Zalma on Insurance Makes Top 50

Some states do not like insurance companies and have been known to eliminate the right of the insurer and insured to agree on a restrictive provision in a statute. Although most state courts, including that in Arkansas, allow insurers to create contract that shorten the time needed to file suit to a time less than the statute of limitations. However, Arkansas, by statute, eliminated that right by statute for property and life insurance policies.

FACTS

Kenneth Graham suffered serious injuries to his eyes when a can of oven cleaner exploded in his face. Graham sued Hartford Life and Accident Insurance Company (Hartford) seeking coverage under his life insurance policy for accidental dismemberment benefits. The district court dismissed Graham’s suit, concluding it was untimely because it was brought more than three years after the loss, outside the policy’s time limitations for bringing legal actions against Hartford. Graham appeals arguing he brought suit within Arkansas’s five-year statute of limitations for breach of contract actions, and Arkansas law provides “[a]ny stipulation or provision in [a property or life insurance policy] requiring the action to be brought within any shorter time or be barred is void.” Ark. Cod Ann. § 23-79-202(b).

Graham asked the Eighth Circuit Court of Appeal to enforce the Arkansas statute and declare the policy limitation of action provision void in Kenneth Graham v. Hartford Life and Accident Insurance, No. 11-2070 (8th Cir. 05/11/2012). Graham alleged that at the time of the accident that he was insured under an accidental death and dismemberment policy issued by Hartford. The policy provided life insurance in the event an accident resulted in Graham’s death. The policy also provided for certain benefits if Graham suffered from dismemberment, which included loss of sight.

The policy required Graham to file a proof of loss within ninety days after the date of loss. The policy further provided “[y]ou cannot take legal action against us . . . after three years . . . following the date proof of loss is due.” Graham filed a timely proof of loss with Hartford, but Hartford denied the claim. Graham then filed an appeal with Hartford, which was also denied.

On July 2, 2010, less than five years after his accident but outside the time period for filing legal actions as provided in the policy, Graham brought this breach of contract action against Hartford in federal district court. Hartford filed a motion for judgment on the pleadings arguing Graham failed to file the lawsuit within the time limits set forth in the policy. Notwithstanding the provisions of the statute the district court granted Hartford’s judgment on the pleadings. The district court relied on several Arkansas cases which generally allow insurance companies to contract for a shorter limitations period than the period provided by the applicable statute of limitations, as long as the period is reasonable.

ANALYSIS

The district court correctly recognized that Arkansas law generally permits insurance companies to contract for a shorter period of time within which policyholders may sue than the maximum period allowed by the state’s applicable statute of limitations, so long as the period of time allowed is still reasonable. The general rule has its limitations. A contractually shortened period must not contravene some statutory requirement or rule based upon public policy. Hartford’s policy provision, shortening the period for him to file suit to a period of less than five years, contravenes the statutory requirement.

The statute clearly provides an action on a claim or loss arising under a life insurance policy may be brought “at any time within the period prescribed by law for bringing actions on promises in writing.” The period prescribed by Arkansas law for bringing actions on promises in writing is five years.

The Arkansas Supreme Court specifically addressed the meaning of that portion of the statute  by stating that it is intended to nullify any limitation of the time within which a cause of action arising out of insurance policies may be instituted to a time shorter than the period fixed by the statute of limitation of the state applicable to such suits. In Arkansas the statute of limitation defining the time within which an insurance policy may be sued upon may not be shortened by any provisions contained in the policy. The effect of the statute is to make such provision void.

ZALMA OPINION

The California Court of Appeal, stated the rule that is followed in most states, that:

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.  App. 2d 581, 586 [281 P.2d 39]. [Citation.].)” (64 Cal. App. 3d at p. 273.)

However, every state has the right to express its public policy and if, as the Eighth Circuit concluded, it is best to refuse to allow an insurer the right limit its contractual obligations and shorten the time to suit. As the Eighth Circuit pointed out statutes can, and in this case, did change the terms of the policy agreed to by the parties.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Zalma on Insurance Makes Top 50

Amateur arsonists do everything necessary to convince fire cause and origin investigators that a fire was not accidental. They use petroleum based accellerants to speed and spread the fire. They set more than one fire in locations where there is no source of an accidentally started fire. They set fires in unusual places, like closets, where a fire will self extinguish because of a lack of oxygen. Finally, they increase their insurance limits, thinking that higher limits will allow them to recover more when all they can recover, regardless of the limits, is what was lost.

Keesha P. Washington, an amateur and ineffective arsonist, was found guilty of aggravated arson, a Class A felony in Tennessee. As a result she was sentenced as a violent offender to eighteen years’ confinement. On appeal, Washington contended that the trial court erred by not holding a hearing to ensure that she knowingly and voluntarily waived her right not to testify and that her sentence was excessive. She appealed in State of Tennessee v. Keesha P. Washington, No. M2011-00227-CCA-R3-CD (Tenn.Crim.App. 05/09/2012), asking the Court of Criminal Appeals of Tennessee at Nashville to overturn the verdict.

Facts

Franklin Fire Captain Chris Brown testified that on May 30, 2006, he responded to a fire at the Defendant’s apartment and saw large amounts of smoke coming from the apartment. He said that the apartment’s front door was locked and that they had to kick down the door to enter the apartment. The firemen extinguished a burning pile of cloth or paper near a sofa before realizing that a second fire was burning in the hallway. He said that the “primary seed of the fire” was in a utility closet and that they put out the fire. Two additional fires, one near a television and another near a computer, had already extinguished themselves. He found a match in the center of the fire that burned near the television. He said that the fires had four separate points of origin and that he secured the scene while he waited for fire marshal investigators to arrive.

Neighbors testified about reporting the fire and multiple experts testified as to why their forensic investigations made it clear that the fire was caused intentionally.

Bobby Medlen testified that he worked as a claims representative for State Farm Insurance. He said that the Defendant had a renter’s insurance policy with State Farm and that she increased her policy limits for personal property from $25,000 to $50,000 on May 22, 2006. The Defendant submitted an insurance claim after the fire but later withdrew the claim on July 17, 2006.

The Defendant testified that she moved to Tennessee in February 2006 and that there were delays when she attempted to transfer her State Farm insurance policies from Michigan to Tennessee.  She said she did not ask to increase her renter’s insurance coverage on May 22, 2006. She said that she called State Farm that day to request a copy of her policy and that when a copy was faxed to her, she noticed it only had $25,000 in coverage. She said she called State Farm and told them her policy was supposed to have $50,000 in coverage.

She said that the smoke detector beeped and that she took it down to change the battery but found no place for a battery. She placed the smoke detector on the floor and intended to have maintenance install a new detector. She put her daughters in the car and smelled smoke when she returned to the apartment to get her computer and her bag. She opened the door to the hallway closet and saw a comforter and a box on fire. She removed the box and comforter, kicked them into the living room, and used a pillow to smother the flames. The Defendant acknowledged that she initially told Marshal King and Detective Adams that she did not know there was a fire in her apartment until she received a telephone call from the apartment complex manager. She agreed that she knew there was a fire before she left her apartment and that she told Marshal King and Detective Adams that she left the apartment because she “got mad and lost it . . . .” She agreed that although she initially told them that she did not know what caused the fire in the closet, she said later that she assumed the fire was caused by the HV/AC unit.

Washington was found guilty of aggravated arson and sentenced as a violent offender to eighteen years’ confinement.

The Defendant argued that a new type of hearing should be required because if a person is warned about their right to remain silent before giving a police statement they should be warned  before the defendant subjects themselves to cross-examination before a jury? Because such a hearing is not required by precedent the appellate court concluded the trial court did not breach a clear and unequivocal rule of law by not holding a hearing to ensure that the Defendant knowingly and voluntarily chose to testify.

A psychiatrist testified that the Defendant was a patient of his and that she had a history of serious mental illness. He diagnosed her with a severe form of bipolar disorder with “psychotic features.” He said the Defendant was using medication when she came to see him, including Lithium, Seroquel, and Lamictal, which were mood stabilizers.

The trial court found that the following enhancement factors applied pursuant to Tennessee Code:

1. the offense involved more than one victim, and
2. the Defendant had no hesitation about committing a crime when the risk to human life was high.

The court found a mitigating factor applicable because the Defendant had no previous criminal record and because the Defendant had a mental health condition. The Defendant contended that her sentence is excessive because the trial court applied incorrect law and mistakenly thought the presumptive sentence was twenty years.

After the evidence was presented, the trial court noted that the applicable range was fifteen to twenty-five years. The court explained its consideration of enhancement and mitigating factors and stated that it believed the sentence imposed was consistent with the purposes and principles of the sentencing act. Washington was unable to show that the trial court imposed an improper sentence or that it applied incorrect law.

ZALMA OPINION

As Forrest Gump’s mother once said “stupid is, as stupid does.” Ms. Washington, perhaps because of her mental illness, decided to profit from a fire at her new apartment in Tennessee.  By doing so she put at risk the tenants of the more than 200 apartments in the facility where she lived and the firefighters called to put out the fire. She was totally incompetent because she set four different fires, two of which self-extinguished before the fire department arrived. The fire department put out the fire before anyone was injured or more than $50,000 damage was done to her contents or the apartment structure.

She made a claim to her insurer thinking she could recover the limits only to have the insurer hire fire cause investigators and engineers whose testimony helped convict her. She was represented by counsel but claimed she was not properly advised by the court of her right to remain silent a warning opposite from that required by law.

Arson for profit, to be successful, requires a person who understands both insurance and the action of fire and smoke detectors. Fortunately for the public and the insurance industry people like Ms. Washington fail at their crime. Those who are professional arsonists are never even suspected. Regardless of her illness she knew what she was doing and was appropriately convicted.

Zalma Insurance Consultants

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

May 15, 2012

Zalma on Insurance Makes Top 50

Continuing with the tenth issue of 16th  Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) reports on May 15, 2012 Barry Zalma comments on why faking the theft of a vehicle to collect insurance is becoming popular in the U.S.  Those who do so are not necessarily professional criminals. They are, rather, regular folks who had never committed a serious crime before but could not afford the monthly payments. They resolve their financial problems by selling the vehicle to the insurance company and again to a private buyer. Because they are not professional criminals they are often caught, prosecuted and convicted. The May 15, 2012 issue reports on the conviction of a person who helped a “friend” fake the theft of a vehicle only to end up in jail for aiding and abetting insurance fraud.

The issue also reports on the new PIP insurance fraud statutes enacted in Florida that will come into effect in June and adds an “Heads I Win, Tails You Lose” story about how a woman tried to get off Welfare by trying insurance fraud.

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

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.

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://barryzalma.blogspot.com/ .

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com.
If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Zalma on Insurance Makes Top 50

“Appraisal” is a form of arbitration required by insurance policies that allows the amount of loss to be determined by a panel of three appraisers whose duty is limited to determining the amount of loss and nothing more. When appraisers exceed the duty to determine only the amount of loss and make legal determinations the duty is breached and the appraisal award can be vacated. In Amerex Group Inc USA V. Lexington Insurance Company USA, No. 10-4163-cv (2d Cir. 05/10/2012) the Second Circuit Court of Appeal was asked to resolve a longstanding insurance dispute between plaintiffs-appellants Amerex Group, Inc., and Amerex USA Inc. (“Amerex”), and their excess insurers, defendants-appellees Lexington Insurance Company and Westchester Surplus Lines Insurance Company (“Excess Insurers”).

Aafter nearly four years of investigation of its claim by the Excess Insurers and mediation between the parties, filed suit against the Excess Insurers. They responded to the complaint by moving to compel appraisal according to the terms of the insurance policies. The district court granted the Excess Insurers’ motion. In accordance with the parties’ contract, each side appointed a member of the appraisal panel (“Panel”), and, when the parties failed to agree on the appointment of the Panel’s umpire, the district court appointed one at their request. The fully-constituted Panel conducted its 30–month valuation and ultimately quantified Amerex’s loss at less than the value of its primary insurance contract, thus rendering the Excess Insurers’ policies inapplicable to Amerex’s claims. The Excess Insurers moved thereafter for partial summary judgment on the basis of this appraisal, and the district court granted the motion, dismissing Amerex’s complaint.

The Appeal

Amerex appealed both the order to compel appraisal and the subsequent order confirming the appraisal and dismissing its complaint.

Amerex distributes outerwear in the United States, acting as an intermediary between its wholesale customers and overseas clothing manufacturers. The company stored some of the clothing that awaited shipment to its customers in its warehouse in Avenel, New Jersey, on a large rack system that facilitated the clothing’s storage and organization.

On August 3, 2001, the rack collapsed, activating the warehouse’s sprinkler system, which flooded the premises. The water not only damaged Amerex’s merchandise, but also rendered its computer system inoperable for “one to three weeks,” and thus prevented Amerex from making promised deliveries. The damages associated with the collapse included lost merchandise, cancellation of orders, late charges for orders fulfilled, and lost business income.

The Insurance

To manage the risk of such losses, Amerex carried three insurance policies. The first, issued by Fireman’s Fund Insurance Company (“Fireman’s Fund”), served as Amerex’s primary insurance, and covered damages associated with the warehouse, business personal property, business income, and other such losses, up to a limit of $2.5 million. The second and third policies, issued by appellees, provided insurance in excess of the Fireman’s Fund policy. Each excess policy had a liability limit of $5 million, for a total of $10 million beyond the coverage provided by Fireman’s Fund.

The excess insurance policies contained substantially identical clauses that allowed either party to insist in writing on the appointment of an appraisal panel to determine the extent of losses associated with any claim. The appraisal clause does not specify any time limit for making such a demand, and instead focuses on the procedure used to appoint the Panel.

Two years after the rack collapse, on or about June 12, 2003, Amerex submitted its proof of loss to Fireman’s Fund and the Excess Insurers, claiming total damages of $8.8 million. Fireman’s Fund paid the full amount of its policy, $2.5 million. Amerex then sought coverage from the Excess Insurers for the remaining $6.3 million. The Excess Insurers investigated the claim until October 2005. During the course of this investigation, the Excess Insurers interviewed certain Amerex employees concerning the nature of the business and reviewed financial statements and other documents.

Ultimately, on February 21, 2006, the Excess Insurers rejected Amerex’s claim. The parties agreed to meet to discuss the terms of the rejection and the Excess Insurers’ claim analysis. During the meeting, the Excess Insurers’ consultants and forensic accountants discussed with Amerex the findings that led them to recommend rejecting Amerex’s claim. After that meeting, in April 2006, the parties agreed to mediate their dispute. In the mediation, the Excess Insurers provided significant documentary evidence to Amerex. Amerex’s own experts also presented their calculation of damages to the mediator. In April 2007, after conferring with the mediator, the Excess Insurers made a final offer. Without responding to that offer Amerex sued the excess insurers.

On June 4, 2007, after Amerex had filed its complaint, the Excess Insurers wrote to Amerex demanding appraisal and answered the complaint the next day, listing the appraisal demand among their affirmative defenses. The Excess Insurers then moved to compel an appraisal. The district court granted the Excess Insurers’ motion to compel appraisal on September 19, 2007. Subject to the terms of their contract, each party appointed one member of the Panel, and, when the parties could not agree on the Panel’s umpire, they petitioned the district court to make that appointment. The district court did so and then stayed the litigation pending resolution of the appraisal.

The Appraisal

In conducting the appraisal, the Panel reviewed documentary and testimonial evidence similar to that reviewed during both the Excess Insurers’ initial investigation and the subsequent mediation. The appraisal proceeding included the examination and cross-examination of witnesses, and a day exclusively set aside for Amerex’s rebuttal. On June 15, 2010, after almost two and a half years of review, the Panel issued its valuation decision, finding that Amerex’s damages amounted to approximately $1.3 million, just more than half of the value of Amerex’s insurance policy with Fireman’s Fund. Pursuant to the parties’ agreement, the Panel did not disclose most of its valuation methodology. It did, however, determine that the period of restoration concluded on October 31, 2001.

Because the Panel valued Amerex’s losses at less than the $2.5 million the company had already received from its primary insurance carrier, thereby precluding recovery from the Excess Insurers under the terms of their policies, the Excess Insurers moved in district court for summary judgment. The district court granted the Excess Insurers’ motion and dismissed Amerex’s complaint.

Analysis

Amerex contended that the Excess Insurers’ appraisal rights under the contract were waived, as their June 4, 2007, demand was untimely. The Second Circuit concluded that the Excess Insurers did not waive their appraisal rights by asserting them after Amerex initiated litigation because the appraisal demand would not  “result in prejudice” to the non-demanding party. Although the separation between the collapse and the appraisal demand was significant—almost six years—it is undisputed that much of the delay was due to Amerex’s inaction.

At the time the Excess Insurers made their demand, the district court expressed its expectation hat the appraisal process would facilitate a prompt resolution to an extended, complicated, wholly factual dispute concerning the extent of Amerex’s damages. Since a prompt resolution is the reason for the existence of the appraisal process the Second Circuit concluded that it was eminently reasonable for the district court to conclude that, if the value of the claim could be authoritatively fixed, the parties might well be able to resolve the dispute by settlement, without the need to address legal issues regarding coverage.

Scope of Appraisal

Amerex also contended that the district court should not have upheld the appraisal award because the Panel improperly decided questions of law.

While the dispute included legal arguments concerning the policy’s coverage, those disputes were not implicated in the appraisal’s resolution. The Panel instead focused solely on determining the extent of the damages, including calculating the relevant restoration period, and did not address whether the Excess Insurers’ policies covered those damages. The Panel did not address conflicting views of the applicable policies, but rather resolved factual questions regarding claims about the conflicting causes of the lost business income. Those were factual questions that can be resolved by a duly appointed appraisal panel, aided by the opinions of experts, including forensic accountants such as those who testified before the Panel below.

That an appraisal panel exercises judgement or produces a controversial result, however, does not turn factual disputes regarding damages into legal disputes regarding coverage. The complexity of the calculations of Amerex’s business losses required appraisers to do more than mechanistically consult objective market values.

Due Process

Finally, Amerex argued that the appraisal process itself turned into an arbitration that violated its due process rights. More specifically, Amerex alleged that it suffered a due process violation because the Excess Insurers could use the results of their investigation in the appraisal proceedings, while Amerex lacked a corresponding right to seek discovery from the Excess Insurers regarding their own investigation.

Amerex is correct that New York law recognizes significant differences between the authority and procedures applied in appraisals as opposed to arbitrations. Procedurally, the prevailing practice in appraisals is more informal and entirely different from the procedure governing arbitration.

While Amerex went into the appraisal with significantly less information about the Excess Insurers than the Excess Insurers had about Amerex, there was no violation of Amerex’s due process rights. It cannot be the rule that appraisals must furnish insured parties the right to extensive discovery from the insurers, as such a rule would turn appraisals into precisely the kind of quasi-judicial proceedings that New York law forbids.

ZALMA OPINION

This is an important decision upholding the true reason why insurance policies contain — usually required by statute — an appraisal provision that allows the amount of loss to be determined expeditiously by a panel of appraisers. That this appraisal panel took more than two years to reach a decision was still expeditious since litigation and extended discovery in such a complex case is even more time consuming and expensive.

The result of the appraisal showed that the excess insurers were correct and that the primary insurer, rather than fight an over $8 million proof of loss paid its $2.5 million limit which was $1.2 million more than the appraisal panel said they really owed. Fireman’s Fund overpaid and will, because of the passage of time, probably be unable to recover the overpayment but should, at least, look into the issue.

I have seen appraisals resolved in weeks and some that take, as did this case, years. Regardless, it is an important and expeditious method to resolve disputes over amount when there is no question of coverage. The insurer and the Excess Insurers tried to resolve the claim and could not. Appraisal resolved it and by making an award, and a judgment, less than the primary limit, destroyed any chance Amerex had to pursue a bad faith case against its insurers and proved that the proof of loss it submitted was excessive and not correct.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

The story that follows is based on fact. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud.

As insurance companies become more sophisticated in the tools needed to defeat insurance fraud, the frauds become more complex. Those who earn a dishonest living stealing from insurance companies find that the simple, straightforward fraud, is no longer successful. They have become insurance scholars to learn better ways to steal from insurance companies.

The 1942 banking industry wrote a document known as the standard or union mortgage clause [Form 438 BFUNS] to protect mortgage holders from dishonest borrowers. The banks were concerned because occasionally their borrowers committed arson and the insurers refused to pay. The policy was declared void as a result of the arson and resulting fraud and neither the insured nor the mortgagee recovered.
As a condition of allowing their borrowers to buy insurance from particular companies, the banks insisted that the companies attach to their policies a union mortgage clause. The clause provided that if the borrower, by act or omission, caused the policy to be void, it would only be void as to the interest of the borrower and not the lender. Therefore, even if an insurer proved that  its insured burned the building down, it still must pay the mortgagee its interest. The contract between the mortgagee and the insurer was a separate and distinct policy. The insurer could only defeat it if the mortgagee had knowledge of an increase of hazard.

The union mortgage clause gave security to honest and reputable lenders. It also gave a dishonest lender the means to commit an arson for profit without the possibility of loss or criminal prosecution. The fraud would work with the insurance criminal first buying a distressed dwelling at a foreclosure sale for less than its true value. With a co-conspirator, he would arrange a mortgage on the dwelling for three times the amount paid. He would then buy a homeowners policy from an unsuspecting insurer, naming the mortgagee under a standard or union mortgage clause. Before the first installment was due on the premium financing the dwelling would burn to the ground. Gasoline would be found on the premises and the local fire arson unit would conclude that the fire was intentionally set. The building would be vacant and without contents. The named insured, the alleged borrower who had used a fictitious name in the purchase of the insurance, would disappear. He would not even give notice of the claim. The lender would submit a proof of loss claiming that its entire interest was destroyed. It would also make claim for the full policy limits, providing a copy of the mortgage instruments to establish its claim. The insurer, convinced that the insured set fire to the dwelling, and unable to reach him, would be thankful that it had no contents or additional living expenses to pay. It would write the named insured at his last known address denying his claim for failure to cooperate. They would pay the mortgagee’s claim in full.

Usually, the insurer, not wishing to get into the mortgage business, would not even request an assignment of the mortgage debt. The lender, paid more than the original price for the fire damage to the dwelling would issue a notice of foreclosure and sell the property at a foreclosure sale as an empty lot. The original named insured would share half the proceeds of the insurance policy with the mortgagee and would also receive 50 percent of the monies received from the foreclosure sale of the empty lot. The insurer, with no way of proving the conspiracy would close its file. The insurer believed that an arsonist had not succeeded in his crime. The insurer had no choice but to pay the “innocent” mortgagee.

This type of fraud continues. Unscrupulous lenders invest their profits in distressed properties, both residential and commercial. The losses they report are not always fire. Some more imaginative insurance criminals use the vandalism coverage to provide a more profitable fraud. First, they avoid the hazard of physical injury when setting an arson fire. They also avoid arrest if accidentally seen committing the arson. Second, by judiciously vandalizing the structure, the mortgagee and the named insured find that they can have a distressed property totally remodeled and restored at no cost. The borrower, shortly after taking possession, would take a three-pound sledge hammer and punch a single hole in every sheet of drywall in every room, a single hole in every cabinet door, a single hole in every passage way door breaks each porcelain fixture in the baths, break the lock and put a single hole in the front and rear entry door. He would also dent or damage the central heating system and cut jagged slashes through the carpeting.

