell’s Animal Farm although all litigants are equal in the courts of the United States some, when faced with a biased judge, are more equal than others. Insurers, when faced with such a difficulty should emulate Great American and file a writ to remove the biased judge.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Insurance Lawyer Expert Striken

Legal Issues Not Proper Expert Testimony

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

FACTS

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

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

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

LEGAL STANDARD

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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A Christmas Story of Fraud

The Sleaze

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Failure of Contract to Provide Indemnity

Rights of Third Party Beneficiary Limited to Terms of Contract

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

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

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

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

FACTS

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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You Only Get What You Pay For

Special Assault & Battery Exclusion Applies

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

FACTS

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

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

ANALYSIS

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Zalma’s Insurance Fraud Letter — December 15, 2014

Merry Christmas & Happy Chanukah

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Infrared Detection of Mold

An Excerpt from the

Mold Coverage Guide

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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

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The Eight Corners Rule Defeats Right to Defense

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

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

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

FACTS

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Insurance Fraud

Insurers are faced with three major types of insurance fraud:

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

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

Denying a Claim

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

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

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

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

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

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

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

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

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

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

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

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

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

False Swearing

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

A Dam Case

When ACV is RCV Less Depreciation

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

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

FACTUAL BACKGROUND

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

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

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

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

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

DISCUSSION

Depreciation

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Doubt About Exclusion Requires Coverage

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

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

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

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

BACKGROUND

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

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

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

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

ANALYSIS

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

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

This insurance does not apply to:

“Personal injury” to:

(1) A person arising out of any

(a) Refusal to employ that person;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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What is Liability Insurance?

How Do I Buy It?

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

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

The California Insurance Code defines liability insurance as follows:

Liability insurance includes:

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

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

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

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

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

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

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

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

The policy will provide coverage for the following:

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

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

Purchasing CGL Insurance For People in the Construction Industry

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

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

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

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

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

–    carpentry only;

–    plumbing only; or

–    framing and dry wall installation;

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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

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Business Risks Never Insurable

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

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

FACTS

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

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

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

THE ARBITRATION DEMAND

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

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

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

THE CGL INSURANCE POLICY

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

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

THE PROCEEDINGS IN THE DISTRICT COURT

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

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

THIS APPEAL

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

The Claims Interview

The Interview is a Structured Conversation

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

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

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

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

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

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

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

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

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

·    Ask questions that call for a narrative response,

·    Listen to the response to each question,

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

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

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

1.    General Principles

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

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

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

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

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

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

ii.    The Interviewer

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

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

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

iii.    The Subject of the Interview

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

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

iv. Types of Interview

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

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

Resident Relative Must Abide in House

Mother’s House Not Son’s Residence

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Fishing Expedition Prohibited in Texas

Scouring Claim Files Not Related to Insured Wrong

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

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

FACTS

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

Following those inspections, National Lloyds paid the claims.

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

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

ANALYSIS

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off

Indemnity & Insurance – Who Goes First

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

Many contracts have dual purposes when it comes to shifting the risk of loss. Usually the owner requires the contractor to name it as an additional insured on its liability insurance policy and to defend and indemnify it to certain tort claims. In Hercules Offshore, Inc. v. Excell Crane & Hydraulics, Inc., — S.W.3d —-, 2014 WL 6601644 (Tex.App.-Hous. (1 Dist., 11/20/14) the Texas Court of Appeal was called upon to determine issues relating to defense, indemnity, and insurance obligations.

FACTS

This dispute between Hercules Offshore, Inc. and The Hercules Offshore Drilling Company, LLC (collectively “Hercules”) and Excell Crane & Hydraulics, Inc. arises from the parties’ conflicting interpretations of indemnity and insurance provisions in their Master Service Agreement (MSA).

Hercules contended that the “additional assured” language in the MSA’s insurance provision means that Excell’s insurance must be exhausted before Hercules’s indemnity obligation is triggered. Excell, on the other hand, argues that Hercules’s indemnity obligation is primary, notwithstanding any other provision of the MSA, including the insurance provision.

The trial court granted summary judgment in favor of Excell and denied Hercules’s motion for summary judgment.There is an additional wrinkle. This case arises out of a personal-injury lawsuit by Hercules employee Dennis  Brunson, who sued Hercules and Excell in Texas state court. Meanwhile, another Hercules employee, Kevin Currey, who was injured in the same incident, sued Hercules and Excell in Louisiana state court. Excell prevailed against Hercules in the Louisiana litigation.

The Louisiana judgment in Excell’s favor became final while the appeal was pending. Excell now argues that the Louisiana judgment precludes further litigation in this case and that Excell is entitled to judgment based on principles of res judicata and collateral estoppel.