The borrower, and named insured, would then disappear, since the entire transaction was a sham with fake names and identification. The mortgagee, claiming discovery of the damage on an inspection trip to decide why the payments had not been made, would report a vandalism claim. The mortgagee, knowledgeable about insurance, would have records showing that the premises were occupied less than thirty days before the discovery of the vandalism.

The insurer, in good faith, would agree to a scope of damage requiring the replacement of all of the drywall, the repainting of all of the rooms, the replacement of the carpet and all of the plumbing furnishings and fixtures. The mortgagee would agree to an actual cash value settlement. Then, using its own employed workmen, the mortgagee would repair the drywall with patching plaster, caulk fixtures and for one tenth of the cost of a reconstruction contractor would totally remodel the house. The mortgagee would then conduct a foreclosure sale and sell the remodeled house. The mortgagee would profit both the profit on the repairs and the profit on the sale of the now remodeled and restored house. The mortgagee and the borrower would split the proceeds equally and start the cycle over with a new house.

To defeat this type of insurance fraud, an adjuster must be professional, vigilant and exceedingly lucky.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Zalma on Insurance Makes Top 50

The Mississippi Court of Appeal was asked to determine whether a criminal act that caused the “accidental death” of a person can be an “occurrence” or “accident” as defined in an insurance policy and whether a criminal act exclusion applies in Rita Kees Lambert, Individually, and v. Safeco Insurance Company of America, No. 2011-CA-00166-COA (Miss.App. 05/08/2012).

FACTS

Rita Kees Lambert, individually and as a personal representative of all heirs at law and wrongful-death beneficiaries of her son, Brian Michael Kees, filed a wrongful-death suit in Rankin County Circuit Court against Al Ellis and John Does 1-10, alleging that Brian had suffered physical injuries and death as a result of Ellis’s gross negligence. The circuit judge assessed $75,000 in damages against Ellis. The circuit judge ultimately entered a final judgment finding that Ellis was not entitled to liability coverage under the homeowner’s insurance policy issued to him by Safeco Insurance Company of America (Safeco) for the $75,000 judgment entered against him as a result of Brian’s death. Lambert now appeals.

On August 13, 2005, Brian and his father, Michael Kees, attended a swimming party at Ellis’s home in Brandon, Mississippi. Ellis and Michael were billiards teammates. Ellis claimed that at some point during the pool party, Michael went into Ellis’s home and stole money. Michael exited the house with Brian and hurried to his car. After concluding that Michael had stolen money from him, Ellis retrieved his pistol and followed Michael outside. As Michael exited the driveway, Ellis fired his pistol at Michael’s car, which Ellis claimed was an attempt to disable and stop the car. Ellis stated that he did not know that Brian was in the vehicle. One of the bullets ricocheted off of the pavement and hit Brian. Brian later died as a result of the gunshot wound.

Ellis was arrested and charged with Brian’s murder. Ellis pled guilty to the lesser charge of manslaughter by culpable negligence, and he was sentenced to a term of incarceration, house arrest, and probation.

On August 15, 2005, Lambert, individually and as a personal representative of all heirs at law and wrongful-death beneficiaries of Brian, filed a wrongful-death suit in the Rankin County Circuit Court against Ellis and John Does 1-10. Ellis answered and denied liability for damages. On May 22, 2008, the circuit court entered an agreed order permitting Safeco, Ellis’s homeowner’s insurance carrier, to intervene in the wrongful-death action. On June 4, 2008, Safeco filed a complaint for declaratory judgment, asserting that Safeco’s homeowner’s insurance policy did not provide Ellis with liability coverage or a defense or indemnification for any claims arising out of Lambert’s wrongful-death suit. Safeco then filed a motion for summary judgment. Following a hearing, the circuit court denied Safeco’s motion, finding genuine issues of material fact on the issue of coverage.

Lambert moved for partial summary judgment on the issue of Ellis’s liability, which the circuit court granted. The circuit court also entered an agreed order, assessing $75,000 in damages against Ellis. After a bench trial on the remaining issue of whether Safeco owed liability coverage to Ellis for Lambert’s $75,000 award of damages, the circuit court entered its judgment in favor of Safeco, finding that Ellis was not entitled to liability coverage under Safeco’s homeowner’s insurance policy. Lambert filed her appeal on January 28, 2011.

DISCUSSION

On appeal, Lambert argues that the circuit judge erred by finding that Ellis is not entitled to liability coverage under his homeowner’s insurance policy, issued by Safeco, for the $75,000 judgment entered against him as a result of Brian’s death. Specifically, she claims that the circuit judge erroneously determined that the policy provides no coverage because:

1. Ellis committed an illegal act;
2. Ellis intended to discharge the firearm in the direction of the vehicle, actions that were not accidental and not an “occurrence” as required under the policy; and
3. Ellis’s actions were intentional, thus barring coverage under the policy’s intentional acts exclusion.

ANALYSIS

Under Mississippi law, when the words of an insurance policy are plain and unambiguous, the court will afford them their plain, ordinary meaning and will apply them as written. Additionally, provisions that limit or exclude coverage are to be construed liberally in favor of the insured and strongly against the insurer.

In his final judgment on the issue of coverage, the circuit judge determined:

        The uncontradicted evidence shows that . . . Ellis knowingly and willfully discharged his weapon at the vehicle in which Brian . . . was riding, evincing a depraved heart regardless of human life, and the evidence is uncontradicted and undisputed that . . . Ellis in fact pled guilty to the crime of manslaughter by culpable negligence. It cannot be disputed by the parties that . . . Ellis did in fact and in law commit a crime and thus an illegal act. Accordingly, the court finds that the death of Brian . . . was caused by an illegal act committed by . . . Ellis, and therefore, pursuant to the Illegal Acts Exclusion in the subject Safeco policy, Safeco does not owe liability insurance coverage to . . . Ellis for the claims being made against him as a result of the death of Brian . . . .

Although there was no proof that Ellis intended to harm or kill Brian personally, the undisputed evidence showed that Ellis did intend the act of shooting a firearm towards and at the vehicle in which Brian was riding. Because Ellis intended the act of shooting his gun and shooting it at the Kees’ vehicle, Ellis’ actions were not an accident and thus not an “occurrence” as required under the subject Safeco policy.

Lambert argued that although Ellis intended to discharge his firearm, the uncontradicted evidence established that he did not intend the consequences of his act – Brian’s death. Lambert also pointed out that Ellis pled guilty to manslaughter by culpable negligence, which she claims is not a specific-intent crime. Lambert thus claimed that the record shows that Ellis lacked the requisite intent to commit an illegal act; therefore, the illegal-acts exclusion in the policy does not apply.

Ellis admitted that he indeed intended to discharge his firearm at the Kees’ vehicle, resulting in Brian’s death (although Ellis claims he only fired at the vehicle with the intention of disabling the car). That fact alone was sufficient for the Mississippi Court of Appeal and it affirmed the circuit judge’s finding that Brian’s death was caused by an illegal act committed by Ellis. Under the illegal-acts exclusion in the Safeco policy, therefore, Safeco could not not owe liability insurance coverage to Ellis.

The record supported a finding that because Ellis intended to discharge the firearm, his actions were not an “accident’ or “occurrence” as required by the policy.

ZALMA OPINION

The Mississippi court applied the facts to the policy wording and since the policy was clear and unambiguous it applied the policy wording. Had it ruled otherwise murderers could avoid the responsibility for their actions by passing that responsibility to an insurer by merely saying — “I didn’t intend to kill him, I was just shooting at his car.” When a policy excludes bodily injury as a result of criminal acts any criminal act should be sufficient. Shooting at a car — occupied or not — is an intentional act and is not, by any variation of the definition, an “occurrence.”

The judgment was small — only $75,000 — and Mr. Ellis should work hard until he earns enough to pay the heirs. His insurer did not agree to protect him from criminal and intentional acts and seeking such coverage was as wrongful as the shooting.

Barry Zalma, Inc.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Zalma on Insurance Makes Top 50

Imaginative and creative lawyers, seeking to provide a defense to an insured person who intentionally and willfully caused damage to another will attempt to characterize the litigation, and the facts surrounding it, as negligent rather than intentional. Since insurance requires either a contingent or unknown event to work an intentional act known to cause damage to another should never be covered for defense or indemnity. In Chi Kin Hui v. Fire Insurance Exchange, No. A133238 (Cal.App. Dist.1 05/02/2012) the insured’s lawyers tried to convince the court that the person suing the plaintiff could include within the intentional act allegations concepts of negligence.

Chi Kin Hui appealed from a summary judgment entered against him on his complaint seeking insurance coverage for the defense of a claim for intentionally destroying vegetable crops by tearing out power blocks that operated the water supply to the crops. The applicable insurance policy provides liability coverage for property damage caused by an “occurrence,” defined as an “accident.”

FACTS

Hui owns as a tenant in common, 20 acres of agricultural land in Gilroy. One of the Gilroy cotenants, Quan Zhong Zhang, has farmed the land since 2001 and paid rent to Hui for the right to do so. In 2009, a dispute arose between the Gilroy cotenants which ripened into litigation.

In August 2009, Hui sued Zhang for breach of the co-tenancy agreement, seeking to eject Zhang from the Gilroy property. Hui also sought to foreclose on a deed of trust securing a purchase-money loan Hui extended to Zhang when Zhang bought his cotenancy interest from Hui. Zhang countered by filing a cross-complaint against Hui alleging a “course of defamation, libel and abuse of process” designed to drive Zhang from the property. Zhang stated multiple causes of action, including malicious damage to growing crops.

Zhang alleged that Hui “destroyed more than $30,000 in vegetable crops” being cultivated on the Gilroy property “by tearing out power blocks that operated the water supply to the crops and power to the residences.”

Hui tendered the defense of the Zhang cross-complaint to Fire Insurance Exchange, the insurer of Hui’s San Francisco property. Hui conceded that most of the claims in the cross-complaint are not covered by the Fire Insurance Exchange policy but contended that the property damage claim for crop destruction is covered. The Fire Insurance Exchange policy is a “dwelling” policy that covers physical loss to the San Francisco property and personal liability. Hui sought to invoke coverage under a provision covering “those damages which an insured becomes legally obligated to pay because of bodily injury or property damage resulting from an occurrence . . . . “

“Occurrence” is defined as “an accident . . . neither expected nor intended by a reasonable person in the position of any insured, which results in bodily injury or property damage.” The policy excludes coverage for property damage arising from the insured’s business pursuits or resulting from “an existing condition on an uninsured location.”

Claim Denied

Fire Insurance Exchange notified Hui that there was no coverage for the cross-complaint because the alleged property damage did not result from an accident and arose from Hui’s business pursuits and from existing conditions on an uninsured location. In September 2010, Hui brought this action for a declaration that Fire Insurance Exchange is obligated to defend the Zhang cross-complaint and for damages for breach of the insurance contract and bad faith insurance practices in denying a defense.

The Judgment

Fire Insurance Exchange filed a motion for summary judgment arguing that the Zhang claim “is not an ‘accident’ within the meaning of the policy and California law. It also arises out of both a business pursuit and an uninsured location, and is consequently excluded from coverage under the terms of the policy.” The trial court granted the motion upon concluding that “[t]he underlying acts referred to in the Zhang cross-complaint[] do not constitute an ‘occurrence,’ defined in the policy to mean an ‘accident.’ ” Judgment in favor of Fire Insurance Exchange was thereupon entered and Hui filed a timely notice of appeal.

Analysis

The duty to defend, which applies even to claims that are “groundless, false, or fraudulent,” is separate from and broader than the insurer’s duty to indemnify. However, where there is no possibility of coverage, there is no duty to defend. The duty to defend, although broad, is not unlimited; it is measured by the nature and kinds of risks covered by the policy.

In the context of liability insurance, an accident is an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause. The common law construction of the term “accident” becomes part of the policy and precludes any assertion that the term is ambiguous.

The Court of Appeal concluded that there was no possibility of coverage and, thus, no duty to defend. The alleged crop damage did not result from an accident. Zhang alleged that Hui maliciously destroyed more than $30,000 in vegetable crops being cultivated on the Gilroy property by tearing out power blocks that operated the water supply to the crops and power to the residences and did so as part of a concerted effort to destroy Zhang and to eject him from the property. Hui conceded that a nonaccidental, intentional tort is alleged but argued that crop destruction can happen accidentally so that he may ultimately be found liable for accidental damage that would be covered by the policy.

In California the bare allegations of the claimant’s complaint do not control as it does in states that apply the four or eight corners rules or the court would have been compelled on the wording of the complaint to deny coverage. However, in California, if the broad charge made, which claims an intentional or wilful tortious act, contains within it the potentiality of a judgment based upon non-intentional conduct, the insurer will be required to defend.

The duty to defend does not turn upon the characterization of the conduct pleaded by the third party but upon whether the alleged facts could support a claim that is within the coverage of the policy.

Coverage turns not on the technical legal cause of action pleaded by the third party but on the facts alleged in the underlying complaint or otherwise known to the insurer.

While a third party’s claim is broadly construed when evaluating potential insurance coverage, the claim must assert some facts or legal theory that bring the claim within the terms of the policy. There must be something in the existing complaint or other facts known to the insurer indicating a potential for coverage. An insured may not trigger the duty to defend by speculating about extraneous facts regarding potential liability or ways in which the third party claimant might amend its complaint at some future date.

Potential liability needed for an insured to obtain a defense is not judged by speculation about what facts or theories could have been alleged by the third party. Rather, the duty is determined by an examination of the facts and theories actually alleged by the third party and a determination of whether these known facts created a potential for coverage under the terms of the policy.  The Zhang cross-complaint does not contain any facts showing the possibility of a judgment based upon an accident.

An accident is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs after the act of the insured that produces the damage. Nothing in Hui’s complaint, the underlying cross-complaint, or the facts presented in opposition to the summary judgment motion suggest that the crop damage here was unexpected. The facts presented in support of the summary judgment motion indicate without contradiction that the damage was the direct and foreseeable result of Hui’s act of cutting electricity to the crops’ water supply. This was not an accident. The judgment denying defense was affirmed.

ZALMA OPINION

“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

Hui intentionally damaged Zhang’s growing crop. He was sued for the damage and sought coverage from the liability insurance provided by the insurer of his home. By doing so he attempted to subvert the meaning of insurance by stretching the phrase “potential liability” beyond reason. Fire Insurance Exchange should be commended for refusing to provide a defense to such intentional conduct and fight the case through the trial and appellate court.

Zalma Insurance Consultants

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Zalma on Insurance Makes Top 50

In more than 40 years of legal practice I have only interviewed two people who claimed they read and understood their insurance policy — both lied. Insurance policies, especially modern easy to read policies of insurance, are written at a fourth grade level. My eleven year old grandson has no problem reading and understanding an insurance policy. He, however, like most of the U.S. public, has no interest in reading a policy.

Failing to read an insurance policy can be very expensive and deprive a person insured of the rights paid for when the policy was acquired. In Brenda Perry v. Damon Kelty and State Farm Mutual Automobile Insurance Company, No. 2011-CA-000160-MR (Ky.App. 05/04/2012) Ms. Perry claimed she never received the full contract of insurance and was, therefore, not bound by a two-year private limitation of action provision and could file within the state’s 15-year statute of limitation.

THE FACTS AND ISSUES

Brenda Perry, appealed the order of the Jefferson Circuit Court, granting summary judgment in favor of Damon Kelty and State Farm Mutual Automobile Insurance Company, concerning Perry’s claim for underinsured motorist coverage.

Perry was the holder of an insurance policy issued by State Farm. Perry brought suit against State Farm for underinsured motorist coverage following a motor vehicle accident in which she and Kelty were involved on August 5, 2005. When that accident occurred, Perry was driving a 1994 Ford Thunderbird. In the trial court Perry conceded that a certified copy of the policy issued by State Farm, with all attachments and endorsements, was a true and accurate copy of the policy in effect on or about August 5, 2005, the date of the accident.

Perry received the Declaration Page for the policy, which confirmed the initial policy period from September 10, 2003, to March 8, 2004, and that the policy consisted of the Declaration Page, the policy booklet-form 9817.5, and any endorsements issued to her with any subsequent renewal notice. State Farm asserted that the Declaration Page also advised Perry of the endorsements to her policy, and specifically referenced Endorsement 6126GP, which provided that policy holders had to file a claim for underinsured benefits within two years from the date of the accident or from the last basic or added reparation payment made by any reparation obligor, whichever later occurred.

Perry admitted that she did not commence the action against State Farm for underinsured benefits within two (2) years of the August 5, 2005, motor vehicle accident, or within two years of the last basic or added reparation benefits.

On March 30, 2009, Perry issued summons against State Farm, commencing an action for underinsured benefits. State Farm asserted the affirmative defense of statute of limitations based upon what Perry asserts was an undelivered and unsigned contract with an amendment that reduced her right to sue from fifteen years to two years. State Farm moved for summary judgment.

Perry asserted, in her response, non-delivery of the written contract and of the amendatory endorsement. She argued that State Farm presented no evidence that the 1994 Ford Thunderbird insurance contract, along with its amendatory endorsement, was ever delivered, received, signed, and/or acknowledged by Perry. Regardless, the trial court granted State Farm’s motion for summary judgment on December 22, 2010.

ARGUMENT

On appeal, Perry made one argument – namely, that in the absence of a signed, written contract, the statute of limitations was fifteen years to bring suit, and not two years. Perry argued that the court below erred in entering its order of summary judgment. In making this argument, Perry acknowledged that the policy contract specified a term of two years in which to bring suit. Nevertheless, she argued that a genuine issue of material fact existed concerning her notice and receipt of the new insurance policy along with its amendatory endorsement limitations.

Perry argued that State Farm had the burden of proving that she had received and signed the new contract with the specified terms, and that she had accepted them, and that without such proof, the court must favor the insured. She asserted that her admission that the policy was in effect was not determinative of the underlying issue as to whether she was provided with a copy of the contract and put on notice of its new limitations and conditions. By so doing she asked the court to enforce those parts of the policy, that she claimed she did not receive but liked, and not enforce the part of the policy she did not like.

State Farm argued that Perry’s physical receipt of a copy of the policy, or lack thereof, is not material. Because Perry acknowledged receipt of the Declarations Page and the premium notices for her policy, all received from September of 2003 until her motor vehicle accident in August of 2005. Further Perry availed herself of the policy terms and conditions when she commenced her action, albeit untimely, against State Farm for underinsured benefits. Receipt of the Declaration Page, which identified the contents of her policy, and her affirmative action of paying premiums, as well as her citation to a provision of the written policy to support an action for benefits, confirm Perry’s acceptance of the policy.

The two-year limitation to commence an action for underinsured benefits set forth in Perry’s policy is the same limitation as that set for an action against a tortfeasor in the Kentucky Motor Vehicle Reparations Act, as codified at Kentucky Revised Statutes. Kentucky courts, like those in most states, have previously held that a two-year limitation of this nature for suits against an underinsured carrier is not unreasonable.

The appellate court concluded that that the limitation contained in the policy is clearly set forth in Endorsement 6126GP, which was referenced in the Declaration Page that Perry admittedly received. Failure to read or become aware of the content of the limitation provision cannot serve as a basis for invalidating the condition or no contract condition could ever be enforced.

ZALMA OPINION

If, as Perry attempted, an insured could claim they did not receive a policy and could then select, like in a cafeteria, parts of the policy that they like and ignore parts of the policy they did not like. The Kentucky court enforced the law and refused to allow a person who sat on her rights by claiming she did not receive or read the policy. She took advantage of the coverage, paid premiums, and made a claim based on the validity of the contract except for the limitation provision.

The court was kind. The suit was frivolous and the parties should have been punished for taking up the time of the court.

Barry Zalma, Esq., CFE

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

The Indiana Court of Appeal was called upon to resolve an insurance dispute over an exclusion for causing an accident while under influence of a controlled substance. In Shawn A. Keckler, Kari Felda, Special Administrator To the Estate of v. Meridian Security Insurance Company, No. 43A03-1112-PL-551 (Ind.App. 04/24/2012). The insurance issue arose when Shawn Keckler, Kari Felda (as Special Administrator to the Estate of Ryan Holloway), Janice Norman and DeWayne Scott (as the mother and father of Bryant Scott), Timothy and Sara Boganwright, and Indiana Farm Bureau Insurance Company (“Farm Bureau”) (collectively, “the Appellants”) appealed the trial court’s entry of summary judgment in favor of Meridian Security Insurance Company (“Meridian”) in Meridian’s declaratory judgment action.

Issues

The Appellants raise five issues, which the court combined and restated as whether the trial court properly concluded as a matter of law that an exclusionary clause in Meridian’s umbrella insurance policy that insured Nathan Creighton at the time of a severe automobile accident caused by him precludes any and all claims by the Appellants against Meridian’s policy and whether public policy requires exclusion of coverage for the Appellants’ claims.

Facts

Shortly after noon on June 29, 2008, Creighton was driving a car westbound on State Road 25, an undivided two-lane road in Kosciusko County, when he approached a vehicle that was stopped in the westbound lane in front of him and waiting to make a left turn southbound onto County Road 1300 West. Creighton, who was eighteen years old, had three passengers in his car: Scott, Holloway, and Keckler. Instead of stopping behind the turning vehicle, Creighton attempted to pass it on the left, crossing into the oncoming eastbound lane of State Road 25. This caused an immediate head-on collision with a pick-up truck driven by Timothy Boganwright, who was traveling eastbound on State Road 25. Scott and Holloway were pronounced dead at the scene of the accident. Both Keckler and Creighton sustained brain injuries and have no memory of the accident. Boganwright also was injured, but his injuries were not as severe.

Police obtained a search warrant to test Creighton’s blood and urine at the hospital for drugs and alcohol. The test results were negative for alcohol but positive for cannibinoids, i.e., marijuana. Creighton later was charged with and pled guilty to one count of Class D felony operating a vehicle with a controlled substance in the body resulting in serious bodily.

At the time of the accident, Creighton’s primary insurer (through his father) was Progressive, with a global policy limit of $500,000. Creighton also was an insured under his father’s umbrella policy issued by Meridian, with a coverage limit of $1,000,000.  After lawsuits were filed by the people injured in the accident, Meridian filed a separate declaratory judgment action against the Appellants asserting that it was not required to provide coverage for any injuries caused by Creighton because of the following exclusionary clause in the policy:

The coverages provided by this policy do not apply to . . . “Bodily injury” or “personal injury” arising out of . . . [t]he use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance(s) as defined by the Federal Food and Drug Law at 11 USCA Sections 811 and 812. Controlled substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician . . . .

Keckler filed a motion for summary judgment against Meridian, in which the other Appellants joined, and Meridian responded with a cross-motion for summary judgment. As part of its designation of evidence, Meridian submitted the deposition of a toxicologist, Dr. Daniel McCoy. Dr. McCoy reviewed Creighton’s hospital test results as well as depositions given by Creighton and Keckler, which were inconclusive on any time frame in which Creighton might have last smoked marijuana before the accident.

Dr. McCoy explained that the test performed by the hospital was “generic” and did not indicate whether the cannibinoids in Creighton’s system were THC, or carboxy THC, or a combination of the two. THC is the psychoactive ingredient in marijuana, while carboxy THC is not psychoactive but is a metabolite of THC, or “a residual non-active drug that hangs on or keeps or it stays around for a longer period of time.” Carboxy THC can be detected within a person’s body for days after smoking marijuana, while the psychoactive effect and detectable amount of THC peaks at about twenty to thirty minutes after usage and then declines. Also, a person who frequently smokes marijuana may have carboxy THC in their system essentially “all the time.” Dr. McCoy opined that, for normal activities, the psychoactive effect of marijuana is felt for three to six hours, although testing of persons having to perform complicated tasks, such as pilots, has indicated that marijuana may affect the performance of such tasks for as long as twenty-four hours.

Dr. McCoy testified that the driving maneuver Creighton made in crossing into the oncoming lane of traffic was “consistent with marijuana use.” Dr. McCoy agreed that he did not know, based on the hospital test result, “when Mr. Creighton would have last used marijuana,” and also that there could not be any testing now performed, even if a sample of Creighton’s blood still existed, that could reliably determine the last time he had smoked marijuana.

On November 7, 2011, the trial court entered summary judgment in favor of Meridian. The trial court concluded that the facts do not demonstrate that the possession or transportation or marijuana within the Dodge Intrepid driven by Nathan S. Creighton was the efficient and predominating cause of the accident. However, the trial court ruled that Meridian was not required to provide any coverage for the accident, observing that the general public policy of Indiana is that no illicit drug use shall occur while driving a vehicle and that under the criminal law, there is no accepted agreement as to the quantity of a controlled substance needed to cause impairment.

Analysis

This case turned upon an exclusionary clause in Meridian’s policy. Interpretation of an insurance policy is a question of law that is appropriate for summary judgment. Meridian’s policy excludes coverage for any claim for personal injury “arising out of . . . [t]he use, sale, manufacture, delivery, transfer or possession by any person” of a controlled substance, including marijuana.  Meridian argues solely that the accident and the injuries suffered by Boganwright, Holloway, Keckler, and Scott arose out of Creighton’s “use” of marijuana.

In Indiana, the phrase “arising out of” as used in insurance policies long has been construed to mean that one thing must be the “efficient and predominating” cause of something else. Additionally, when there is more than one possible cause of an otherwise insurable injury, it generally is a question of fact as to what the predominant cause of the injury was in order to determine if the injury “arose out of” an activity that is excluded from coverage.

In order to invoke the controlled substances exclusionary clause in its policy, Meridian was required to establish that Creighton’s use of marijuana was the efficient and predominating cause of the injuries to Boganwright, Holloway, Keckler, and Scott. Meridian failed to meet the burden. Persons of average intelligence reading Meridian’s policy and its exclusion for injuries “arising out of” the use of marijuana would presume that, for the exclusion to have effect in the case of a car accident, there must be some evidence that the accident was caused by or at least related to marijuana’s impairing or psychoactive effects, or possibly use of the drug while driving.

Surprisingly, case law regarding criminal convictions for operating a vehicle with a controlled substance in one’s blood, or for operating a vehicle while intoxicated resulting in death or serious bodily injury, have little to no application in the context of interpreting insurance even though the conviction is determined beyond a reasonable doubt.

Regardless of the lack of conclusive, undisputed evidence that the accident arose out of Creighton’s use of marijuana, Meridian essentially contended that the court should read a “public policy” exclusion into its insurance policy.

The Court of Appeal insisted on following Indiana law that a court may not rewrite an insurance contract. The power to interpret insurance policies does not extend to changing their terms. Reading a “public policy” exception into Meridian’s policy would be a rewriting of the policy, in contravention of established law that prohibits such rewriting.

The insurance policy in no way saves the insured from the consequences of his criminal act. Creighton has been penalized for that act. Denying insurance coverage here, on the other hand, would have drastic consequences not only for Creighton, but also for “innocent” injured parties seeking recompense for the injuries he caused.

ZALMA OPINION

I agree with the Court of Appeal that it is up to the Supreme Court or the Legislature to create a public policy. No one, as the trial court agreed, should be allowed to recover from an insurance policy for an accident that resulted from that persons use of a psychoactive controlled substance like marijuana. By placing a burden on the insurer that could not be met — to determine the efficient proximate cause of the accident was the marijuana — when the authorities failed to get adequate testing because what they got was sufficient to convict the driver beyond a reasonable doubt.

Once a person is convicted of a criminal act of operating a vehicle with a controlled substance in the body resulting in serious bodily should have been sufficient for proving the requirement of the exclusion. The concern for those injured is an attempt to make insurance a governmental entitlement rather than a contract between two people.

One must be concerned for the victims of the accident but that is not a reason to change the terms of the contract of insurance.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

Patricia Meleski appealed a trial court’s non-final order dismissing on summary judgment her bad-faith claims against Partners Mutual Insurance Company. In Patricia Meleski v. Schbohm LLC and Partners Mutual Insurance Company, No. 2010AP2951 (Wis.App. 05/01/2012) the Wisconsin Court of Appeal was asked to determine whether a non-insured may assert bad-faith claims against an insurance company when the company’s obligation to the non-insured is fixed, and the non-insured contends the company refuses in bad faith to discharge that obligation.

FACTS

Meleski sued Schbohm, LLC, and Partners Mutual, Schbohm’s insurance carrier. Meleski’s complaint alleged that she was hurt when she fell on Schbohm’s property. She claimed personal-injury and medical-expense damages. This appeal concerns only the medical-expense damages.

The Partners Mutual policy promised to “pay medical expenses … for ‘bodily injury’ caused by an accident” either “[o]n premises” Schbohm owned or rented, or “[o]n ways next to premises” Schbohm owned or rented. Partners Mutual does not dispute the applicability of this insuring clause.

Partners Mutual also promised Schbohm that it would pay the medical expenses “regardless of fault.” Meleski claims that Partners Mutual nevertheless stonewalled her, and refused, in the words of her complaint, to pay her “medical expense claim, without reasonable proof to establish” that it “was not responsible for payment.” The circuit court dismissed her bad-faith claims because, as it opined in an oral decision, those claims, in its view, could only be asserted by someone in “privity of contract” with the insurance company.

PRIVITY NOT REQUIRED

Although insurance policies issued to an insured are contracts between the carrier and the insured, they also can create third-party-beneficiary duties running from the insurance company to a non-insured.

Where one person, for a consideration moving to him from another, promises to pay to a third person a sum of money, the law immediately operates upon the acts of the parties, establishing the essential of privity between the promisor and the third person requisite to binding contractual relations between them, resulting in the immediate establishment of a new relation of debtor and creditor, regardless of the relations of the third person to the immediate promisee in the transaction; that the liability is as binding between the promisor and the third person as it would be if the consideration for the promise moved from the latter to the former and such promisor made the promise directly to such third person, regardless of whether the latter has any knowledge of the transaction at the time of its occurrence; that the liability being once created by the acts of the immediate parties to the transaction and the operation of the law thereon, neither one nor both of such parties can thereafter change the situation as regards the third person without his consent.

The tort of insurance-company bad faith is based on a breach of a duty imposed as a consequence of the contractual relationship. Although generally limited to the breach of good faith and fair dealing the insurance company owes its insured, it is not so limited. The key is whether a person seeking to assert a bad-faith claim against an insurance company is in a contractual relationship with that insurance company. Since third-party beneficiaries of contracts are in such a relationship – that is, they are in the class that the insurance contracts were designed to benefit.

Meleski is such a claimant.

The right of a third party claimant to maintain an action for bad faith against the insurer has been recognized only where the claimant has a fixed claim, whether as a result of statutory entitlement, for example under the worker’s compensation statutes, or as a result of an unsatisfied judgment against the insured.

Since the policy obligated Partners Mutual to pay medical expenses irrespective of anyone’s fault, Meleski’s medical-expenses claim became fixed or vested.  Partners Mutual, therefore, is obligated to treat Maleski in good faith. Failing to do so, as Meleski alleged, Partners Mutual is subject to her bad-faith action because she became, at the moment she fell, a fixed third-party beneficiary of the Partners Mutual insurance contract with Schbohm.

The Wisconsin Court of Appeal, as a result, allowed Meleski to enforce her third-party-beneficiary rights against Partners Mutual. Of course it will be up to a jury or judge sitting as a fact-finder to determine whether Partners Mutual acted in bad faith in rejecting Meleski’s claims for medical damages, as she contends.

ZALMA OPINION

Med pay insurance is a no-fault coverage that provides medical payments to anyone on the premises of the insured regardless of responsibility for the injury. The med pay coverage is not for the benefit of the person insured but for the benefit of a visitor on the insured’s premises.

There are, as the court noted, many reasons why an insurer would refuse to pay a med pay claim that is not bad faith such as fraud, excessive billing or medical charges not related to the injury. Meleski believes she is entitled to payment and Partners Mutual believes she is not. The judge or jury will determine who is right.

Since med pay coverages are usually small this may be a classic tempest in a tea pot that should have been resolved amicably and without the use of the courts.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

James Grissom purchased flood insurance for his home in Pascagoula, Mississippi under the Federal National Flood Insurance Program (“NFIP”). Grissom was eligible for a preferred risk insurance policy, but did not know about his eligibility. Following the destruction of his home in Hurricane Katrina, Grissom sued Liberty Mutual for negligent misrepresentation to recover the difference between the coverage he had and the coverage he could have purchased under the preferred risk policy. The district court concluded that Grissom’s claim was not preempted by federal law and sent the case to the jury which awarded Grissom $212,900 in compensatory damages. Liberty Mutual appealed in James P. Grissom, v. Liberty Mutual Fire Insurance Company No. 11-60260 (04/23/2012)  and asked the Fifth Circuit Court of Appeal to reverse.

FACTS

In 1977 Grissom first purchased flood insurance through the Federal Emergency Management Agency’s (“FEMA”) Write Your Own (“WYO”) flood insurance program under the National Flood Insurance Act. Liberty Mutual was Grissom’s WYO insurance provider when Hurricane Katrina severely damaged his property. This court has previously discussed the WYO program:

By enacting the National Flood Insurance Act of 1968, Congress established the Program to make flood insurance available on reasonable terms and to reduce fiscal pressure on Federal flood relief efforts. Within the Program, the WYO program allows private insurers to issue flood insurance policies in their own names. Under this framework, the Federal government underwrites the policies and private WYO carriers perform significant administrative functions including “arrang[ing] for the adjustment, settlement, payment and defense of all claims arising from the policies.” WYO carriers must issue policies containing the exact terms and conditions of the [Standard Flood Insurance Policy ("SFIP")] set forth in FEMA regulations. Additionally, FEMA regulations govern the methods by which WYO carriers adjust and pay claims.

In 1989 a preferred risk policy became available for the flood zone on which Grissom’s home was located, but Grissom is unsure if he was ever explicitly offered the preferred risk policy. There is no indication that Liberty Mutual affirmatively informed Grissom he was eligible for preferred coverage. In 2004 he renewed his Liberty Mutual policy with covered total loss of up to $121,200 for a $531 premium. Had he been enrolled in the preferred risk policy, he would have had $350,000 in total covered loss for a $317 premium. The 2004 renewal notice from Liberty Mutual mentioned the existence of preferred rate policies, but did not indicate whether Grissom was eligible.

In August 2005, Grissom’s home was destroyed by Hurricane Katrina. Liberty Mutual paid Grissom’s $121,200 claim, the policy maximum. Grissom then sued Liberty Mutual in Mississippi state court to recover the difference between the coverage he had and the coverage he could have had under the preferred risk policy.  Liberty Mutual appeals.

DISCUSSION

1. The issues on appeal were:
2. whether the district court erred by determining this was a policy procurement case rather than a claims handling case subject to federal preemption;
3. whether the district court erred by allowing this case to go to a jury when federal funds were at risk; and
4. whether Mississippi law recognizes negligent misrepresentation in the insurance context.

Federal Preemption

Federal law preempts state law tort claims arising from claims handling by a WYO according to multiple Fifth Circuit decisions. Federal law, however, does not preempt state-law procurement-based claims. The dispute is whether Liberty Mutual’s failure to inform a current customer, Grissom, he might be eligible for a richer insurance policy constitutes “claims handling” or is “insurance procurement.”

The key factor to determine if an interaction with an insurer is “claims handling” is the status of the insured at the time of the interaction between the parties. If the individual is already covered and in the midst of a non-lapsed insurance policy, the interactions between the insurer and insured, including renewals of insurance, are “claims handling” subject to preemption. Grissom was insured by Liberty Mutual at the time of his interactions with Liberty Mutual. He filed a claim for coverage which was granted and paid in full.

Only after Grissom discovered his eligibility for additional subsidized coverage did he raise the negligent misrepresentation claim to obtain additional covered payments. Grissom is alleging that while he was already insured, his insurer should have been more proactive in informing him of his eligibility for additional subsidized flood insurance coverage. Because Grissom’s dispute with Liberty Mutual relates to his renewal of a policy already in place—claims handling, not the initial procurement of the insurance policy — the Fifth Circuit concluded that Grissom’s state law claim is preempted.

Federal Funds

Liberty Mutual alleges that the district court erred in submitting this case to the jury because the federal government would be required to pay any damages award and has not affirmatively and unambiguously granted the right to a jury trial for such matters. Grissom does not dispute that if federal funds are at stake a jury trial is inappropriate. However, he alleged FEMA is not obligated to pay damage awards that result from omissions by WYO insurance companies because the insurance company receives a commission for signing up insureds. By submitting the case to the jury, the district court implicitly determined that the Arrangement which forms a contract between WYO insurers and FEMA does not require FEMA to either defend or indemnify Liberty Mutual.

The NFIP establishes private insurers “as fiscal agents of the United States.” [42 U.S.C. § 4071(a)(1).] The federal government pays flood insurance claims and reimburses costs, including defenses costs, for adjustment and payment of claims by private insurers in the WYO program. The federal government will both indemnify and defend WYO insurers in the program for many insurance and litigation expenses unless the litigation is grounded in actions by the WYO Company that are significantly outside the scope of this Arrangement, and/or involves issues of agent negligence.

The right to a jury trial has not been extended by the government to WYO cases because the line between between a WYO company and FEMA is too thin to matter for the purposes of federal immunities. Because FEMA is presumed to be paying both the litigation expenses and any resulting damage award, the Fifth Circuit concluded that the district court erred in submitting this case to the jury.

Negligent Misrepresentation by Insurer in Mississippi

Although the state law claim is preempted, Grissom’s negligent misrepresentation by an insurer claim also does not find a basis in Mississippi law. In Mississippi, a plaintiff must meet five factors to succeed in a claim of negligent misrepresentation:

1. a misrepresentation or omission of a fact;
2. that the representation or omission is material or significant;
3. that the person/entity charged with the negligence failed to exercise that degree of diligence and expertise the public is entitled to expect of such persons/entities;
4. that the plaintiff reasonably relied upon the misrepresentation or omission; and
5. that the plaintiff suffered damages as a direct and proximate result of such reasonable reliance.

Mississippi follows the legal principal that the purchase of insurance is an arms-length transaction and no fiduciary duty arises between an insurance company or its agents and the purchaser of the insurance. In Mississippi, a claim of fraud by omission arises only where the defendant had a duty to disclose material facts purportedly omitted. Insurance Agents in Mississippi do not have an affirmative duty to advise buyers regarding their coverage needs. Liberty Mutual was not required to provide advice to insurance customers. Because Liberty Mutual was not offering insurance advice, was not a fiduciary of Grissom, and did not offer any statement to Grissom to imply the lack of alternative insurance options, Mississippi law would not recognize negligent misrepresentation as a cause of action against Liberty Mutual and the submission of negligent misrepresentation to the jury was error.

The Fifth Circuit reversed the ruling of the district court with instructions to dismiss Grissom’s claim.

ZALMA OPINION

Flood insurance is not insurance in the usual sense but is a federal entitlement program that is called “insurance.” It is treated differently than the type of policies actually issued by an insurance company. In this case, Liberty Mutual, did not underwrite and insurance policy but simply acted as a representative of the federal government and took a fee for handling the issuance of the policy and the handling of claims.

More importantly, the Fifth Circuit accepted the rule in Mississippi and most states that the relationship between an insurance agent and his or her customer is not a fiduciary relationship and does not remove from the person to be insured the duty to take care of his or her needs. The insurer and the agent are only obligated to obtain for the insured that which the insured asked for and not to force them to buy more or better insurance. Mr. Grissom got the insurance he ordered. He was not interested in a better insurance coverage until Katrina destroyed his house. Although hindsight is always 20/20 an insurer should not be required to pay for what hindsight told Mr. Grissom he should have bought.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

The Supreme Court of Colorado was asked to review an unpublished decision of the Court of Appeal in in Sunahara v. State Farm Mutual Automobile Insurance Co., No. 09CA0599, slip op. (Colo. App. May 6, 2010) (not selected for official publication), to determine whether the court of appeals erred under Colorado’s collateral source doctrine when it admitted evidence of the amounts paid by Respondent State Farm Mutual Automobile Insurance Company (State Farm) for medical expenses that Petitioner Jack Sunahara incurred as a result of a car accident in Petitioner v. Respondent, 2012 CO 30 (Colo. 04/30/2012).

Facts

A vehicle driven by Raymond Mallard collided with Sunahara in a parking lot. Sunahara alleged that the accident resulted in injuries to his back and shoulders that required surgery and other medical treatment. He carried a motor vehicle insurance policy with State Farm at the time of the accident that included underinsured motorist (UIM) coverage. Sunahara reported the incident to State Farm pursuant to that policy. State Farm opened a claim file, made initial liability assessments, and established reserves and settlement authority for the case. State Farm then covered Sunahara’s medical expenses, paying approximately $14,000 in full satisfaction of the medical bills even though Sunahara’s healthcare providers billed him over $50,000 for their services.

Sunahara subsequently sued Mallard for negligence. The action settled and Mallard’s insurance company paid Sunahara $100,000 in damages — the limit on Mallard’s policy.

Seeking additional damages, Sunahara then filed a UIM claim with State Farm pursuant to the UIM portion of his insurance policy. Sunahara’s UIM coverage had a $2,000,000 limit and provided that State Farm would pay damages for bodily injury that Sunahara was legally entitled to collect from the owner or driver of an underinsured motor vehicle. State Farm argued in response to Sunahara’s claim that Sunahara was at least partially at fault for the accident with Mallard, and that it was not required to pay Sunahara any damages pursuant to the UIM policy.

Sunahara filed a motion in limine to exclude evidence of the discounted amount State Farm paid to satisfy Sunahara’s medical bills. The trial court denied the motion, reasoning that the $14,000 paid was admissible for the purpose of determining the reasonable value of Sunahara’s medical expenses. The jury returned a verdict in Sunahara’s favor, but also found that Sunahara was 25 percent at fault for the accident. It awarded him $0 in past economic damages, $50,000 for non-economic damages, $50,000 for physical impairment, and $11,000 for future economic damages.

Admissibility of Evidence of the Amounts Paid by a Collateral Source

The Supreme Court concluded that the court of appeals erred under the common law evidentiary component of the collateral source rule when it affirmed the trial court’s admission of evidence of the amounts paid by State Farm to cover Sunahara’s medical expenses because a trial court may not admit evidence of the amounts paid by a collateral source to reimburse healthcare providers for medical expenses incurred by an insured plaintiff.

Colorado’s collateral source rule consists of two components:

(1)     a codified post-verdict setoff rule; and

(2)     a pre-verdict evidentiary component, described by the common law.

The second component remains in effect, applies in this pre-verdict case, and excludes evidence of collateral source benefits because such evidence could lead the fact-finder to improperly reduce the plaintiff’s damages award on the grounds that the plaintiff already recovered his loss from the collateral source.

Under the proper legal standard, evidence of the amount paid by State Farm to satisfy Sunahara’s medical bills is inadmissible because it is evidence of a collateral source benefit.

The Supreme Court concluded that Sunahara is entitled to a new trial on the issue of damages because the trial court’s erroneous admission of the amounts paid evidence prejudiced Sunahara’s economic damages award.

In a dissent, three justices stated they would hold that the fact that a medical provider accepted an amount less (here, $14,000) than the amount billed (here, $50,000) as full payment is admissible because it is relevant to the reasonable value of medical services provided, and does not run afoul of the collateral source doctrine because the identity of who paid the medical provider (in this case, plaintiff’s health insurer) is irrelevant.

They disagreed with the majority’s assertion that because the jury knew plaintiff’s medical providers accepted less than $50,000 in payment for the medical bills, it awarded no past economic damages. The majority does not consider an alternative explanation of the jury’s award – namely, that the nature of the plaintiff’s injuries was hotly contested at trial by both sides, including the fact that he had significant pre-existing injuries to both of his shoulders and his lower back.

ZALMA OPINION

The decision of the Colorado Supreme Court is an invitation to fraud. Just because a doctor or health care provider bills $50,000 for its services but agrees to accept only $14,000 as full payment for their services that is clear and convincing evidence of the true value of the services rendered. If Mr. Sunahara had no insurance, was billed $50,000 by his doctors and they agreed to accept $14,000 from him as the true value of his services, he should not be allowed to collect from a tortfeasor an additional $36,000 because his doctor overbilled.  That fact should not be kept from a jury any more than when a house is destroyed shortly after a sale could the owner assert its value was the $1 million asking price when it sold for $150,000. That the house was over priced is not an example of its true value, the true value is what the seller was willing to take from the buyer and that the buyer was willing to pay.

Since it costs nothing for the doctor to bill $50,000 for $14,000 in services because he is still paid what he is owed, that bill should be questioned. The collateral source rule should not, nor can it, prevent the defendant from calling the doctor as a witness and forcing the doctor to testify to the amount he is willing to accept as the true value of his services.

I had some medical problems lately and just reviewed the report from Medicare and my insurer on what they were billed and what was accepted by the health care providers. The true value of the services I received, like the true value of what Sunahara received, was what the providers accepted, not what they billed which, in my case, was about as excessive as that in this case.

Recently, the California Supreme Court, in Rebecca Howell v. Hamilton Meats & Provisions, 257 P.3d 1130, 52 Cal.4th 541, 129 Cal.Rptr.3d 325 (Cal. 08/18/2011), found that “[a]n injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial. In so holding, we in no way abrogate or modify the collateral source rule as it has been recognized in California; we merely conclude the negotiated rate differential–the discount medical providers offer the insurer–is not a benefit provided to the plaintiff in compensation for his or her injuries and therefore does not come within the rule.” To rule otherwise, as did the Supreme Court of Colorado, allows the plaintiff to be unjustly enriched and recover as economic damages more than he was obligated to pay.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

In this, the ninth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), ZIFL reports on:

1.    Barry Zalma reports on an interesting appellate decision that convicted a person for failing to advise his insurer that he intentionally caused a fire at his property. The arson and the failure to disclose the arson to the insurance carrier occurred at different times. The arson occurred at the time of the fire. The failure to disclose the arson to the insurance carrier occurred in the following days and months as the insurance adjuster investigated the insurance claim. Because the two crimes constituted a course of conduct divisible in there is no reason to preclude punishment for both crimes. The California Statute, therefore, requires that an insured who has attempted an insurance fraud, advise his or her insurer of the fact or make no claim at all. Failure to do so is a criminal act. This is a weapon against fraud that is seldom used but should be used often when evidence of fraud exists.