THE ACCIDENT

In 2007, Hercules was serving as the drilling operator of a semi-submersible drilling rig off the shore of Louisiana. Three Hercules employees, including Brunson and Currey, were injured when the rig elevator in which they were riding went into a free-fall. Excell had inspected and tested the elevator two months earlier, and it performed this work under the terms of the MSA.

TRIAL COURT ACTIONS

Excell moved for summary judgment on its cross-claim, arguing that the indemnity provision unambiguously required Hercules to defend and indemnify Excell against Brunson’s claims. Hercules counterclaimed for breach of the MSA, arguing that it was not obligated to indemnify Excell under the MSA until the insurance that Excell was obligated to provide Hercules had been exhausted.

Hercules moved for traditional summary judgment on Excell’s claim for indemnity and on its own claim for breach of the MSA.

The trial court granted Excell’s motion for summary judgment. The trial court entered a final judgment, ordering Hercules to defend and indemnify Excell for Brunson’s claims pursuant to the MSA.

DISCUSSION

Hercules contends in a single issue that the trial court erred in granting summary judgment for Excell and denying Hercules’s motion for summary judgment as to the contract interpretation issue, because federal maritime law, which the parties agree applies here, dictates that the “additional assured” language in the MSA’s insurance provision means that Hercules’s indemnity obligation is triggered only after Excell exhausts the insurance it agreed to obtain.

Both parties agree that federal maritime law governs the substantive dispute in this case. Well-settled Fifth Circuit law, beginning with Ogea v. Loffland Brothers Company, 622 F.2d 186 (5th Cir.1980), holds that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

In Ogea, the Fifth Circuit held that contractor Loffland Brothers’ insurance obligation must be exhausted before Phillips Petroleum Company’s indemnity obligation was triggered. The Fifth Circuit noted that the insurance and indemnity obligations in a maritime contract “must be read in conjunction with each other in order to properly interpret the meaning of the contract.”

Since Ogea, the Fifth Circuit has consistently held that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

ANALYSIS

The appellate court conclude that this case is controlled by Ogea. The MSA provided that Hercules would indemnify Excell against claims by Hercules’s employees. The MSA provided that Excell shall maintain at its sole expense the minimum insurance coverage requiring that all insurance policies, except Worker’s Compensation, shall name all such parties as additional assureds. All such policies shall be endorsed to provide that additional assureds shall not be liable for premiums and that such policies shall be primary as to additional assureds, regardless of any “excess” or “other insurance” clauses therein.

The coverage extended an additional assured shall not be less than that provided to the Contractor. All policies will cover investigation and defense of claims. All policies will include contractually assumed liability coverage.

The controlling fact is the existence of the ‘additional assured’ coverage whereby Excell agreed to procure insurance coverage for the benefit of Hercules. The import of the additional assured clause is emphasized here because the MSA also required that insurance procured by Excell must afford primary coverage to Hercules. It also made clear that the policy must include contractually assumed liability coverage, and it did not limit the insurance requirement to liability coverage assumed by Excell.

When there are conflicting indemnity and insurance requirements, the insurance of the indemnitee must first respond up to the dollar limit of coverage. Only then must the indemnitor honor its hold harmless obligation.

Hercules is seeking coverage for Brunson’s injuries, which allegedly arose as a result of a free fall in an elevator that Excell had certified for use only 50 days earlier. The MSA limits the scope of the agreement such that the insurance referenced could apply only to work by Excell, its affiliates, and its subcontractors for Hercules or its affiliated companies.

Accordingly, following well-settled Fifth Circuit maritime law, the court concluded that Hercules is not obligated to indemnify Excell until the limits of insurance coverage that Excell was obligated to purchase by the MSA have been exhausted.

RES JUDICATA

After briefing in this appeal was complete, Excell sought leave to file a supplemental brief in which it argued that the doctrines of res judicata and collateral estoppel preclude further litigation and that Excell is entitled to judgment in its favor. The basis of the argument is that a Louisiana state court adjudicated the same issue presented in this case and entered a final judgment in Excell’s favor. The Louisiana case arose from the same incident. Currey, who was injured in the same elevator accident as Brunson, sued in Louisiana, and Excell and Hercules litigated in Louisiana the very same insurance and indemnity issues presented in this appeal.

Because the final judgment upon which Excell relies was rendered by a Louisiana court, Louisiana law governs its res judicata and collateral estoppel effect.

The appellate court declined to apply res judicata and collateral estoppel. While Louisiana substantive law controls the effect of the Louisiana judgment, Texas procedural rules control how that effect is determined. In Texas, res judicata and collateral es