2.    Chapter VIII of the serialized novel “Murder and Insurance Don’t Mix.”

3.    Zalma on Insurance – the blog and Zalma Books.

4.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 400 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 are available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Zalma on Insurance Makes Top 50

In the Maryland motor vehicle insurance law, the phrase “first named insured” makes what the Court of Appeals of Maryland calls “a cameo appearance” in
Kelly Swartzbaugh, et al. v. Encompass Insurance Company of America, No. 100 (Md. 04/25/2012) It serves only to identify the person who has authority to accept or waive certain types of coverage under a policy. Because Maryland statutes fail to define the phrase “first named insured” the highest court in Maryland was called upon to explain its meaning and determine if a waiver of uninsured motorist or underinsured motorist cover when waived by the applicant could be ignored because the person signing the waiver was not named first in line in the policy applications.

Motor Vehicle Insurance

Since the early 1970s, Maryland’s compulsory motor vehicle insurance law has been designed to ensure that those who own and operate motor vehicles registered in the State are financially able to pay compensation for damages from motor vehicle accidents. That law makes automobile liability insurance a prerequisite to the registration of a motor vehicle. The law specifies certain types of coverage that a policy must contain. As a result, policies will generally contain similar or identical provisions in order to comply with Maryland law, although there is no standard automobile insurance policy in Maryland.

Required Coverages

A policy must provide protection against damages caused by uninsured motorists, sometimes referred to as “UM coverage.”  It is well-settled that UM coverage includes coverage for accidents involving under-insured, as well as uninsured, motorists.

Waivers of UM Coverage

With respect to UM coverage, State law allows for waivers of the coverage that the law otherwise specifies. In particular, under the State insurance code, UM coverage under a motor vehicle insurance policy is by default equal to the liability coverage under the policy.  This level of coverage may be waived, however, in favor of a lesser amount at least equal to the minimum coverage required by the motor vehicle law. The waiver must be in writing on a form devised by the state that complies with certain statutory standards concerning format and content.  The waiver is to be executed by the “first named insured.” Again, the waiver of higher limits of coverage will reduce the premium owed for the policy.

FACTS

The facts are straightforward and not in dispute. This case concerns an insurance policy purchased by Kenneth and Lynne Swartzbaugh and its potential coverage of an accident involving their daughter, Kelly Swartzbaugh. In July 1998, Lynne, who handled the family finances with respect to insurance and related items, applied for insurance coverage for the family with a local independent insurance broker. She ultimately purchased a “package” policy that included both homeowners and motor vehicle insurance with Respondent Encompass Insurance Company. With respect to motor vehicle insurance, the policy provided liability coverage in the amounts of $250,000 per person and up to $500,000 per accident. As later amended, it listed three vehicles, and named Kenneth, Lynne, and Kelly as drivers. Lynne executed a waiver of higher UM coverage on the standard form.

By its terms, consistent with Maryland law, the waiver remained in effect until withdrawn. In March 2008, Kelly was injured while a passenger in an accident involving an under-insured driver. The driver’s insurer tendered the limits of his policy. Because the higher limits of UM coverage on the Petitioners’ own motor vehicle policy had been waived, she was unable to collect further damages from Encompass under that policy’s UM coverage. The Petitioners then brought a declaratory judgment action in the Circuit Court for Carroll County, seeking a declaration that the waiver was ineffective on the ground that Lynne was not in fact the “first named insured” on the policy. The circuit court disagreed and ruled that the waiver signed by Lynne was valid and enforceable.

Analysis

Petitioners challenge the effectiveness of Lynne’s waiver of enhanced UM coverage. The effectiveness of the waiver turns on whether Lynne was properly considered the “first named insured” with respect to the Petitioners’ motor vehicle insurance policy at the time she executed the waiver in 1998. The determination of this question is, in part, a matter of statutory construction — for it is the statute that specifies that the waiver is to be made by the “first named insured.”

Neither the State motor vehicle law nor the insurance code explicitly requires any particular individuals to be named in, or insured under, a motor vehicle insurance policy. The law literally requires that vehicles, not specific individuals, be covered.  Neither the motor vehicle law nor the insurance code necessarily dictates the identity of the individuals to be insured under a policy, much less designates who should be “first named insured.”

A motor vehicle insurance policy also typically covers various classes of individuals who are not specifically named in the policy. For example, some individuals insured under a motor vehicle policy are covered by “omnibus” clauses that describe categories of individuals, such members of the policyholder’s family or permissive users of the automobile. Thus, it appears likely that the concept of a “named insured,” at least in the context of an automobile insurance policy, distinguishes those individuals covered by the policy who are specifically named in the policy, in contrast to those who are covered but only generally described and not named.

The Court of Special Appeals found no evidence in the legislative history that, in requiring the waiver to be made by the “first named insured,” the Legislature was expressing a policy choice keyed to name order.  The court concluded that the parties to an insurance policy could designate the “first named insured” in the policy documents, regardless of the order in which insured individuals are listed.

In a space labeled “Policyholder,” Kenneth’s name appears above Lynne’s, though this does not appear to be a complete listing of named insured individuals as Kelly’s name does not appear in this section of the policy. All three Petitioners are named as “rated drivers” in several places in the policy, but the order of names differs — Kenneth’s name appears first in one instance and Lynne’s name appears first in another.

The one place in the policy documents that expressly uses the phrase “first named insured” is the form for the waiver of enhanced UM coverage. Lynne signed this form.

The UM coverage waiver form that Lynne executed was devised by the state in compliance with the legislative directive. On that form, the signatory avers that he or she is the “first named insured/applicant” and the line for signature identifies the signatory as the “First Named Insured.” This is consistent with the view that the individual who acted for the other insured parties in applying for insurance coverage would presumably be “first named insured” for purposes of a waiver once the policy was issued.  The highest court in Maryland noted that if one could always identify the first named insured simply by reference to name order, a certification of that status would be unnecessary. The certification on the waiver form thus anticipates the possibility that one who is named later on other policy documents might act for the other insured parties.

The highest court in Maryland agreed with the intermediate appellate court that the use of the phrase “first named insured,” at least in the context of motor vehicle insurance, has a notion of primacy. The policy underlying the waiver provision was to allow insurance consumers to make an informed choice between enhanced UM benefits at a higher premium and a lower level of benefits with a correspondingly lower premium.

The Court concluded that the named insureds are entitled to determine who will exercise that choice and serve as primary or first named insured. In the absence of a specific designation in the policy documents, the waiver form fills that gap by requiring the individual who executes the form to certify his or her status as “first named insured.”

Lynne fit the statutory definition of a “named insured.” There is no question that Lynne was the household member in charge of procuring and making decisions about insurance. She decided to waive the enhanced UM coverage in favor of a lower premium. She certified herself to be “first named insured/applicant” in the waiver form.

In Maryland, in the context of motor vehicle insurance policy, the phrase “first named insured” refers to a person insured under the policy and specifically named in the policy who acts on behalf of the other insured parties and is designated as “first named insured” in the policy documents. The injured party was, therefore, limited to a recovery of the limits chosen for UIM coverage.

ZALMA OPINION

This is a case that wended its way through all available courts in Maryland because, after the accident, with 20/20 hindsight, the insured sought to revoke the waiver for which they received a major premium discount, and force their insurer to pay limits it did not agree to pay at the time the policy was issued.

Insurance is a contract where the insured only obtains the coverage sought and should never be allowed to change the terms of the policy after an accident to provide coverage they refused but which, after the accident, they determined they needed.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2857 0 http://zalma.com/blog/?p=2853 http://zalma.com/blog/?p=2853#comments Fri, 27 Apr 2012 23:53:00 +0000 Barry Zalma http://zalma.com/blog/?p=2853 Continue reading →]]> Limitations on Punitive Damages

When a lawyer asks for punitive damages against an insurer for bad faith conduct he or she will always ask the jury to “teach the insurer a lesson” to stop it from doing the same to others. The argument has been successful in thousands of bad faith suits brought from California to Florida and from Texas to Wyoming. The United States Supreme Court has weakened, if not destroyed, that argument in Philip Morris USA, v. Williams, Personal Representative of Estate of Williams, Deceased, on Certiorari to the Supreme Court of Oregon, No. 05-1256 decided February 20, 2007.  The plaintiff’s lawyer convinced the jury to award $79.5 million in punitive damages with a similar argument when he asked the jury to:

        [t]hink about how many other Jesse Williams in the last 40 years in the State of Oregon there have been. … In Oregon, how many people do we see outside, driving home … smoking cigarettes? … [C]igarettes … are going to kill ten [of every hundred].

This is the same argument made by insurance bad faith lawyers – that the insurance company (like the tobacco companies) is hurting everyone they insure and must be punished sufficiently to protect the world of insurance buyers:

        Think about how many other John Smith’s in Oregon have had their claims wrongfully denied. How many people do we see outside, driving home, whose financial lives were destroyed by ABC Insurance Company not living up to its promises.

The U.S. Supreme Court has put a stop to that practice. Juries can no longer be confused. They must be cautioned that no matter how awful they think the insurers actions were the punishment they can impose is limited to a consideration of the harm done to the plaintiff alone. This ability to punish is also limited by the Supreme Court’s findings in State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408, 416 where due process is limited to a single digit multiplier of compensatory damages.

In the Phillip Morris case a jury found that Jesse Williams’ died because he smoked cigarettes manufactured by Philip Morris who knowingly and falsely led him to believe that smoking was safe. The jury awarded the estate $821,000 in compensatory damages for deceit and $79.5 million in punitive damages, The Oregon  Supreme Court rejected Philip Morris’ arguments that the trial court should have instructed the jury that it could not punish Philip Morris for injury to persons not before the court, and that the roughly 100-to-1 ratio the $79.5 million award bore to the compensatory damages amount indicated a ”grossly excessive” punitive award.

The US Supreme Court, perhaps because of errors made in the trial court, reversed and remanded the case back to Oregon because the “punitive damages award based in part on a jury’s desire to punish a defendant for harming nonparties amounts to a taking of property from the defendant without due process.”  It did not rule on the 100-to-1 ratio of punitive damages to compensatory damages because it was not necessary to reach that point.

The Supreme Court has ruled in the past that the Constitution imposes certain limits, in respect both to procedures for awarding punitive damages and to amounts forbidden as ”grossly excessive.” (Honda Motor Co. v. Oberg, 512 U.S. 415, 432 (1994);  Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443 (2001);  BMW of North America, Inc. v. Gore, 517 U.S. 559, 568; and  Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443.

In a decision made by the bare majority of the court with Justice Bryer writing for the majority stated the rule:

“In our view, the Constitution’s Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties or those whom they directly represent…”

The Due Process Clause prohibits a State from punishing an individual without first providing that individual with the ability to present all available defenses. A defendant, like an insurer, faced threatened with punishment for injuring nonparty victims who have the right to bring their own individual suits is unable to defend against the charge since it cannot bring in evidence of its proper claims handling with regard to the unnamed and unknown victims. As Justice Bryer pointed out doing so would establish a “near standardless dimension to the punitive damages…” calculations of the jury.

Noting that the Supreme Court could find no authority supporting the use of punitive damages awards for the purpose of punishing a defendant for harming others the court also recognized that evidence of actual harm to nonparties can help show that the conduct also posed a substantial risk of harm to the general public, and so was particularly reprehensible.

The Oregon Supreme Court was unable to formulate a method by which evidence of reprehensibility could be admitted and still protect against a violation of the defendant’s due process right to not be punished for harm done to nonparties. Justice Bryer concluded that Oregon’s Supreme Court was wrong, such a method can be formulated:

        In particular, we believe that where the risk of that misunderstanding is a significant one-because, for instance, of the sort of evidence that was introduced at trial or the kinds of argument the plaintiff made to the jury-a court, upon request, must protect against that risk. Although the States have some flexibility to determine what kind of procedures they will implement, federal constitutional law obligates them to provide some form of protection in appropriate cases.

        [W]e remand this case so that the Oregon Supreme Court can apply the standard we have set forth. Because the application of this standard may lead to the need for a new trial, or a change in the level of the punitive damages award, we shall not consider whether the award is constitutionally ”grossly excessive.” We vacate the Oregon Supreme Court’s judgment and remand the case for further proceedings not inconsistent with this opinion.

The insurer faced with an argument that the jury teach a lesson to the insurer must demand that the court protect against the risk of a misunderstanding and make it clear that punishment can only be directed at the damages caused to the plaintiff and require the court to advise the jury that it cannot seek to punish Philip Morris for injury to other persons not before the court.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

On September 27, 2011 I wrote about a holding of the Virginia Court of Appeal at http://zalma.com/blog/?p=1792 where the court concluded that an intentional act cannot be an occurrence. The parties appealed to the Supreme Court of Virginia who, in The AES Corporation v. Steadfast Insurance Company, No. 100764 (Va. 04/20/2012), was called upon to decide whether the trial court and Court of Appeal erred because the pleadings included reference to the word “negligence.”

The Supreme Court of Virginia considered whether the suit against The AES Corporation (AES) did not allege an “occurrence” as that term is defined in AES’s contracts of insurance with Steadfast Insurance Company (Steadfast), and that Steadfast, therefore, did not owe AES a defense or liability coverage.

Background

AES is a Virginia-based energy company that holds controlling interests in companies specializing in the generation and distribution of electricity in numerous states, including California. Steadfast is an Illinois-based company and indirect subsidiary of Zurich Financial Services, a global insurance provider. AES paid premiums to Steadfast for commercial general liability (CGL) policies from 1996 to 2000 and 2003 to 2008.

In February 2008, the Native Village of Kivalina and City of Kivalina (Kivalina), a native community located on an Alaskan barrier island, filed a lawsuit (the Complaint) in the United States District Court for the Northern District of California against AES and numerous other defendants for allegedly damaging the village by causing global warming through emission of greenhouse gases. AES requested Steadfast provide a defense and insurance coverage, pursuant to the terms of the CGL policies, for the claims alleged in the Complaint. Steadfast provided AES a defense under a reservation of rights and filed a declaratory judgment action, which is the subject of this appeal, in the Circuit Court of Arlington County.

In the declaratory judgment action, Steadfast claimed that it did not owe AES a defense or indemnity coverage for damage allegedly caused by AES’s contribution to global warming based on three grounds:

1. the Complaint did not allege “property damage” caused by an “occurrence,” which was necessary for there to be coverage under the policies;
2. any alleged injury arose prior to the inception of Steadfast’s coverage; and
3. the claims alleged in the Complaint fell within the scope of the pollution exclusion stated in AES’s policies.

The parties subsequently filed cross-motions for summary judgment, both claiming that whether Steadfast had a duty to defend AES against the Complaint could be decided by examining the “eight corners” of the Complaint and the CGL policies. The circuit court denied AES’s motion for summary judgment and granted Steadfast’s motion for summary judgment, holding that the Complaint does not allege an “occurrence” as that term is defined in the CGL policies, and thus, the allegations in the Complaint are not covered under those policies.

The Insurance Policies

In each of the CGL policies AES purchased from Steadfast, Steadfast agreed to defend AES against suits claiming damages for bodily injury or property damage, if such damage “is caused by an ‘occurrence.’ ” The policies define “occurrence” as follows: ” ‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The policies specify that Steadfast has no duty to defend or indemnify AES against damage suits to which the policies do not apply.

The Complaint

The complaint alleged that Kivalina is located on the tip of a small barrier reef on the northwest coast of Alaska, approximately seventy miles north of the Arctic Circle. As pertinent to this appeal, in the Complaint, Kivalina alleges that AES engaged in energy-generating activities using fossil fuels that emit carbon dioxide and other greenhouse gases, and that the emissions contributed to global warming, causing land-fast sea ice protecting the village’s shoreline to form later or melt earlier in the annual cycle. This allegedly exposed the shoreline to storm surges, resulting in erosion of the shoreline and rendering the village uninhabitable.

The Complaint alleged that AES “intentionally emits millions of tons of carbon dioxide and other greenhouse gases into the atmosphere annually.”  The Complaint further alleges that AES “knew or should have known of the impacts of [its] emissions” of carbon dioxide, but that “[d]espite this knowledge” of the “impacts of [its] emissions on global warming and on particularly vulnerable communities such as coastal Alaskan villages,” AES “continued [its] substantial contributions to global warming.” Kivalina then dedicates sixteen pages and sixty-six paragraphs of its sixty-nine page Complaint to explaining global warming.

The Complaint alleges a civil conspiracy by power, coal and oil companies to mislead the public about the science of global warming.  The Complaint then states three claims for relief against AES. Two causes of action are for nuisance and the other is for concert of action. The first claim for relief is entitled “Federal Common Law: Public Nuisance.”  The second claim for relief asserted against AES is entitled “State Law: Private and Public Nuisance.” The last claim for relief against AES is entitled “Concert of Action.” Kivalina alleges that the “[d]efendants have engaged in and/or are engaging in tortious acts in concert with each other or pursuant to a common design” in creating, contributing to and/or maintaining a public nuisance, specifically, global warming.

Analysis

Both AES and Steadfast agree that it is a well-established principle, consistently applied in this Commonwealth, that only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured. This principle is commonly known as the “eight corners rule” because the determination is made by comparing the “four corners” of the underlying complaint with the “four corners” of the policy, to determine whether the allegations in the underlying complaint come within the coverage provided by the policy.

The relevant policies provide coverage for damage resulting from an “occurrence,” and define an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The terms “occurrence” and “accident” are synonymous and refer to an incident that was unexpected from the viewpoint of the insured. The Supreme Court has held in the past that an “accident” is commonly understood to mean an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated.  An accidental injury is one that happens by chance, unexpectedly, taking place not according to the usual course of things, casual or fortuitous.

Kivalina alleges that AES intentionally released tons of carbon dioxide and greenhouse gases into the atmosphere as part of its electricity-generating operations. The Virginia Supreme Court has held in numerous cases that an intentional act is neither an “occurrence” nor an “accident” and therefore is not covered by the standard policy. If a result is the natural or probable consequence of an insured’s intentional act, it is not an accident.

However, even though the insured’s action starting the chain of events was intentionally performed, when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision. In such a context, the dispositive issue in determining whether an accidental injury occurred is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been reasonably anticipated or the natural or probable consequence of the insured’s intentional act. For coverage to be precluded under a CGL policy because there was no occurrence, it must be alleged that the result of an insured’s intentional act was more than a possibility; it must be alleged that the insured subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.

Resolution of the issue of whether Kivalina’s Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that were not natural or probable consequences of AES’s deliberate act of emitting carbon dioxide and greenhouse gases.

AES notes that the Complaint alleges that AES intentionally or negligently created the nuisance, global warming, and that the defendants’ concerted action in causing the nuisance constitutes a breach of duty.

Applying the “eight corners” rule, the Supreme Courts precedent required it to consider the terms of the relevant insurance policies and the allegations in the Complaint. The policies issued to AES do not provide coverage or a defense for all suits against the insured alleging damages not caused intentionally. Likewise, the policies in this case do not provide coverage for all damage resulting from AES’s negligent acts. The relevant policies only require Steadfast to defend AES against claims for damages for bodily injury or property damage caused by an occurrence or accident.

In the Complaint, Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.

Allegations of negligence are not synonymous with allegations of an accident. In this instance, the allegations of negligence do not support a claim of an accident. Even if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.

The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury or property damage is the relevant intentional or negligent act alleged in the complaint. The complaint alleges that AES was “negligent” only in the sense that it “knew or should have known” that its actions would cause injury no matter how they were performed.

Under the CGL policies, Steadfast would not be liable because AES’s acts as alleged in the complaint were intentional and the consequences of those acts are alleged by Kivalina to be not merely foreseeable, but natural or probable. Where the harmful consequences of an act are alleged to have been not just possible, but the natural or probable consequences of an intentional act, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an “accident” even when the complaint alleges that such action was negligent.

Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases are something that AES knew or should have known about. If an insured knew or should have known that certain results were the natural or probable consequences of intentional acts or omissions, there is no “occurrence” within the meaning of a CGL policy. Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

ZALMA OPINION

Although global warming is the gravamen of the complaint filed by the village of Kivalina this is not a pollution or global warming case. This is a case that explains the meaning of the term “occurrence” as used in a CGL policy of insurance and that there is no possibility that an intentional act can be an “occurrence.”

Fortuity is an essential element of every insurance policy. If the event is not fortuitous there can never be coverage.

Barry Zalma

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

When it took more than 20 months to resolve a claim for the theft and burning of a vehicle, Rocky Walker and Kristi Walker (“Walkers”) sued their insurer for bad faith even though the claim was eventually paid. The trial court granted summary judgment for the insurer because there was no evidence of bad faith, Progressive Direct Insurance Company and the Walkers appealed. The Tenth Circuit, in Rocky Walker; Kristi Walker v. Progressive Direct Insurance Company, Tenth Circuit, No. 11-5122, March 23, 2012 [http://scholar.google.com/scholar_case?case=4098360186012591787&q=%22rocky+walker%22&hl=en&as_sdt=2003] was called upon to resolve the dispute.

FACTS

Plaintiffs Rocky and Kristi Walker appealed from the district court’s decisions granting summary judgment in favor of defendant Progressive Direct Insurance Company and denying the Walkers’ motion to alter or amend the judgment.

The Walkers were covered by a Progressive insurance policy for their 2003 Chevrolet Tahoe. On July 29, 2008, Ms. Walker called Progressive to report that their vehicle had been stolen while they were out of town on vacation. The vehicle was recovered, but it had been burned and suffered damage.

On August 22, Progressive decided to refer the claim to its Special Investigations Unit (“SIU”) because:

(1)     the vehicle was for sale at the time of the loss,
(2)     the column was not compromised,
(3)     the vehicle was a “gas guzzler”; and
(4)     both sets of keys were in the Walkers’ possession at the time of loss.

An expert for Progressive testified by affidavit that these factors are “generally recognized indicators of insurance fraud.”

On August 25, Progressive notified the Walkers that there were certain coverage issues with their claim and that it was being investigated by the SIU.

On September 9, Progressive requested that the Walkers provide them with a key for inspection and copies of vacation photographs to prove that they were out of town when the theft occurred. As of September 16, Progressive had not received the requested items so it again asked the Walkers to provide them. On September 25, Progressive received copies of the vacation photos and a key. Upon review of the photos, it appeared as though the photos had been altered.

On October 7, Progressive’s claim file notes that a “possible issue surfaced with the keys.” The Walkers’ stated that they had only two keys to the vehicle and had both keys in their possession at the time of the theft, but a Progressive employee discovered the existence of a third key. On that same day, a Progressive employee left a voicemail message for Ms. Walker asking for a call back, requesting receipts and further documentation from their vacation, advising her that the vacation photos did not seem to be original photos, and informing her that Progressive would like to speak with the other parties who accompanied the Walkers on vacation. Progressive did not hear back from Ms. Walker. On October 16, Progressive sent a letter to the Walkers by regular and certified mail following up on its request for receipts from the Walkers’ vacation.

Progressive’s claim file notes that the origin of the third key remained unresolved as of November 3. The next day, however, the claim file notes that Progressive had authorized coverage for the loss and that the documentation had shown the Walkers were not in town on the date of loss. On November 17, Progressive notified the Walkers that it had completed its coverage review, had resolved the coverage issue, and would be providing coverage for their loss.

On June 12, 2009, the Walkers brought suit in state court asserting that Progressive acted in bad faith in the handling of their insurance claim. Progressive removed the action to federal court and then moved for summary judgment. The district court granted summary judgment in Progressive’s favor.

ANALYSIS

To establish a bad-faith claim, the Walkers must show, among other things, that Progressive’s actions were unreasonable under the circumstances and that Progressive failed to deal fairly and act in good faith in the handling of the Walkers’ claim. When considering a motion for summary judgment on a bad-faith claim under Oklahoma law, a district court must first determine, under the facts of the particular case and as a matter of law, whether insurer’s conduct may be reasonably perceived as tortious.

In Progressive’s motion for summary judgment, it argued that the Walkers’ had failed to offer any evidence showing that its actions were unreasonable or taken in bad faith. The Walkers alleged that Progressive conducted an untimely and improper investigation based on Progressive’s handling of two issues—the existence of the third key to their car and the authenticity of the vacation photos. Specifically, the Walkers argued that Progressive’s actions were unreasonable because the insurance company could have discovered easily that the pictures were valid and that the third key was created after the loss. The Walkers also complained that Progressive allowed the “key” issue to be presented to its expert, Barry Zalma, who used that to accuse the Walkers of fraud in his expert report.

With respect to the third-key issue, the district court stated that the Walkers’ “reliance on Zalma’s use of the third key in his expert report is misplaced, as this report was prepared in the course of this litigation and was not part of Progressive’s investigation, making it inapplicable to [the Walkers'] bad faith claim.”  Finally, the court explained that an insurer’s investigation need only be reasonable, not perfect.

THE EXPERT REPORT

Although not detailed in the opinion the affidavit of the expert stated:

A red flag or fraud indicator means facts, circumstances or events which, singly or combination, support an inference that insurance fraud may have been committed and a thorough investigation is required.

In this case SIU investigators were assigned after the insurer discovered the following generally recognized indicators of insurance fraud: (1) the subject vehicle is “for sale” at the time of loss; (2) the steering column is not compromised; (3) the subject vehicle is a gas guzzler; (4) all keys are in the insured’s possession after the reported loss; (5) an auto theft where the allegedly stolen vehicle was also burned; (6) the vehicle was reportedly stolen from a location not the place where the vehicle is normally garaged; and (7) when the vehicle was recovered there were no parts missing.

The affidavit presented in support of the Motion for Summary Judgment did not accuse the Walkers of fraud and was written to explain to the court the reasons for an SIU investigation.

The Tenth Circuit noted that the Walkers’ brief contained a meager five pages of argument; there were no citations to the district court record in any of the argument sections and many of the assertions are conclusory and fail to sufficiently explain how the district court erred. For example, the Walkers offer no legal authority for their argument and no citations to the record to demonstrate how Progressive failed to address their undisputed material facts.

The Walkers’ bad-faith claim was based on Progressive’s handling of the existence of the third key and its position that the vacation photos were not originals. Finally, the Walkers present a mere two sentences in support of their claim that the district court abused its discretion.

The Walkers also argued that it was twenty months before Progressive determined the origin of the third key and that Progressive’s expert accused them of felony insurance fraud in his expert report. This argument has no relevance to the Walkers’ bad-faith claim. The fact that the origin of the key was not determined until March 2010 did not impact the timeliness or the reasonableness of the investigation into the Walkers’ claim.

Once Progressive verified that the Walkers were out of town during the date of loss, it authorized coverage for the claim, even though the origin of the third key remained unresolved.

The Tenth Circuit agreed with Progressive that “it was irrelevant when Progressive determined the origin of the third key because Progressive agreed to pay for the repairs to the vehicle in November 2008. Likewise, the Tenth Circuit agreed with the district court that the expert report prepared for the litigation in February 2010 is inapplicable to the Walkers’ bad-faith claim, which was based on Progressive’s investigation from the date the claim was submitted on July 29, 2008, until coverage was authorized on November 17, 2008.

ZALMA OPINION

Because of the extent of insurance fraud in the United States insurance companies have been forced by state statutes to create Special Investigation Units (SIU) to thoroughly investigate suspicious claims in an effort to reduce the effect of insurance fraud. In this case the SIU did a complete investigation and decided to pay the claim although there were multiple red flags of fraud.

The insurer, having done what the law required, completing a thorough investigation finding the claim was a covered loss. Progressive paid the claim and was sued for bad faith. The court rightly looked at what was done and saw no bad faith because it cannot be an act of bad faith to conduct a complete investigation. I am pleased that I was able to assist the court in understanding the issues and why, when multiple red flags exist, an insurer is justified in doing a thorough investigation.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

When seeking to insure major risks, like a manufacturing facility, a professional broker will submit a manuscript policy to cover all the risks of loss faced by the insured. Insurers, however, are not obligated to accept all of the provisions of the manuscript policy wording and will usually amend the policy by endorsement to fit the risk the insurer is willing to take.

It is axiomatic that an endorsement supersedes the body of an insurance policy if the endorsement and the body of the policy are in conflict. In PBM Nutritionals, LLC v. Lexington Insurance Company, et al., No. 110669 (Va. 04/20/2012) the Virginia Supreme Court was asked to decide whether a pollution exclusion endorsements in a commercial property insurance policy precluded coverage for a multi-million dollar infant formula loss resulting from the infiltration of filter elements into the formula during the manufacturing process and whether the endorsements superceded the provisions in the body of the policy.

Background

PBM Nutritionals, LLC (PBM) filed a declaratory judgment action in the Circuit Court of the City of Richmond against Lexington Insurance Company (Lexington), Arch Insurance Company (Arch) and ACE American Insurance Company (ACE) (collectively the Insurers). PBM sought insurance coverage for its loss resulting from infiltration of filter elements into the infant formula it manufactured between January 22 and January 30, 2009. The Insurers claimed that the “Pollution Exclusion Endorsements” in their policies excluded coverage for PBM’s infant formula loss because the formula was “contaminated.”

The trial court found that the Insurers were not liable under the policies for PBM’s infant formula losses.

Facts

PBM manufactures and produces infant formula at a facility located in Burlington, Vermont. PBM manufactures its infant formula by mixing dry ingredients with hot, filtered water. To heat the water, PBM uses a heat exchanger, a vessel in which steam heats water flowing through tubes. A butterfly valve regulates the steam by opening or closing to allow more or less steam into the heat exchanger. Once heated, the water is released from the heat exchanger and passes through water filters, to ensure its cleanliness before it enters the liquefying tank where it mixes the dry ingredients. Industrial dryers then dry the created mixture into finished infant formula.

On December 14, 2008, PBM conducted a routine cleaning and discovered a defect in the butterfly valve. The defect allowed steam to leak into the steam tube when the valve was in the closed position. PBM ordered a replacement valve, but it did not arrive until late January 2009. Until January 20, 2009, PBM continued to manufacture infant formula and conduct routine cleanings. PBM’s testing revealed no problems with the infant formula produced during this period.

Between January 20 and January 22, 2009, PBM conducted an extensive cleaning of the system in preparation for the manufacture of its Profylac brand infant formula. PBM can complete a routine cleaning in 4 to 6 hours, but a Profylac cleaning takes between 42 and 46 hours. During this Profylac cleaning, water was sealed inside the heat exchanger water tube and in the filter housing. Because the butterfly valve was leaking, steam seeped into the heat exchanger and superheated the water in the water tube and the filter housing. Unable to withstand the superheated water, the water filters disintegrated into their constituent components of cellulose, melamine and other filter materials, which infiltrated the water.

After the Profylac cleaning, PBM began to manufacture its Profylac formula, unaware that it was using superheated water that contained melamine and other filter materials to mix the formula ingredients. When PBM tested the batches of Profylac made during this period, it discovered that 4 of the 25 batches contained levels of melamine that exceeded the Food and Drug Administration (FDA) limit of one part per million. The other 21 batches had melamine levels within the FDA limit, but PBM feared they contained disintegrated filter components.

The parties stipulated that the “[e]levated levels of melamine detected in infant formula batches made between January 22, 2009 and January 30, 2009 are evidence of the disintegration of the water filters and the infiltration of melamine and other filter media into the infant formula.” After notifying its insurance companies, PBM elected to destroy all batches manufactured after the Profylac cleaning. It sought insurance coverage for the formula it had to destroy.

The Insurance Policies

At the time of the loss, PBM had insurance policies with four different insurance companies. Specifically, PBM had property damage and business interruption policies with the Insurers. PBM also had a contamination insurance policy with Dornoch LTD with whom it settled.

The manuscript form policy sought by PBM’s broker contained a provision entitled “Pollution.” This provision, Paragraph 9(H), states:

        9. PERILS EXLUDED

        This policy does not insure:

        H. Pollution. The Insurers will not cover loss or damage solely and directly caused by or resulting from the presence, release, discharge or dispersal of “pollutants” unless the presence, release, discharge or dispersal is itself caused by a peril insured against.

        Definition: Wherever in this policy the word “pollutant(s)” occurs, it shall be held to mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. (Emphasis added)

The three insurers issued their own pollution exclusions. None of the pollution exclusions contained an exception for “insured perils” as contained in Paragraph 9(H) of the sought after manuscript form policy. The circuit court held that the pollution exclusion endorsements are clear and unambiguous and have the “effect of superseding Paragraph 9(H) to the extent that they conflict.”

Analysis

PBM claimed that the trial court erred in ruling that it was not entitled to insurance coverage from the Insurers for the unsafe formula that PBM destroyed. First, PBM argues that the circuit court erred by construing two directly conflicting policy provisions in favor of the Insurers and not the insured.

Under Virginia law, an insurance policy is not ambiguous merely because courts of varying jurisdictions differ with respect to the construction of policy language. Additionally, where the exclusion is not ambiguous, there is no reason for applying the rules of contra proferentem or liberal construction for the insured.

An exception that serves to negate the applicability of one particular exclusion does not create a “conflict” with another policy exclusion that operates to bar coverage. An exception to an exclusion only has bearing on that exclusion’s applicability-it is without force with respect to other provisions of the policy. An exception to an exclusion does not, nor can it, create coverage where none exists.

The exception to the pollution exclusion in Paragraph 9(H) does not in and of itself provide coverage. If coverage is excluded under the pollution exclusion endorsements, the exception to exclusion in Paragraph 9(H) does not restore that coverage. As a result, Paragraph 9(H) has no application to the pollution exclusion endorsements and the provisions of the policies do not conflict.

Pollution exclusions operated to preclude coverage. The law of this Commonwealth and the plain language of the insurance policy provide the answer. It is a basic tenet of Virginia law that the courts, when interpreting a contract, construe it as written and do not add terms the parties themselves did not include. A court should never insert by construction, for the benefit of a party, a term not expressed in the contract.

The endorsements are broad, but not unlimited.  According to their plain language, the pollution exclusions are not restricted to traditional environmental pollution

Since the parties stipulated that the formula contained disintegrated portions of filters that made the product unfit for human consumption and unmarketable as a result of the infiltration. As a result, the evidence established that the formula was “contaminated” as defined in the policies because disintegrated filter components caused a loss of value or marketability of the formula.

ZALMA OPINION

The Supreme Court of the state of Virginia applied a basic rule of insurance policy construction by applying the words of clear and unambiguous endorsements concerning pollution to its interpretation. The insured purchased a policy covering the risk with what appeared to be an inadequate limit of $2 million and sought to get additional coverage from policies that did not take the risk of pollution by contamination of the baby formula.

Clear and unambiguous policy wording in an endorsement must take precedence over the body of the policy and regardless of the need of the plaintiff the court refused to change the wording of a clear and unambiguous policy endorsement to help thee insured.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

Suspicious insurance claims have common attributes that insurers and fraud investigators have collated into lists to be used to determine whether further investigation is required.  Continually growing, these lists are known as the “red flags” or “indicators” of fraud.  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.

Standing alone, the red flags are not capable of establishing fraud they are useful in determining whether further investigation is required and, when presented in exceptional numbers, may lead to a conclusion that fraud was attempted.

Some common read flags of fraud can be found if the questions below are answered in the affirmative:

Personal Property

• Does the claim include a large amount of cash?
• Does the claim include numerous family heirlooms?
• Was all of the property inherited from a deceased relative (especially one in a foreign country)?
• Does the claim include any of the invoices or receipts for the items claimed lost?
• Does the insured have invoices or receipts for all of the items claimed lost?
• Does the insured have invoices for items claimed lost, but not for the items not stolen?
• Are the receipts suspicious in any way (e.g., have no invoice number, charge no sales tax)?
• Is the insured willing to accept an inordinately small settlement rather than document all claimed losses?
• Has any of the property lost or destroyed been advertised for sale?
• Does the claim include the loss of numerous appraised items?
•  If Yes, was the property appraised by someone without expertise in the field?
• Is the appraisal handwritten?
• Does the appraisal misspell items (e.g., Porcelin, Koogeran, Emerrild, karatt, carot, Rollex, or Carteer)?
• Is sterling silver described as having a Hallmark EPS (electro-plated silver)?
• Has the name of the appraiser been rubber stamped on the document?
• Is the appraisal dated?
• Is the appraisal signed?
• Is the name of the appraiser legible and printed on the form?
• Does the gem stone appraisal reflect color, cut, and quality?
• Does the diamond appraisal show color, cut, quality, and carat weight?
• Does the jewelry appraisal show the carat quality (e.g., 14 K, or 18 K)?
• Does the art appraisal state the name of the artist, the medium used, the material on which the art was painted, the date the art was created, or the provenance of the piece?
• Does the oriental carpet appraisal show the city of origin, the materials used (e.g., silk, wool), the design, the dimensions, quality, or age?
• Was the appraisal performed free of charge?
• Was the appraisal performed from photographs?
• Is the appraisal more than 18 months old?
• Is the appraiser located more than 30 miles from the insured’s home or business?
• Is the loss claimed for the total contents of the business or home including items of little or no value?
• Are the policy limits in excess of the values at hand?
• Are the losses questionable, e.g., a home stereo stolen out of a car, or a fur coat stolen on a trip to Tahiti?
• Are the losses items of significant value that were recently purchased?
• Is the claim of a value that is beyond the apparent means of the insured, e.g., a $15,000-a-year janitor claims that he bought, for cash, and then had stolen a $40,000 diamond ring?
• Has a claim been made for extremely valuable and unique items that are difficult to sell, but not for those items which are valuable but easy to sell?

Commercial Property

• Were there extensive commercial losses at a site where few or no security measures are in effect?
• Did the loss occur when the security devices fail to work?
• Are there radically differing accounts of the accident or manner in which the loss occurred?
• If a commercial loss primarily involves seasonal inventory or equipment, is the claim at the end of the selling season, e.g., ski inventory claimed stolen in the spring, farm machinery stolen in the fall?
• Do the claimed commercial losses include old, outdated, or otherwise unmarketable inventory?
• Are the facilities outmoded?
• Is the claimant approaching retirement age?
• Would the claimant like to retire?
• Is the claimant ill?
• Did the claimant have a renovation loan approved before the loss, but work had not begun?
• Is the property in receivership or foreclosure?
• Is a major investment required for a change in technology?
• Did the loss occurred on a holiday, weekend, or after hours?
• Were fire doors left open?
• Were work orders canceled just prior to the loss?
• Is the business failing to meet production quotas or deadlines?
• Is the business’s inventory is obsolete or overstated?
• Is the business’s storage area too small for the amount of claimed inventory?
• Is the unit value of items overstated on the inventory?
• Are receipts unnumbered or on generic forms?
• Do receipts include pre-printed information?
• Is the claimed loss not directly related to the claimant’s business?
• Is the business in a bad location or deteriorating neighborhood?
• Was the property over-insured?
• Is there evidence that valuable property was recently removed from the premises or relocated to a safer place within the premises?
• Was there any departure from long-standing routine (failure to activate alarm system; shut-down of sprinkler system; discharge of security guard)?
• Is there evidence of unlawful entry?
• Does it appear that evidence of unlawful entry has been manufactured?
• Is there any indication that the business is having financial difficulties or has immediate need for funds?
• Is the real property heavily mortgaged?
• Does business property secure multiple and substantial debts?
• Is there recent history of late payments or default on loans?
• Do the principals in the business have a history of business failures?
• Has there been a recent expansion of business facilities that has caused the insured to incur substantial debt or other over extension?
• Is there an overlapping ownership of related businesses with inventory moving readily between businesses without adequate documentation?
• Is the economic climate poor for this particular business?

Financial Indicators

• Has the insured’s business shown decreasing revenue?
• Does the insured’s business show increasing production costs for labor, materials, sales, general, and administrative overhead?
• Has new technology made the insured’s current process or equipment inefficient and/or out of date?
• Is the insured’s business suffering from increased competition?
• Is the insured’s business producing new products, making inventory obsolete?
• Have new competitors moved into the insured’s neighborhood?
• Does the insured’s business require a high level of research and development expenditure?
• Does the insured’s business reflect a low level of research and development expenditure?
• Is the insured’s business showing a poor financial position in the industry?
• Is the insured paying for a costly lease or rental agreement that is not covered by earnings?
• Has the insured entered into contracts with customers that are not profitable?
• Has the insured lost key customers?
• Do the insured’s records show a failure to record depreciation?
• Do the insured’s inventory records show excessive spoilage or defects?
• Do the insured’s records show double payments of bills?
• Does the insured pay personal expenses with corporate funds?
• Does the insured maintain numerous bank accounts?
• Do the insured’s bank records show a low or overdraft cash balance?
• Do the insured’s records reveal poor or negative cash flow from operations?
• Do the bank records reflect frequent NSF (bounced) checks?
• Are there large or frequent currency transactions?
• Do the records reflect a trend in accounts receivable growth?
• Has the insured pledged assets for multiple loans?
• Do the books and records reflect hypothetical assets?
• Do the insured’s records show multiple liens on assets?
• Are assets insured for more than their fair market value or replacement cost?
• Does the insured factor accounts receivable?
• Was inventory removed prior to loss?
• Did the inventory at time of loss only include slow moving items?
• Was their overstocking caused by overproduction or obsolete items?
• Do books and records reflect increased borrowing by the insured?
• Do books and records reflect large or numerous overdue accounts payable?
• Do books and records reflect inability to pay current bills for utilities, payroll, or vendors?
• Do books and records reflect multiple loans to or from officers or employees?
• Do books and records reflect severe credit limits imposed on the insured by lenders or suppliers?
• Has the insured reported frequent C.O.D. purchases?
• Do books and records show payment of bills by cashier, certified check, or money order?
• Were withholding taxes, payroll taxes, or sales taxes deposited tardily?
• Has the insured overstated asset values in a proof of loss statement?
• Is the insured a guarantor or co-maker of a note with loan in default?
• Was there a sale or auction of assets shortly before the report of the loss?
• Has the insured acquired excessive business interruption insurance?
• Do the books and records reflect much litigation against the insured’s business or owners?
• Do the books and records reflect an extraordinary write-off?
• Are there bankruptcy proceedings of the owner, firm, or affiliated business?
• Are there frequent or unusual inter-company transactions with an affiliated company?
• Does the insured maintain two or more sets of books?
• Do the books and records contain false or altered documents or records?
• Does the insured’s business maintain weak internal controls?
• Has the insured’s business license been revoked or suspended?
• Are there large, unexplained differences between book and taxable income?
• Do the books and records reflect duplicate sales invoices?
• Has the insured over-documented losses with a receipt for every loss and/or receipts for older items of property?
• Does the insured’s loss inventory differ significantly from the police department’s crime report?
• Can the insured recall the place and/or date of purchase for newer items of significant value?
• Has the insured provided receipt(s) with incorrect or no sales tax figures?
• Has the insured provided receipt/invoices from the same supplier with sequence numbers in reverse order of purchase dates?
• as the insured provided two different receipts with the same handwriting or typeface?
• Has the insured provided a single receipt with two different handwritings or typefaces?
• Has the insured provided a credit card receipt with an incorrect or missing approval code?
• Has the insured provided copies of checks with no coding in the bottom right corner?

Arson for Profit

• Did the fire occur on a holiday or weekend?Did the fire start late at night?
• Did the fire occur during renovation?
• Is there an absence of accidental or natural causes at the point of origin?
• Was there an unusual presence of combustible material on the premises?
• Was there unusual handling of combustible materials normally present on the premises?
• Were there multiple separate fires?
• Was there a fire where there is no natural source of ignition available?
• Did the fire start immediately following a family argument?
• Did the fire start in a bed?
• Did the fire spread unnaturally?
• Is there excessive fire damage?
• Is there evidence of extreme heat?
• Was the entry for fire fighters blocked by vehicles or contents pushed up against entry doors?
• Was the view into the structure blocked?
• Was there a short period of time between exit of occupant and fire?
• Is this the second fire in same structure?
• Is there presence of burned or unburned newspapers at point of origin?
• Was there structural damage prior to the fire?
• Are the insureds’ movements unaccounted for at the time of the loss?
• Is there an unexplained absence of typical household items or non combustible items at fire scene?
• Were contents, such as major appliances, removed prior to the fire?
• Was valuable or sentimental property recently moved to a safe place?
• Had contents been substituted?
• Were contents out of place or unassembled?
• Were personal items or important papers absent?
• Is there evidence of other crimes?
• Is the property overinsured?
• Is the insured under economic duress or will he or she gain some economic advantage from the fire?
• Do the alleged contents of the structure seem improbable (such as a Picasso oil painting in a low-income apartment)?
• Were pets absent from the home at the time of the fire?
• Is the insured missing receipts, photos, or other evidence of the items allegedly destroyed in the fire?
• Does the insured have receipts, photos, and documentary evidence of every items allegedly destroyed in the fire?
• Was the insured recently divorced or separated?
• Is the insured unusually calm?
• Is the claimant suspicious of public officials?
• Are there large, outstanding utility bills or property taxes?
• Did the fire alarm, burglar alarm, or sprinkler system fail to work at the time of the loss?
• Is the property loss site claimed by multiple mortgages or chattel mortgages?
• Does the contents list include items of high value recently purchased?
• Does the contents list include serial numbers that owners do not typically record?
• Is there no proof provided for recent expensive purchases?
• Is the value of items is inconsistent with claimant’s income?
• Is the face value of policy greater than market value of property?
• Do receipts show incorrect tax or no sales tax?
• Are receipts in whole dollar amounts?
• Are receipts generic with no store logo?
• Were receipts and owners manuals destroyed in the loss?
• Does the insured indicate distress over prospect of examination under oath?

Auto Claims

• Does physical damage to one vehicle not match the physical damage to other vehicles involved in the same accident?
• Does the damage to the vehicle appear to have been applied by a blunt object like a light pole, wall, or a hammer rather than by another vehicle?
• Do the witnesses and parties have conflicting versions of the same accident?
• Did a third party report the claim?
• Did the accident occur on private property near the residence of those involved?
• Does the Vehicle Identification Number (VIN) match the damaged vehicle?
• Are all damaged vehicles in a reported accident taken to the same repair shop?
• Are the repair shops used not actually equipped to make repairs listed on the estimate?
• Is there no lienholder listed for an expensive, late model vehicle?
• Does the owner want to retain salvage of the vehicle?
• Was the vehicle repaired before the loss was reported?
• Did the accident occur shortly after one or more of the vehicles was purchased or registered?
• Is the letter from the lawyer dated the day of the accident or shortly thereafter?

 Life Insurance Fraud

• Is the policy’s effective date close to the date of death?
• Is the deceased not well-known by relatives?
• Did the deceased live alone?
• Are there many small policies with coverages that are available in mass offerings, i.e., in magazines and mail-in and television advertisements?
• Are the agent’s “loss ratios” unusually skewed, considering the size of the market and the types of people insured?
• Were numerous life insurance policies purchased on the deceased?
• Were different carriers used in securing coverage for no apparent reason?
• Is the coverage amount excessive considering the social position of the deceased?
• Was the death certificate obtained by the beneficiary?
• Was the claim made shortly after the expiration of the con testability period?

Conclusion

Red flags of insurance fraud are important tools in the work of the insurance industry to reduce the amount of insurance fraud. They are not evidence. They are often contradictory. If three or more red flags appear in an investigation there is sufficient information to refer the claim to the insurer’s SIU and to do a more thorough and complete investigation.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

If this post is interesting to you you might find useful his E-book, “Zalma on Rescission in California.” Mr. Zalma also recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The story that follows is based on fact but is fiction. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. If you like the story it is one of more than 80 in my e-book “Heads I Win, Tails You Lose”, available for a reasonable price at www.zalma.com/zalmabooks.htm.

Career criminals are not the only people who perpetrate insurance fraud. The temptation has become so great that almost anyone will try.

Zalma on Insurance Makes Top 50

A few years ago residents of a hillside community received a letter from the county engineer informing them that their houses sat on an active landslide. The engineers concluded that an unusual amount of irrigation water, water from septic systems, and rainfall lubricated an ancient landslide under their homes. The slide was moving. The engineers were concerned because it was moving at the rate of three inches a year. The houses sitting on the landslide were also moving a few inches a month. Within ten years the houses would be torn apart by the movement if nothing was done to stabilize the hillside.

Homeowners, living on the hill, noticed cracks in the plaster walls. Concrete block walls split at the mortar seams. Cracks formed in the foundation systems. Since the homes on the hill were all valued from  $500,000 and $5,500,000, the monetary value of the potential loss of 300 homes on the landslide was enormous. Many of the homeowners gathered and hired counsel to pursue persons responsible for their damage.

On advice of counsel, the homeowners reported claims to their insurers. Most of the insurers denied the claims. The insurers concluded that the predominant cause of the damage was the excluded peril of earth movement.

The claims were fairly and reasonably rejected. Some of the homeowners accepted the decision of their insurers. Some of the homeowners sued their insurers. The imaginative homeowners, like the insured, found a better way.

The insured was a real estate lawyer. He had experience in dealing with insurers for commercial developers he represented. He knew that, in addition to the basic retail insurance market, there was a surplus and excess lines insurance market that would insure almost anything.

Without informing his broker of the landslide situation on the hillside he asked the broker to seek a specialty insurance policy for his home. He wanted insurance that covered him for both earthquake and earth movement, landslide, mudslide or other types of earth movement normally excluded by homeowners policies. He explained to the broker a concern that the wild fires that often devastate hillside communities remove vegetation from the hillsides and increase the hazard of mudflow and landslide. He had invested a great deal of money in his home and wanted to protect against that risk.

The broker found a policy offered by a surplus lines insurer. The policy insured dwellings only for the perils of earthquake and earth movement. The premium was a reasonable 3.75 percent of the value of the dwelling with a deductible equal to 5 percent of the total amount at risk. All the insurer required, by way of application, was the name of the insured, the address of the property to be insured, and the amount of insurance requested.

After receiving a signed application from the insured the insurer agreed to insure any property because it did not fall within certain specified earthquake fault areas. The insured obtained a $$2,500,000 policy for a premium of only $9,375.00. At the time the insured bought the policy he had received and read the letter from the County. He knew there was a landslide actively affecting his house. At the time he bought the policy the insured had already seen cracks in his plaster walls. When he bought the policy the insured applied the old maxim “ask me no questions – I’ll tell you no lies.”

His experience as a real estate attorney convinced the insured that if he told his prospective insurer his house was sitting on an active landslide they would not insure him. The insurer did not ask. The insured did not offer the information.

After the policy had been in effect for three months and the cracks in the plaster had grown to a size that he could place his index finger inside the crack he reported a loss to the earth movement insurer. He presented a claim for the total loss of the house. He demanded payment of policy limits less the deductible.

The insurer sent its adjuster to meet with the insured. They retained a geologist to inspect the property and determine the cause of the damage. The geologist learned of the active landslide from the public records kept by the city and County. He informed the insurer that thirteen months before it issued the policy the county had sent notice to all homeowners, including the insured, advising the homeowners of the active landslide.

After completing its investigation, with the advice of counsel, the insurer did the following:

1.    It advised the insured that the policy was rescinded from its inception because of the concealment of a material fact. The insured had concealed the fact of the landslide. With notice the insurer returned the $9,375.00 premium.
2.    It advised the insured that even if it had not rescinded the policy it would have denied his claim as one that was not fortuitous. Its investigation showed that the landslide had started before the inception of the policy. It further advised the insured that the loss in progress rule barred any recovery.
3.    The insurer recommended that the insured present his claim, if he still wished to pursue it, to the insurer who insured him a against earth movement at the time of the loss.

The insurer, reasonably concluded that although the loss was progressive and continuous it was fairly certain that a loss had occurred on or before the insured learned of the landslide.

Of course, the insured did not have earth movement insurance at the time of the notice and bought the insurance from the surplus line insurer in an attempt to recover for the loss that had already occurred.

The insured, if asked, would testify that he had no intent to defraud his insurer. He would testify that the insurer, if it had asked him, would have been told the truth. All he was doing was taking an economic advantage over a lazy insurer who did not bother to ask. What the lawyer/insured would have said sounds reasonable. It wasn’t true. He knew of a material fact that would affect the decision of his insurer to insure him. He concealed that fact from the insurer. He intended to conceal the fact from the insurer. Had the insurer known the truth it would not have issued a policy for a loss that was in progress. The insured attempted a fraud. His action in fraudulently getting an earth movement policy was reprehensible. His actions in buying the earth movement policy were no less a fraud than if he set the house aflame and made claim on his fire insurance.

Insurance is, as the lawyer should have known at the time, is: “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

 As a lawyer the intentional concealment of a material fact with the intent to deceive an insurer to its detriment is fraud and grounds for disbarment. For that reason the insured accepted the denial and did nothing further about the claim. Had the insurer not done the miniumum investigation and retained the services of a competent engineer it would have paid the $2,500,000.00 claim.

(c) 2012 – Barry Zalma

Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Insurer Has an Unquestioned Right to Select Whom it Will Insure

Often forgotten by courts in the United States is the fact that an insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to risks faced by the applicant. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39].)

The right of an insurer to select whom it would insure was presented to the Sixth Circuit Court of Appeal when asked to resolve a dispute between a lawyer and his insurer when the insurer sought to rescind a malpractice liability policy it issued to the lawyer. The insurer based its claim of rescission on the incomplete responses to questions on the applicable insurance applications. The Sixth Circuit affirmed the trial court’s grant of rescission in Continental Casualty Company v. Law Offices of Melbourne Mills, Jr., Pllc; Melbourne Mills, Jr, No. Nos. 10-5813/5814 (6th Cir. 04/13/2012).

Facts

Lawyer Melbourne Mills, Jr. was successfully sued for millions of dollars for legal malpractice. The trial court granted Continental summary judgment, holding that Mills’s failure to disclose an ongoing state bar association inquiry constituted a material misrepresentation when the policy renewal application specifically asked if “any attorney [was] subject to any disciplinary inquiry . . . during the expiring policy period.”

In 2010, the Kentucky Supreme Court issued an order which permanently barred Mills from the practice of law in Kentucky.

Mills and others represented a group of over 400 plaintiffs in a class action suit against American Home Products for injuries related to the use of the diet drug Fen-Phen. At the outset of the suit, it was agreed that the lawyers’ fees would be determined by contingency fee contracts, limited to 30% of the clients’ gross recovery. In May 2001, American Home Products agreed to settle the class action for almost $200 million. The plaintiffs in the action together received only $74 million, or 37% of the settlement. The lawyers received $53 % including Mills who received $23 million. The remaining 10% was used to establish The Kentucky Fund for Healthy Living, Inc. Mills served as a member of the Fund’s Board of Directors, for which he allegedly received a monthly compensation of $5,350.

In early February 2002, Mills learned that the Kentucky Bar Association (“KBA”) was investigating complaints filed against him in connection with the Fen-Phen class action. The Inquiry Commission Complaint stated that Mills was under investigation for fees obtained in settlement of certain claims regarding the use of Fen-Phen and other pharmaceuticals that were divided with other counsel not in his firm, as well as allegations concerning a paralegal in Mills’s office who was conducting the unauthorized practice of law as part of the work on the class action.

On February 11, 2002, Mills’s attorney, William Johnson, attended a hearing of the KBA’s Inquiry Commission with respect to an application for a subpoena duces tecum that was served on Mills.

The Application

In August 2003, Mills applied to renew his professional liability insurance with Continental for the 2003- 2004 year. Continental had insured Mills’s law office for many years prior to this application.

Question 3 of the application asked: “Are there any claims, or acts or omissions that may reasonably be expected to be a claim against the firm, that have not been reported to the Company or that were reported during the expiring policy period?” In response, Mills checked “NO.”

Question 4 of the 2003 application read: “Has any attorney been disbarred, suspended, formally reprimanded or subject to any disciplinary inquiry, complaint or proceeding for any reason other than non-payment of dues during the expiring policy period?” Again, Mills checked “NO.”  According to Mills, at the time of the 2003 application, he did not know the status of the 2002 KBA investigation; in his own words, the case “lay in limbo for years at a time. Just nothing was done.”

The Policy

In August 2003, Continental issued an insurance policy, entitled Lawyers’ Professional Liability Policy, to the Law Offices of Melbourne Mills, Jr. The policy contained various exclusions, including a Dishonesty Exclusion which stated:

This Policy does not apply . . . to any claim based on or arising out of any dishonest, fraudulent, or criminal or malicious act or omission by an Insured except that this exclusion shall not apply to personal injury. The Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal or malicious act or omission has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of the Company’s rights under this Policy.

The Malpractice Suit

In 2005, the Fen-Phen class action members asserted legal malpractice claims against Mills and others in Abbott, et al. v. Chesley, et al. The Boone County Circuit Court determined that the attorneys “breached their fiduciary duties to the Plaintiffs when they paid themselves fees over and above the amount to which they were entitled to under their fee contracts with their clients.” As a result, the class plaintiffs were awarded $42 million. Continental initially provided Mills a defense in this case; however, Continental also fully reserved its rights, including the right to rescind the policy.

Because the trial court found that “Mills knew that a bar complaint had been filed against him in early 2002,” and the “KBA’s investigation was ongoing,” the district court held that Mills’s response to Question 4 constituted a material misrepresentation. The trial court noted that the “ongoing KBA inquiry into Mills’s actions with respect to the Fen-Phen Action is precisely the type of information Continental needed to evaluate its potential for current and future risk.”

In addition to the grant of summary judgment to Continental, a money judgment for $233,674.49 was entered against Mills, which was the amount of the defense costs Continental paid on his behalf in the initial class action.

On June 10, 2010, the same day that the money judgment was entered, the district court also granted Continental leave to file supplemental authority, namely:

(1)     the May 20, 2010 Order of the Kentucky Supreme Court which disbarred Mills from the practice of law in Kentucky, and

(2)     the August 27, 2009 Findings of Fact and Conclusions of Law of the Trial Commissioner, which the Kentucky Supreme Court used to reach its decision to disbar Mills.

The trial court took judicial notice of the Order of the Supreme Court disbarring Mills and the Findings of Facts.

Analysis

Because Mills made a material misrepresentation in his malpractice insurance application with Continental, the policy was properly voided under Kentucky law. According to Kentucky statute, K.R.S. § 304.14-110, a misrepresentation voids an insurance policy if the misrepresentation is “material” to the acceptance of risk or if the insurance company would not have issued the policy if the true facts had been made known. Though this standard is disjunctive, Mills’s response to Question 3 was both a misrepresentation that was material to Continental’s acceptance of risk and, if Continental had known of the investigation against Mills, Continental would not have issued the policy or would not have issued the policy at that rate.

Mills’s answer to Question 3 of the 2003 application was a material misrepresentation. Question 3 of the application asked. Mills’s answer to Question 3 was a misrepresentation because in August of 2003, when he was filling out the application, Mills knew of not only the ongoing KBA investigation, initiated in February 2002 but unresolved at that time, but also all of the acts surrounding the Fen-Phen class action settlement negotiations, which reasonably could have – and ultimately did – lead to a malpractice claim. Even though the class action members did not bring the legal malpractice suit until 2005, in August 2003 Mills still knew that, collectively, the lawyers in the Fen-Phen class action paid themselves over $126 million. According to one uncontested document put forth by the class members, the lawyers were limited to fees of a little over $60 million. Mills knew that the clients had not been told all of the pertinent facts regarding the settlement offer and the fee splitting arrangement, and that the KBA had subpoenaed the financial records from the case as a result of the 2002 inquiry.

Mills was aware that he had engaged in conduct that led to the disbarrment of him and two of his co-counsel. Mills knew that his conduct was egregious and that his “acts” and “omissions” could have “reasonably be[en] expected” to lead to “a claim against the firm.” Mills was unquestionably required to disclose this information to Continental when filling out the policy renewal application.

Mills’s failure to disclose his actions in response to Question 3 was also material to Continental’s acceptance of risk. The lie had an impact on Continental’s decision to issue the policy at the rate that it did. A misrepresentation is material if there is sufficient evidence that the insurance company would not have issued the policy or would have issued a different policy if it had knowledge of Mills’s actions and omissions under.

Mills’s failure to disclose the circumstances surrounding the Fen-Phen class action and the ongoing KBA investigation was material to Continental, which likely would not have issued the policy, or would have issued a different policy, had it known of Mills’ acts and omissions during this time. The Sixth Circuit, therefore, affirmed the trial court’s order of rescission.

ZALMA OPINION

The conduct of ex-attorney Mills was reprehensible taking funds belonging to his clients and using them to pad his personal fortune. He then added insult to injury by attempting to get his insurer to pay his victims after obtaining the insurance by a calvilcade of lies.

By misrepresenting material facts in the application he breached the covenant of good faith and fair dealing and deprived his insurer of the right to make a reasonable and wise discrimination as to whether it wished to insure or not insured him. Had he told the truth the insurer would not have taken the risk it took. Rescission is an equitable remedy and it would simply be unfair for the insurer to be required to pay a multi-million dollar judgment on a policy it would not have written had the insurer been told the truth.

(c) 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

If this post is interesting to you you might find useful his E-book, “Zalma on Rescission in California.” Mr. Zalma also recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

Sometimes trial courts feel sorry for plaintiffs injured by a totally negligent driver and ignore the provisions of an insurance policy to provide payment to the injured persons.

The Louisiana Court of Appeal was called upon to resolve a dispute that arose from a trial verdict that ignored the clear and unambiguous provisions of an insurance policy. Safeway Insurance Company (“Safeway”) asked the court of appeal to reverse the trial judgment because the trial court found that the company’s insurance policy provided coverage for Timothy Peaker when he drove a rented car into the plaintiffs, Jennifer Partain; her minor child, Luke Wesley Partain; Heather Case; and her minor child, Gavon McCoy. In Jennifer Partain, et al. v. Timothy Peaker, et al. , No. 46,978-CA (La.App. Cir.2 04/11/2012). The Court of Appeal resolved the coverage dispute concerning a provision of its policy that the driver was not operating the vehicle with the permission of its owner. The trial court avoided the motion of Safeway and made a finding of coverage.

FACTS

The accident occurred on April 14, 2006, on the parking lot of Wal Mart in Minden, Louisiana. Peaker was driving a 2005 Mazda that had been rented by Sarah Yocum from Enterprise (“Enterprise”), a car rental company, on April 12, 2006. Peaker was not designated as an additional driver on the rental car agreement. Peaker drove the vehicle into the plaintiffs, who were walking on the lot.

On November 22, 2006, the plaintiffs filed suit for their damages against Peaker; his insurer, Safeway; Louisiana Farm Bureau Mutual Insurance Company (“Farm Bureau”), the uninsured/underinsured (“UM”) insurer of Partain; and Allstate Insurance Company, the UM insurer of Case.

On July 3, 2008, Safeway filed a motion for summary judgment, citing the provision in Peaker’s policy which specified that coverage for a non-owned vehicle was provided to the named insured “provided the non-owned automobile is being used by the named insured with the permission of its owner.” The motion was never ruled upon.

Trial on the matter was held on April 18, 2011. On June 1, 2011, the trial court signed and filed a judgment finding Peaker to be 100 percent at fault in causing the accident. Damage awards were made to all the plaintiffs.

Safeway appealed the trial court judgment, claiming that the trial court erred in finding that its policy provided coverage to Peaker in this case. There was no transcript of the trial so the parties, for the purposes of the appeal, stipulated to facts.  In their joint stipulation, the parties agreed that:

1. Peaker was 100 percent at fault;
2. that claims against Peaker were dismissed to the extent that he was not insured;
3. that the Safeway policy filed in connection with the motion for summary judgment was adopted by reference and introduced into evidence;
4. that the plaintiffs will not appeal the amount of damages;
5. that the issues on appeal will be limited to insurance coverage, and specifically, whether the trial court correctly held that Safeway’s policy insured Peaker while operating the rental vehicle at the time of the accident.

The parties stipulated the testimony of Jagot, the branch manager of Enterprise where the vehicle was rented, and the testimony of Peaker. Jagot testified that he was employed by Enterprise as a branch rental manager and had access to the records dealing with the lease of the rental car involved in this case. He was personally familiar with the terms and conditions of the lease agreement between Enterprise and Yocum. On April 12, 2006, Jagot leased a 2005 Mazda to Yocum, who lived in Princeton, Louisiana.

Yocum was picked up and delivered to Enterprise. She filled out and signed the lease agreement. A copy of the lease agreement was produced that was signed by Jagot and Yocum. Yocum paid in cash. Jagot did not remember Peaker being present. Jagot specifically asked Yocum if there would be any other drivers and she said there would be none. If Yocum had identified Peaker as an additional driver, and if he had a valid driver’s license, he would have been listed on the rental agreement as an additional driver. If Peaker did not have a valid driver’s license, he could not have been listed as an additional driver.

Jagot walked out to the car with Yocum, did a walk-around inspection, and gave her instructions. Jagot never authorized Peaker’s use of the vehicle and was not aware that Peaker would be a driver. Yocum was the only authorized driver of the vehicle. Jagot did not authorize Peaker to drive or operate the leased vehicle. Peaker did not have permission of Enterprise to operate the car on April 14, 2006. Peaker was not an authorized driver of the vehicle under the lease agreement executed on April 12, 2006.

Peaker stated that on April 14, 2006. According to Peaker, both he and Yocum talked to the Enterprise employee at their home. The Enterprise employee drove them to the Enterprise office in Bossier. Yocum filled out and signed the lease agreement at Enterprise. Peaker believed they did it that way because his driver’s license was not valid.

INSURANCE COVERAGE

The Court of Appeal concluded that when a party rents a vehicle and fails to designate any additional drivers in the rental car agreement, the rental car agency that owns the vehicle has not conferred express permission on any person other than the lessee to drive the vehicle. Therefore, insurance policy provisions like the one contained in Peaker’s contract of insurance with Safeway do not provide coverage for the nonpermissive use of a non-owned vehicle.

In this case, the record does not support the trial court’s finding that Peaker had the express or implied permission of Enterprise to operate the rented vehicle.

Peaker claims that he accompanied Yocum to Enterprise where she filled out the rental car agreement. Peaker acknowledged that Yocum rented the car because Peaker did not have a valid driver’s license and would not, therefore, be eligible as a driver on the rental agreement.

No one from Enterprise instructed Peaker in the operation of the vehicle. Yocum drove the vehicle away from Enterprise, not Peaker. Peaker gave a conflicting statement by saying that when Yocum asked him to drive the car, he did not think he should be driving because he lacked a valid driver’s license, but that he thought he had permission to drive the vehicle.

CONCLUSION

Because Peaker was not listed as an additional driver on the policy, it was clear to the Court of Appeal that he did not have the express permission of Enterprise to use the vehicle. The record also does not support the finding that Peaker had implied permission to drive the vehicle. The testimony of the rental agency that they would not have agreed to Peaker as an additional driver if he did not have a valid drivers’ license was telling.

The Court of Appeal noted that it was unfortunate that Peaker caused an accident resulting in injury to four people under circumstances precluding coverage by his insurance policy with Safeway. However, Peaker clearly used this vehicle without the express or implied permission of the owner, Enterprise. Under the terms of the Safeway insurance policy, there is no insurance coverage to Peaker for this accident.

The Court of Appeal reversed the trial court judgment against Safeway and found that Safeway provided no insurance coverage in this case.

ZALMA OPINION

The Court of Appeal should be commended for apply the law and the conditions of the policy of insurance. It is unfortunate that people were injured while innocently walking through  a WalMart parking lot by a person operating a vehicle without a valid license but the unfortunate nature of the accident does not make an insurer pay for risks of loss it did not agree to pay.

A contract must be honored as written. Emotion and the need of those innocently injured must be ignored. Courts and insurance companies are not welfare agencies.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Another Weapon Against Insurance Fraud

Insurance fraud is a serious problem in the United States estimated to take from $80 billion to $300 billion a year. No one knows for sure how much insurance fraud takes. The California Legislature enacted a comprehensive set of criminal statutes regarding insurance fraud and arson-for-profit. The privilege against self-incrimination arises only when testimony is compelled. The testimony, no matter how incriminatory, must be compelled within the meaning of the Fifth Amendment for it to apply.

An insurance claim can only be made if there is a contract of insurance; a property damaged by a peril insured against, and the presentation of a claim to an insurer. No one is compelled to buy fire insurance or to make a claim to an insurance company. California makes it a criminal activity to “Conceal, or knowingly fail to disclose the occurrence of, an event that affects any person’s initial or continued right or entitlement to any insurance benefit or payment, or the amount of any benefit or payment to which the person is entitled.” [California Penal Code Section 550 (b)(3)] (Emphasis added)

Although, in Gruenberg v. Aetna Insurance Co., 9 Cal. 3d 566, 510 P.2d 1032, 108 Cal. Rptr. 480 (Cal. 06/11/1973) the California Supreme Court found that an insurer should delay an examination under oath of its insured who claimed the Fifth Amendment protection until he could resolve a criminal charge while claiming testifying before his insurer might incriminate him, the Supreme Court did not eliminate the right to an examination but only compelled its delay.

Concealing Involvement in Arson-For-Profit is a Crime

On April 12, 2012, the California court of Appeal refused to reverse a conviction for arson and insurance fraud of James Kurtenbach. In doing so the Court of Appeal, in The People v. James Kurtenbach, No. D058933 (Cal.App. Dist.4 04/12/2012), found that a statute that makes it a criminal act to conceal from an insurer the fact that the insured committed, or conspired with others to commit, insurance fraud or arson for profit does not violate the Fifth Amendment to the U.S. Constitution.

A jury convicted James Kurtenbach of conspiracy to commit arson, arson causing great bodily injury,  concealing or knowingly failing to disclose an event affecting an insurance benefit and vandalism. The jury also made true findings that in committing the arson Kurtenbach used a device designed to accelerate the fire and acted for pecuniary gain. The trial court imposed a prison sentence of 15 years eight months. Kurtenbach contended, among many things, that his conviction for concealing or knowingly failing to disclose an event affecting an insurance benefit violated his federal constitutional privilege against self-incrimination.

FACTUAL BACKGROUND

A house that Kurtenbach owned as a rental property was destroyed by fire in the early morning of October 31, 2008. The fire began with a powerful explosion and quickly proceeded to engulf the entire house in flames and destroy it. A neighboring house sustained over $100,000 in damage. Joseph Nesheiwat, who was in the house to ignite the fire, died in the explosion and fire.

Nesheiwat was an employee at a gas station that Kurtenbach owned. In their investigation of the incident, the police obtained information leading them to suspect that Kurtenbach had solicited Nesheiwat to burn down the house. According to arson experts, the fire was fueled by gasoline.

Kurtenbach’s homeowner’s insurance agent had filed a claim for Kurtenbach after she learned of the fire from a source other than Kurtenbach, and that Kurtenbach thereafter spoke with an insurance adjuster about facts relating to the claim. Kurtenbach’s last communication with the insurance adjuster was in December 2008, when Kurtenbach informed the adjuster that he was represented by legal counsel. The insurance fraud claim – based on the allegation that Kurtenbach concealed or knowingly failed to disclose an event affecting an insurance benefit was presented to the jury. The jury made true findings that in committing the arson, Kurtenbach used a device designed to accelerate the fire and acted for pecuniary gain. The trial court sentenced Kurtenbach to prison for a term of 15 years eight months.

THE FIFTH AMENDMENT

Kurtenbach was charged with, among other counts, concealing or knowingly failing to disclose an event affecting an insurance benefit based on the fact that while his insurance carrier was investigating whether to provide coverage for the damage caused by the fire, Kurtenbach did not inform the carrier that the fire was caused by an arson that he planned. He claimed the Fifth Amendment protected him from this count.

To qualify for the Fifth Amendment privilege, a communication must be testimonial, incriminating, and compelled.  The United States Supreme Court has held that, in certain instances, a defendant may invoke the Fifth Amendment privilege against self-incrimination as a defense in a criminal prosecution that is based on the defendant’s failure to comply with a statute requiring the disclosure of incriminating information.

However, the United States Supreme Court set limitations on the circumstances in which a defendant may successfully invoke the Fifth Amendment privilege against self-incrimination as a defense to a prosecution for failing to comply with a statute requiring the disclosure of incriminating information.  Tension between the State’s demand for disclosures and the protection of the right against self-incrimination must be resolved in terms of balancing the public need on the one hand, and the individual claim to constitutional protection on the other. In conducting this balancing, the Court determined that the self-incrimination defense is not available when the incriminating disclosure is required for compelling reasons unrelated to criminal law enforcement and as a part of a broadly applied regulatory regime.

A defendant may invoke the privilege against self-incrimination as a defense when a statute requiring the disclosure of incriminating information is directed to a highly selective group inherently suspect of criminal activities in an area permeated with criminal statutes, but the defense is not available when a statute requires disclosure in an essentially non-criminal and regulatory area of inquiry.  Importantly, the analysis does not focus on whether the disclosures required of the specific defendant will require an incriminating statement. Instead, the inquiry is whether, in general, the statutory requirements will result in the disclosure of incriminating information.

Considering the applicable legal principles, the Fifth Amendment privilege against self-incrimination does not provide a defense to Kurtenbach’s conviction under the insurance fraud statute.

First the disclosures required by the insurance fraud statute will not usually reveal incriminating information, as some of the most common disclosures covered by the statute would be, for example, material facts concerning an insured’s medical condition as relevant to disability or health insurance, the material facts concerning the operation of an automobile in the case of automobile insurance, the circumstances of an injury or ability to work as relevant to worker’s compensation insurance, or the existence of other insurance policies as relevant to the availability of coverage under the policy at issue. It is the rare case when – as here – the required disclosure would be the admission to a crime.

Second, as it is an antifraud provision with criminal penalties, the activity it regulates is the making of insurance claims. Seeking benefits from an insurance carrier is an essentially legal activity. The clear intent of the statute is to criminalize the making of false or fraudulent claims the ultimate objective of which is to obtain benefits to which the offender is not entitled. The part of the statute relating to concealment or failure to disclose functions as an integral part of that antifraud provision. Because it is part of a broader antifraud provision the part of the anti-fraud statute satisfies the requirement that it was enacted for a compelling purpose other than to force a disclosure to be used in criminal law enforcement.

Kurtenbach had no right to rely on the Fifth Amendment privilege against self-incrimination as a defense to his conviction for concealing or knowingly failing to disclose that he committed arson because he was not compelled to make a claim to his insurer. Since the privilege against self-incrimination arises only when testimony is compelled and the testimony, no matter how incriminatory, was not compelled within the meaning of the Fifth Amendment.

The statute applies only when a person is attempting to obtain insurance benefits. There was no requirement that Kurtenbach pursue a claim for insurance benefits. The evidence supported a finding that Kurtenbach had an opportunity to withdraw that claim, but did not do so, and actually met with and discussed the claim with the insurer’s adjuster.

The jury found that Kurtenbach failed to disclose the arson in order that he could obtain benefits to which he would not be entitled if he had disclosed that fact. Kurtenbach was not compelled by the statute to disclose the arson. Instead, he voluntarily put himself within the reach of the statutory disclosure requirements by attempting to obtain insurance benefits. In the absence of legal compulsion to make an incriminating disclosure, the Fifth Amendment privilege against self-incrimination does not apply.

The arson and Kurtenbach’s failure to disclose the arson to his insurance carrier occurred at different times. The arson occurred at the time of the fire. The failure to disclose the arson to the insurance carrier occurred in the following days and months as the insurance adjuster investigated the insurance claim. Because the two crimes constituted a course of conduct divisible in time statutes do not preclude punishment for both crimes.

ZALMA OPINION

This decision provides insurers and prosecutors a powerful weapon against those who would commit insurance fraud or arson-for-profit. It makes clear that a person who commits insurance fraud is obligated to advise the insurer of the fraud or make no claim. If an insurer or prosecutor can prove the fraudulent act the making of the claim without disclosing the fraud is a criminal act. The Fifth Amendment will not protect the criminal who remains silent.

The Statute, therefore, requires that an insured who has attempted an insurance fraud, advise his or her insurer of the fact or make no claim at all. Failure to do so is a criminal act. This is a weapon against fraud that is seldom used but should be used often when evidence of fraud exists.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

In this, the eighth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), ZIFL reports on:

1.    Barry Zalma submits a proposal for taking the profit out of insurance fraud by applying the K.I.S.S. (“Keep It Simple, Stupid”) method of dealing with fraud perpetrators. By avoiding the temptation to file massive lawsuits naming multiple insurance fraud perpetrators and large amounts the insurer who does so defeats its purpose. Zalma suggests simple one count suits or prosecutions many times rather than a massive, difficult to prove suit.

2.    Chapter VII of the serialized novel “Murder and Insurance Don’t Mix.”

3.    A summary of a decision of the Sixth Circuit Federal Court of Appeal on the effect, even after an incontestability clause in a life or disability policy, of a lie in the application that allows the insurer to void the policy.

4.    Zalma on Insurance – the blog and Zalma Books.

5.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 377 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 are available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

The California Court of Appeal was asked to resolve a dispute between two insurers concerning the apportionment of the costs to defend and indemnify co-insureds. Axis Surplus Insurance Company and Glencoe Insurance Ltd. provided general liability insurance in favor of Pacifica Pointe L.P. Pacifica was sued in a construction defect suit and tendered claims to both Axis and Glencoe. Axis agreed to defend Pacifica subject to a reservation of rights. Glencoe declined the tender, but monitored the construction defect suit and asked Pacifica to inform it once it satisfied the self-insured retention (SIR) under the Glencoe policy.

Pacifica and Axis paid a total of $1 million to settle the construction defect suit. Although Glencoe refused to participate in the settlement, it approved of Pacifica contributing its SIR ($250,000) as part of the settlement, which Pacifica did.

After settling the construction defect suit, Axis sued Glencoe for declaratory relief and equitable contribution to recover at least a portion of the $750,000 it paid in settlement. After a bench trial, the court found in favor of Axis and allocated a 60/40 split of Axis’s settlement payment to the advantage of Axis.

Glencoe appealed. The Court of Appeal, in Axis Surplus Insurance Company v. Glencoe Insurance Ltd, No. D058963 (Cal.App. Dist.4 04/11/2012), resolved the dispute.

FACTUAL HISTORY

In September 2004, Pacifica purchased the Carmel Pointe apartments. It subsequently converted the apartments to condominiums, and in turn, sold the condominiums to individual owners. A homeowners’ association called the Carmel Pointe Homeowners Association (Association) then was created. The Association filed a construction defect suit against Pacifica. The Association brought claims for breach of warranties, negligence, nuisance, negligent misrepresentation, and intentional misrepresentation arising out of the condominium conversion project at Carmel Pointe.

The Axis policies provided primary coverage with limits of liability of $5 million and $10 million and with defense expense outside the limit of liability. The Axis policies contained an “other insurance” clause, which provided for the sharing of a loss with a coinsurer by equal shares if the coinsurer also provides for sharing by equal shares. The Axis policies provided coverage for liability for property damage caused by an occurrence during their respective terms.

Axis accepted Pacifica’s tender subject to a reservation of rights but the policy limits were exhausted in May 2008 as a result of unrelated claims. Axis then provided Pacifica with a defense under a second policy and paid $118,624.50 in attorney fees and costs on behalf of Pacifica in the construction defect suit.

Pacifica also tendered a claim to Glencoe. Glencoe issued a wrap-up/owner controlled insurance policy to Pacifica specifically for the Carmel Pointe construction project with a policy period from September 2, 2004 through September 2, 2007. The Glencoe policy had a $5 million limit per occurrence and in the aggregate. The Glencoe policy contained an SIR in the amount of $250,000. The policy stated Glencoe had no duty to investigate or defend any claim until Pacifica satisfied the SIR. It also contained an “other insurance” provision similar to the one found in the Axis policy.

One Accepts the Other Reserves Rights

Glencoe did not accept Pacifica’s tender, but instead, reserved its rights under its policy and requested that Pacifica provide evidence that it had satisfied the SIR. Although Glencoe declined to defend Pacifica, the construction defect suit progressed with Axis providing Pacifica’s defense. The Association produced a preliminary defects list with a total cost of repair of $13,976,250, which included relocation costs and acoustical claims. The Association made a $1 million settlement demand, almost $13 million less than the claim, on Pacifica that was set to expire on December 17, 2008.

In response to the Association’s settlement demand, Pacifica sent experts to Carmel Pointe to evaluate defects and deficiencies and prepare a preliminary scope and cost of repair. Pacifica instructed its experts to identify all potential defects and not just those defects claimed by the Association. The experts created a preliminary repair estimate totaling $1,466,747.50. Pacifica advised Glencoe about the Association’s $1 million settlement demand.  Glencoe stated it lacked sufficient information to agree to fund a settlement but it did not object to Pacifica contributing its SIR to a settlement funded by Axis up to the proposed $1,000,000.

Before the deadline expired the Association and Pacifica entered into a written settlement agreement. Thereafter Axis filed an action against Glencoe alleging causes of action for declaratory relief and equitable contribution.

Trial Court Decision

The court determined Axis had met its burden of proof to establish a claim for equitable contribution with regard to the $750,000 Axis paid to settle the construction defect suit on behalf of Pacifica. The court then concluded that a 60/40 split of the $750,000 settlement payment in favor of Axis was the most equitable result. Therefore, Axis was awarded $450,000 as damages against Glencoe.

Analysis

Equitable contribution is available to apportion a loss among several insurers when each of those insurers is obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others.

In this case, as Glencoe did not raise any objections to the statement of decision. The court is  required to presume the trial court made all findings necessary to support the judgment. In an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of potential coverage under the nonparticipating insurer’s policy. After the settling insurer has satisfied its burden of proof, the burden shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy.

The court found Axis satisfied its burden of proof in proving the potential of coverage under the Glencoe policy.

By settling, the parties avoided the cost and uncertainty of litigation. The settlement and the amount of the settlement are thus presumptive evidence of the insurer’s liability and the amount of liability. Glencoe specifically approved Pacifica’s payment of its SIR toward settlement.

The insured was a named defendant and tendered claims to both primary insurers. Although Glencoe did not agree to defend Pacifica, it reserved its rights under its policy, requested Pacifica provide evidence that it had satisfied the SIR, and monitored the construction defect suit.

A critical inquiry in any action for equitable contribution between insurers is whether the nonparticipating coinsurer had a legal obligation to provide a defense or indemnity coverage for the claim prior to the settlement of a claim.

Equitable contribution claims between coinsurers is not based upon contract, involves equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. California follows the general rule that an insurer that discharges a common obligation of another insurer may seek contribution from the second insurer. The insurers’ respective obligations flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.

In an equitable contribution action, a court reviews the applicable facts and policies and decides what is fair between the potential coinsurers. The Glencoe policy specifically insured Pacifica for its construction project at Carmel Pointe.  Pacifica tendered its claim to Glencoe. Glencoe did not agree to defend, but instead, monitored the litigation and requested to be informed when Pacifica satisfied its SIR. During his deposition, a Glencoe representative acknowledged potential coverage existed assuming the SIR was satisfied. Pacifica did not satisfy the SIR until it contributed to the settlement of the construction defect suit because Axis, a coinsurer, was defending Pacifica. While Glencoe did not agree to contribute to the settlement, it specifically approved Pacifica’s payment of its SIR as part of the settlement.

This is not a case where Glencoe had no notice of the claim or settlement. The trial court found that “Glencoe never made any effort to secure the authority necessary to settle, or contribute to the settlement of the [construction defect suit] even though the insured was facing a time-sensitive settlement opportunity…” with a potential exposure of $13 million more than the offer of settlement.

Conclusion

To allow Glencoe to defeat an equitable contribution claim merely based on the timing of the payment of the SIR would award Glencoe for its inaction and work an injustice. The Court of Appeal noted that Glencoe appeared to hide behind the SIR requirement in its policy and gambled that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit. The Court of Appeal found the conduct to be gamesmanship and refused to to adopt a rule sanctioning such conduct.

When a trial court is required to evaluate claims for equitable contribution among multiple liability insurers, each insuring the same insured on the same claim, the trial court must exercise its discretion and weigh the equities seeking to attain distributive justice and equity among the mutually liable insurers. The trial court properly did equity.

ZALMA OPINION

Insurance companies usually work to protect their insured while, at the same time, protecting its assets. Pacifica was faced with a potential exposure of almost $14 million. It received a settlement demand for less than the policy limits of both its concurrent insurance policies. Had the settlement not been reached both Axis and Glencoe could be found to have acted in bad faith and opened their $5 million policy limits to cover the full $14 million claimed.

Axis recognized the exposure and protected its insured. Glencoe sat back and tried to avoid its obligation by claiming the SIR had not been exhausted.

If Glencoe was an insurer acting in good faith it would have met with Axis and Pacifica and agreed to work together to settle the suit for the $1 million demand and would have avoided the contribution suit.

Lawyers working for insurers in such a situation should advise their clients to avoid litigation and resolve this type of suit. All three are lucky they avoided a major judgment in excess of their limits and Glencoe, rather than attempting to avoid its exposure, should have thanked Axis for protecting them from an excess verdict.

Zalma Insurance Consultants

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

Life and disability policies usually contain an incontestability clause that prevents an insurer from voiding a contract of insurance after it has been in effect for more than two years. People insured know of the incontestability clauses and do not make claim until the two years have expired. Often, even people who obtain a policy by fraud, succeed in obtaining benefits from an insurer who could have avoided the policy for misrepresentation or concealment but are prevented by the application of the Incontestability Clause.

The Sixth Circuit Court of Appeal was asked to review a district court’s summary judgment for UnumProvident Corp. and Robert A. Correa in George Kutlenios v. Unumprovident Corp., et al, No. 09-2604 (6th Cir. 04/06/2012) after George Kutlenios (Kutlenios) sued Unum when the company rescinded his disability insurance policy.  The district court granted Unum’s motion pursuant to the terms of the insurance contract.

FACTS

On March 1, 2004, Kutlenios applied for disability income insurance from Unum with the help of his insurance agent Correa, who had sold Kutlenios insurance related to Kutlenios’s business for the past fifteen years. Kutlenios attested on the application that he had read the application and his answers to the questions on the application and that his answers were true, complete and correctly recorded on the application. He also acknowledged that he understood that if his answers were incorrect or untrue that Unum could deny his benefits or rescind his policy. Kutlenios left unanswered the medical information portion of the application, which asked 20 questions about his health.

Unum rejected Kutlenios’s application because the medical information section was incomplete. It returned the application to Correa with instructions to complete the application. Kutlenios’s application was resubmitted to Unum with all of the questions answered “no” with the exception of question nine, which was still unanswered. One of the questions on the application with the answer “no” was, “Have you ever been diagnosed by a member of the medical profession as having or treated for. . . injury, disease or disorder of the spine, neck, back, extremities, including muscles, bones, joints, amputations or any chronic painful condition, neuritis, neuralgia or neuropathy, sciatica, arthritis or gout?”

Subsequently, Unum contacted Kutlenios for a “phone history interview” as part of the application process. The Unum agent asked Kutlenios questions about his health including the unanswered question nine, which read “Have you, in the last five years, seen any doctor or medical practitioner not otherwise listed on this application?” Kutlenios answered “no.”

Based on the information provided on the application, Unum issued Kutlenios a disability policy that was effective on May 20, 2004. Unum tendered the policy to Correa, who gave it to Kutlenios. The policy contained an “incontestability clause” that prevented Unum from denying Kutlenios benefits because of a misstatement or omission on the application two years after the policy’s effective date. The Unum clause, however, contained an exception for fraudulent misstatements or omissions.

On June 15, 2006, just two years and three weeks after the policy’s effective date, Kutlenios filed a claim for disability benefits. He stated he was suffering from “ankylosing spondylitis” (A/S), a type of arthritis that causes vertebrae in the spine to fuse together. The physician statement from Dr. David Schwartz that accompanied the claim revealed that Kutlenios first saw Dr. Schwartz for A/S on April 9, 2003, nearly a year before Kutlenios applied for his policy.

After receiving the claim, Unum sought more information about Kutlenios’s medical history. Unum’s investigation revealed that Kutlenios sought treatment for A/S in 1998. It also discovered a December 5, 2000 x-ray and a May 23, 2001 report that indicated that Kutlenios was suffering from spinal issues consistent with A/S.A June 28, 2001 report noted symptoms “consistent with [Kutlenios's] history of [A/S],” and a July 3, 2001 medical record contained an x-ray report that confirms Kutlenios was suffering from A/S.

In March 2007, Unum denied Kutlenios’s benefits claim and rescinded his policy based on his misstatements on his application regarding his medical history.

Analysis

Common law has always permitted the avoidance of a contract procured by means of fraud. Fraud occurs when a someone knowingly makes a materially false representation or recklessly makes a materially false representation without regard to its veracity with the intent that the statement be relied on by another party and that other party suffers an injury.

In Michigan an insured is charged with knowledge of the information in an insurance application. Kutlenios, knowing that he was suffering from A/S,  omitted the fact on his application. In fact, Kutlenios had suffered from A/S for several years before he applied for a disability policy.

Unum provided sworn testimony that it would not have issued a policy to Kutlenios if it had known about his A/S. Unum, as a result of the falsehoods presented to it by Kutlenios and his agent, suffered an injury when it relied on the misstated medical history. The misrepresentation, made with knowledge of its falsity, to the detriment of another is, by definition, common law fraud. Since Unum proved the fraud there was no need to consider the incontestability clause.

In a concurring opinion, one Justice noted that it was beyond dispute that the application contained misstatements or omissions concerning Kutlenios’s medical history, and those misstatements are attributable to him. Kutlenios argued that the insurance policy’s incontestability clause protected him from Unum’s attempt to rescind.  However, the record demonstrated, beyond any legitimate dispute, that Kutlenios was under physician’s care for his A/S during the period from May 2004 to May 2006 and, therefore, Unum was within its rights to void the policy based on the misstatements in the application (even if innocently made).

ZALMA OPINION

Mr. Kutlenios, knowing he was suffering from a serious disease that had, or would soon, make him totally disabled. He also knew, if he told the truth to an insurer they would not issue a policy of disability insurance to him because the disability would have been a certainty. Insurance can only insure against contingent or unknown events. First he tried to get the policy without answering any of the health questions. When that failed he answered all but one of the health questions in the negative. That failed again and when he was called by the insurer he responded in the negative although he was simultaneously treating with his physician for the disease that would have disqualified him for the insurance.

Unum properly rescinded the policy and the court properly affirmed the rescission whether for fraud or innocent misrepresentation.

In Michigan, the Insurance Code Section 500.4503 makes a felony for a person to present, cause to be presented, or prepare with knowledge or belief that it “will be presented to or by an insurer or any agent of an insurer, or any agent of an insurer, reinsurer, or broker any oral or written statement knowing that the statement contains any false information concerning any fact material to an application for the issuance of an insurance policy.” (Emphasis added)

The findings of the Sixth Circuit could be sufficient to conclude that a felony was committed when Mr.  Kutlenios told Unum he had not seen a physician and did not disclose that he was suffering from A/S. The Justices should have reported their findings to the local prosecutor.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 More

Since publishing this post I was provided with a copy of Plaintiff George Kutelenios’ second amended complaint and motion to allow the filing of the second amended complaint.

The allegations, if proved, will establish that Mr. Kutelenios was caused to make the misrepresentations relied upon by the Sixth Circuit Court of Appeal, by his insurance agent.

The motion to amend the complaint states:

The evidence demonstrates that Defendant Correa knew that Plaintiff suffered from ankylosing spondylitis and that he had purchased a disability policy from Trustmark during 1983 or 1984. Defendant Correa knew that Unum would not have issued a policy based on Plaintiff’s health, or that it would have issued a rider excluding the ankylosing spondylitis. Defendant Correa knew that Plaintiff’s available monthly disability benefit through Unum would have been significantly reduced based upon Plaintiff’s thenexisting Trustmark disability policy. Defendant Correa knew that Unum was not going to require Plaintiff to undergo a medical exam, given the monthly disability benefit that his income allowed, yet, on March 1, 2004 when he and Plaintiff met to prepare the Unum application, Defendant Correa misrepresented to Plaintiff that a medical exam was going to take place. Defendant Correa knew that that representation was false on March 1, 2004; it remained false when Unum returned the application to him in order to secure answers to the missing Part 2 medical questions; and Defendant Correa continued to know that it was false when he took it upon himself to answer the Part 2medical questions instead of contacting Plaintiff to  secure appropriate answers.

Defendant Correa knowingly  misrepresented to Plaintiff that the Unum policy appropriately met his needs and that a medical exam would be performed with the intent that Plaintiff rely on those assertions,  which he did. Plaintiff suffered injury as aresult of Defendant Correa’s misrepresentation, insofar as he believed that he purchased a secure policy, but after realizing what had occurred, e.g., Unum’s denial and learning the true extent of Defendant Correa’s action, Plaintiff has  experienced depression, anxiety, frustration, and anger, while  Defendant Correa has collected over $10,000.00 in sales commissions.

I don’t know what is true. If the allegations of the second amended complaint are true then the person who lied, contrary to the findings of the Sixth Circuit, was the agent. If he did so he violated his duty of good faith to the insured.

I hope attorney Ilana S. Wilenkin will keep me posted on the results of the case.

My earlier conclusion that the findings of the Sixth Circuit could be sufficient to conclude that a felony was committed when Mr.  Kutlenios told Unum he had not seen a physician and did not disclose that he was suffering from A/S. Similarly, if the misrepresentation was not that of Mr. Kutlenios but rather by his agent, a crime was still committed and the court should consider reporting the result of the fraud case — now pending — to the local prosecutor.

Misrepresentation in an application is always wrong. If the person insured told his agent the truth and the agent presented false facts to the insurer to allow the insurer to rescind, then the agent needs to be punished for breaching the duty to act fairly and in good faith.

February 28, 1912 – April 9, 2012

On April 9, 2012, my mother, Sarah Zalma, born February 29, 2012 passed away peacefully of natural causes at her home at Palm Court in Culver City, California.

Only a few weeks ago more than 50 family and friends gathered at the residence hotel where she lived to celebrate her 100th birthday.

We celebrate the life of my mother who was cared for in her last years by her  devoted friend and caregiver, Pacita San Diego.

Born in the small town of Monastir in what is now Macedonia but was originally part of the Ottoman Empire. She was the daughter Isaac Hazan and his second wife Mazaltov. Her father was the Cantor or Hazan of the Sephardic community in Monastir.

Jews first moved there to Monastir in 1492 when the King of Spain ordered the expulsion of all Jews from Spain. The Sultan Beyazit II of the Ottoman Empire issued a decree to welcome the Jews. The Ottoman Jews are identified as Sephardic Jews from the word Sepharad –  which in Hebrew means Spain. Her mother made extra money for the family by taking in laundry from the neighbors which she washed in the nearby Dragor River. Washing machines were as yet unknown.

My mother lived through 100 years of history from the time she was born on February 29, 1912 until she passed away on April 9, 2012. So many things had changed since she was born and she had seen it all happen.

Sarah Zalma

When she was born, the automobile was a new invention, indoor plumbing was only available for the very wealthy and unknown to poor Jewish families living in the Ottoman Empire. There were no radios, television, computers, aircraft, rockets, video games, cellular telephones, or movies with sound.

Some of what happened around the time she was born include:

• In 1912, the year she was born, Serbia conquered Monastir in the Balkan War ending 530 years of Ottoman rule over Monastir.
• In December 1915 — Monastir fell to Bulgaria during WWI when she was only three.
• In November 1916 – Serbia retook Monastir
• From November 1916 until 1918 Monastir was shelled by Bulgarian and German troops nearly every day for 22 months.
• When she was only five years old, World War I, the battle of Monastir took place on the Macedonian Front between Bulgaria and France in May 1917.
• Thousands of Jewish Monastirlis (as the locals referred to themselves) emigrated to North and South America, Jerusalem, and the Sephardic metropolis of Salonika, in Greece.
• Monastir was virtually destroyed. About 6,000 Jews – nearly the whole community – deserted Monastir for Salonika, Athens and elsewhere.
• Mother was sent to her stepsister’s house in Salonika, Greece to be safe, get a good education, and help her stepsister with household work.  The family in Salonika lived in a big house and was considered wealthy.
• It was not a very happy time for Mother because her brother-in-law was very strict and she missed her mother and brothers.

After the war ended in November 1918 my grandmother Mazeltov Hazan, collected Grandma, her brothers Morris and Ralph and her baby sister Becky so they could leave Europe and emigrate to the US where Mother’s three older half-brothers, Israel, Aaron and Albert Hazan had started a new life.

Their emigration was not easy and they stayed in Paris, France for a year waiting for a ship to take them to the US. In Paris mother was impressed and still talks about seeing one of the first telephones. The rest of the extended family, including her half-sister in Salonika, stayed in Greece along with about 3000 of the 11000 Jews who had lived in Monastir before WWI.

In 1941 the Nazi army and its allies reached Monastir and every Jew who stayed in Salonika and Monastir were taken to concentration camps and killed. None returned.

If mother, her mother and brothers, had stayed with her half-sister in Salonika or Monastir, she would not have survived World War II and none of her extended family would have been born.

Mother traveled in steerage class below the water line in the ship. When it arrived in America, they stopped at Ellis Island in New York harbor. The immigrants were checked to see if they were healthy and that they had someone willing to help them. Mother’s little sister, Becky, was sick and taken off the ship to a hospital on Ellis Island in New York. Her brave big brother, Morris, jumped off the ship, swam to shore, found the hospital and found Becky even though he knew no English.  It was a very scary time for mother and her brothers because they knew no English to ask anyone for help except the relatives who had earlier come to New York from Monastir.

People like Mother’s family came to America because it was a place people could live free and where everyone had an equal opportunity to succeed regardless of their family, their religion, race or national origin. If they worked hard they had the ability to succeed. There was no social safety net from the government — the safety net was only family and work.

Mother’s adult half-brothers had come first and worked in factories where they learned a business. Sarah, as a little girl, learned how to sew. She worked in sweat shops with many other young girls making dresses. Today, little girls, 10-years-old, are not allowed to work. In her time she was the only one making money and she supported her whole family.

Because Mother had to work, she didn’t get to finish elementary school. She only went through about the third grade before she started working in a clothing factory. She claimed how sad she was that she couldn’t finish school because she really liked school.

She used to call herself “stupid” because she didn’t get to finish school, but she was wrong. She was only undereducated. She was a brilliant woman who was smarter than most college graduates. She managed to enjoy most of her 100 years enjoying her children, grand children and great grandchildren.

She came to America knowing no English but did speak some French, Turkish, Ladino (the Sephardic version of Spanish) and Greek. She learned English, how to sew and was good enough that she was asked to be a supervisor. Since she was so fast at her work she gave up being a supervisor because she made more money being paid by the piece rather than on salary.

She was a hard worker, a risk taker, a fast learner and an aggressive go getter. She learned by doing. She was strong and unafraid.

As a young woman she married my father, Sam, a Sephardic immigrant from Istanbul Turkey whose family came to the United States about the same time as mother and settled, like her, in Brooklyn. Sam was a hard worker who did any job he could get. Although intelligent enough to be a college graduate, he like mother, had to work before finishing elementary school.

He did everything. He worked as a short order cook at Madison Square Garden in New York, drove a taxi cab, worked in the shipyards in San Pedro and Long Beach, California building Liberty ships during World War II (since he was rejected for the military because of a burst eardrum), drove a Helms Bakery truck, drove a delivery truck for a dry cleaner and eventually started his own dry-cleaning business which he operated until he retired after his second heart attack.

The business was a success because he worked 16 hours a day six days a week and only eight hours on Sunday. He was eventually helped by my big brother who operated the business after he retired. Dad supported his family and kept his mother-in-law in our house until she died.

My mother and father loved each other and tolerated each other. Sam provided for Mother and their children. Mother brought up her children all of whom were successes in their own right. She was there for her children 24 hours a day seven days a week because she and my father felt it was more important that their children always had someone to care for them rather than collect expensive things. They taught their children what was important by example not by lecture.

Sarah and Sam Zalma are the kind of people that made America great.  Impressive, self-sufficient, asking nothing of anyone but the ability to work as hard as they could to live free of fear.  They took advantage of the opportunities the United States of America provided to them – and made a success out of it. They made up for the lack of education with hard work and determination.

Their children grew up with little in the way of things and much in the way of love. We, her children learned by their example, that love and caring for each other was more important than things. Dad, when Irving, Starr and I were young, worked three jobs and would leave for work before we woke and not return until after we were in bed. On Sundays he had the right to sleep late but we would all jump into bed with him and Mother and get into vicious and delicious tickling bouts.

Sarah, after moving to Palm Court, worked every day for her great-grandchildren playing Bingo. Her winnings went into banks for each great-grandchild who received their share of what she earned on Chanukah or their birthday or on her birthday.

Mother will rest beside my father, the love of her life.

She leaves me and my sister Starr, her nine grandchildren and her twelve great-grandchildren behind to miss her.

Mother made friends with what seemed effortless skill wherever she went because she would greet everyone with a friendly touch. She was afraid of no one. She was not, and never could be, politically correct. She said “goodbye” when she meant hello. She enjoyed people and they enjoyed her.

She was a classic Jewish mother. She would give me two shirts for my birthday and when I wore one the next time I saw her she would say: “So you didn’t like the other one!”

No matter how much you had eaten before seeing her she had to feed you more. She made cookies that were almost impossible to copy although she never had a recipe. Starr worked for years to create a cookie almost identical.

The funeral will be Wednesday, April 11, 2012, at Home of Peace Memorial Park, 4334 Whittier Boulevard, Los Angeles, CA 90023 at 12:00 noon.

Zalma on Insurance Makes Top 50

The Minnesota Court of Appeal was called upon to resolve a challenge by Farm Bureau Mutual Insurance Company (“Farm Bureau”) to the trial court’s summary judgment in favor of its insured, respondent Earthsoils, Inc. Farm Bureau argued that the district court erred by concluding that the insurance policy requires Farm Bureau to defend and indemnify Earthsoils for claims asserted by respondents Laverne Ptacek and Jeffrey Ptacek (father and son, collectively the Ptaceks) in Farm Bureau Mutual Insurance Company v. Earthsoils, Inc, No. A11-693 (Minn.App. 04/02/2012).

FACTS

The Ptaceks jointly operate a farm in Steele County, Minnesota. Earthsoils provides agronomy consulting services to farm operators and sells fertilizer based on its recommendations. At all relevant times, Earthsoils had commercial general liability (CGL) insurance coverage through a policy issued by Farm Bureau.

In spring 2005, the Ptaceks hired Earthsoils to test and analyze their soil and make fertilizer recommendations for their corn crop. Earthsoils did so and represented to the Ptaceks that the nitrogen fertilizer it recommended was sufficient in quality and quantity to produce 180-200 bushels of corn per acre. The Ptaceks purchased and applied the recommended fertilizer, but their corn crop produced less than one-half of the anticipated yield.

The Ptaceks, not satisfied with the lack of promised sued Earthsoils claiming breach of contract, consumer misrepresentation, negligence, and breach of warranties because the corn they were promised never grew on their plants. Earthsoils tendered the defense of the action to Farm Bureau, and Farm Bureau defended Earthsoils under a reservation of rights.

Farm Bureau sought direction from the court that it is not obligated to defend and indemnify Earthsoils under the CGL policy (the policy). Farm Bureau moved for summary judgment. The district court denied the motion and on its own, without a request, granted summary judgment in favor of Earthsoils and the Ptaceks, concluding as a matter of law that the policy covers all of the Ptaceks’ claims and Farm Bureau is obligated to both defend and indemnify Earthsoils for any damages awarded on the Ptaceks’ claims. Farm Bureau appealed.

ANALYSIS

The Court of Appeal noted that a liability insurer owes two duties to its insured: a duty to defend and a duty to indemnify. The duty to defend extends to every claim that arguably falls within the scope of the policy’s indemnity coverage and exists regardless of the merits of the underlying claims. In Minnesota, whether the insurer owes a duty to defend is determined by comparing the plain language of the insurance policy to the allegations in the complaint and any extrinsic facts that could bring those allegations within the scope of coverage.

The policy provides that Farm Bureau “will pay those sums that [Earthsoils] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage,’” and must defend Earthsoils “against any ‘suit’ seeking those damages.” The policy defines “property damage” as “[p]hysical injury to tangible property, including all resulting loss of use of that property.”

The Ptaceks do not claim, in their pleadings or with extrinsic facts, that the crop produced less than it would have without the fertilizer or that the corn cobs actually produced were damaged or unmarketable.

Minnesota law distinguishes between physical injury to tangible property and economic loss. Economic losses may be recovered as consequential damages from physical injury to tangible property but do not, in and of themselves, constitute property damage.  The Ptaceks only alleged that Earthsoils’ fertilizer failed to provide sufficient nitrogen to their corn crop, causing it to produce less than the anticipated yield. But while the Ptaceks emphasized the effect on the appearance and productive capacity of their corn plants, they did not allege that the fertilizer damaged or otherwise rendered unmarketable the corn cobs actually produced. Nor did the Ptaceks allege that Earthsoils’ fertilizer physically damaged the corn plants by causing them to produce less than they would have without any fertilizer. The only injury the Ptaceks allege is failure to achieve anticipated crop yield.

Less-than-anticipated crop yield may result from physical injury to tangible property. In such a case the difference between the anticipated crop yield and the actual crop yield may provide a measure of damages.

Failure to achieve anticipated crop yield is not itself physical injury to tangible property. It is merely injury to an intangible economic interest. A crop that never existed does not constitute tangible property. Because the Ptaceks do not claim that they were damaged by any physical injury to the corn plants themselves (their tangible property) the Court of Appeal concluded that the claims against Earthsoils only allege economic loss and that, therefore, Farm Bureau had no duty to defend or indemnify Earthsoils.

ZALMA OPINION

Insurance is, as the Minnesota Court of Appeal found, a contract that promises to defend or indemnify the insured against specifically enumerated risks of loss. It does not, nor could it, respond to every claim against the insured. In this case Farm Bureau promised to defend or indemnify its insured against risks of loss to tangible property.

If the Ptaceks had claimed — or produced evidence — that the fertilizer they were sold by Earthsoils burned the corn plants, killed some or caused less corn per acre than the soil would have produced without the fertilizer, there would have been coverage for, at least, a defense. They did not because they were, as their complaint alleged, the victim of puffery. They were sold a fertilizer based on a claim by the seller that it would increase production. They believed the puffery and when their corn did not grow as promised, they sued.

Earthsoild should have been more careful in its sales pitch to avoid this type of suit but could do nothing to make the claim of misrepresentation to be a covered loss any more than there would be coverage for a car salesman who told a customer that the 1955 Chevrolet he was selling for $500 would be able to win a drag race and achieve 150 miles per hour in a quarter mile without modification.

When a promise seems too good to be true — it is.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance Makes Top 50

The Wisconsin Court of Appeal was called upon to determine if Ross Glove Company was entitled to coverage for defense or indemnity of a suit claiming it had infringed on the trade dress of another in Acuity, A Mutual Insurance Company v. Ross Glove Company, No. 2011AP1464 (Wis.App. 04/04/2012) The trial court granted judgment in favor of the insurer that its policy, specifically its “advertising injury” provision, does not afford coverage for the lawsuit brought against Ross Glove.

FACTS

Ross Glove is a Wisconsin corporation engaged in the manufacture of cold weather neck and face protectors. Ross Glove had a business relationship with Cabela’s, Inc., a Delaware corporation. Cabela’s offered for sale the products manufactured by Ross Glove. On May 13, 2009, Seirus Innovative Accessories, Inc., filed an action in the United States District Court for the Southern District of California seeking damages from Cabela’s and Ross Glove for alleged patent infringements and trade dress infringement based on four of the cold-weather headwear products. Seirus’ amended complaint contains four claims for relief against Ross Glove, including three claims based on patent infringement and one claim based on unfair competition by trade dress infringement.

The commercial general liability (CGL) insurance policy issued by Acuity to Ross Glove was in effect at the time of the alleged infringements. The policy provides coverage for any damages Ross Glove becomes legally obligated to pay due to advertising injury. Acuity accepted the tender of defense while reserving its right to dispute liability coverage.

In February 2010, Acuity filed a declaratory judgment complaint against Ross Glove, asserting that its policy did not afford coverage for Seirus’ claims in the underlying action. According to Acuity, Seirus’ complaint did not trigger an initial grant of coverage because the underlying claims did not allege that Ross Glove engaged in “advertising activity.” Acuity further asserted that because the underlying claims alleged knowing, willful and intentional infringement, any arguable initial coverage would be excluded as a knowing violation of the rights of another.

DISCUSSION

Acuity’s duty to defend is governed by the terms of its insurance policy. A duty to defend is based upon the nature of the claim and not on the merits of the claim. It is the nature of the claim alleged against the insured which is controlling even though the suit may be groundless, false or fraudulent. An insurer may have a clear duty to defend a claim that is utterly specious because, if it were meritorious, it would be covered. Finally, when an insurance policy provides coverage for even one claim made in a lawsuit, the insurer is obligated to defend the entire suit.

THE POLICY

The “advertising injury” provision in Acuity’s policy provides:

COVERAGE B – PERSONAL AND ADVERTISING INJURY LIABILITY

1. Insuring Agreement

        a. We will pay those sums that the insured becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages….

2. Exclusions

This insurance does not apply to:

        a. Knowing Violation of Rights of Another

Personal and advertising injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury.

        i. Infringement of Copyright, Patent, Trademark or Trade Secret

        Personal and advertising injury arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. However, this exclusion does not apply to infringement, in your advertisement, of copyright, trade dress or slogan.

SECTION V – DEFINITIONS

        1. “Advertisement” means a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters….

14. “Personal and advertising injury” means injury, including consequential bodily injury, arising out of one or more of the following offenses:

        g. Infringing upon another’s copyright, trade dress or slogan in your advertisement.

THE UNDERLYING SUIT

To determine whether the allegations in the complaint give rise to the possibility of coverage under the advertising injury provision of the insurance policy, the court must make three inquiries:

1. Does Seirus’ complaint state an offense covered under the advertising injury provision of Acuity’s policy?
2. Does Seirus’ complaint allege that Ross Glove engaged in advertising activity?
3. Does Seirus’ complaint allege a causal connection between the injury alleged and Ross Glove’s advertising activity?

In its fourth claim, Seirus alleges trade dress infringement by Ross Glove in violation of the federal Lanham Act, 15 U.S.C.A. § 1125(a). Specifically Seirus alleges the shape, form and appearance of its “PROTECTOR LINE” of products (all the identified products), as well as the packaging for the MASQUE™ line of products, have acquired a distinctiveness and meaning designating Seirus as the manufacturer and source of the products and packaging.

Seirus expressly identifies Ross Glove’s product packaging as a source of infringing activity. It is well established that trade dress encompasses the packaging of a product. The Court of Appeal concluded that a reasonable insured would understand the undefined policy term “notice” to include the packaging.  Seirus also alleged that the packaging was “published.” The plain and ordinary meaning of “publish” as understood by a reasonable insured to bring to the public attention; announce.

The complaint seeks to hold Ross Glove liable for injury arising from the misrepresentation of the source of Ross Glove’s products, which, separately and together with the activities of Cabela’s in advertising and selling the packaged product, has resulted in confusion, mistake and deception as to the source and origin of the infringing packaged products. Not only is the packaging an advertising instrument, it is a source of Seirus’ alleged injury – consumer confusion and lost sales.  In so concluding, we reject Acuity’s suggestion that Ross Glove, as the manufacturer of the infringing packaged products, could not also be engaged in advertising. This is so regardless of whether Cabela’s was also engaged in advertising. The packaging is an advertisement, and Seirus alleges that it is a cause of its injury – confusion on the part of buyers as to the packaged products’ origin and the resulting loss of sales.

Liberally construing Seirus’ complaint and drawing reasonable inferences therefrom, the appellate court concluded the complaint alleges both that Ross Glove engaged in activity covered under the advertising injury provision of the CGL insurance policy and that a causal connection exists between Ross Glove’s activities and Seirus’ alleged injuries.

Acuity’s policy excludes coverage for advertising injury if it was “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury.” In support of its motion for declaratory judgment, Acuity points to paragraph 36, in which Seirus alleges that Ross Glove’s trade dress infringements were willful and done with the intent to cause harm, and seeks to recover treble damages under 15 U.S.C.A. § 1117(b).

The court noted that Acuity overlooked paragraph 35 of the underlying suit, in which Seirus alleged entitlement to damages, including lost profits, as a result of the non-intentional infringement. Intent is not a required element of trade dress infringement. The Lanham Act is a strict liability statute – there need not be an allegation of willfulness in order to succeed on the issue of liability.

CONCLUSION

Seirus’ complaint alleged trade dress infringement in Ross Glove’s advertisement which is a covered offense under Acuity’s policy. Since the complaint seeks to hold Ross Glove liable for trade dress infringement without any allegation of a knowing and intentional violation the policy’s  exclusion was not available to preclude coverage. The trial court was reversed and Acuity was required to defend the insured, Ross Glove.

ZALMA OPINION

The “Advertising Injury” section of a CGL policy provides coverage for specifically stated offenses some of which do not fit within the general coverage grants of a CGL because there is no property damage or bodily injury. It is dangerous to analyze the “Advertising Injury” portion of a policy as if it was similar to the sections dealing with bodily injury and property damage.

This case teaches that an “advertisement” can be as simple as a package for a product since the package helps to sell the product to the public. If that package infringes — copies or emulates — the package used by another the insurer is obligated to defend the insured and probably will be required to indemnity the insured.

Intentional acts, by definition, are not covered by an insurance policy. However, when the plaintiff alleges both intentional and non intentional acts part of the action would be covered and the insurer will be required to defend the entire action.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

Zalma on Insurance In Top 50

The Illinois Court of Appeal was asked to resolve a dispute between the Illinois School District Agency (ISDA), a provider of commercial general liability insurance and St. Charles Community Unit School District 303 (District) concerning a series of lawsuits stemming from mold infestation in the District’s high school building.  In Illinois School District Agency v. the St. Charles Community Unit School, 2012 IL App 100088 (Ill.App. Dist.1 03/30/2012) the court recognized that Illinois is one of only three states that allow an insured to selectively tender the defense of a lawsuit to one insurer over other chronologically concurrent insurers and the District selected ISDA. The District sought approval of its attempt to select which, of consecutive insurers, was required to defend and indemnify it while contemporaneously making settlements with other insurers to the detriment of the insurer selected.

Only Montana and Washington have joined with Illinois to recognize the right of selective tender. Therefore, the court found it necessary to tread with caution applying right of selective tender which is uncommonly generous to insured parties.

Abbot & Costello could write this better but the right to selective tender places insurers in a state of confusion as to who should be on first in providing defense and indemnity to an insured. The Court of Appeal was called upon to make the question serious and humorless.

BACKGROUND

The District is a public entity that oversees St. Charles East High School, which suffered a mold infestation. The ISDA was established by certain school districts of Illinois to pool their risk. It offers for purchase by its members insurance coverage, much like ordinary commercial insurance carriers. The ISDA provided commercial general liability (CGL) insurance coverage to the District from July 1, 1995, through July 11, 2001.

Its policy provided that the ISDA “will have the right and duty to defend any ‘suits’ seeking *** damages.” It also provided that the ISDA “will pay, with respect to any claim or ‘suit’ we defend: *** All reasonable expenses incurred by the [District] at our request to assist us in the investigation or defense of the claim or ‘suit.’ ”

Prior to coverage by the ISDA, the District held CGL policies various commercial insurers from 1971 to 1995.

The Mold Lawsuits

In March 1999, the District notified the ISDA that it faced potential tort liability stemming from mold exposure to St. Charles East High School students. The ISDA reserved its rights and retained attorney Robert Smyth of the law firm of Donohue, Brown, Mathewson & Smyth to investigate and monitor mold-based claims.

Between March 2001 and March 2002, three separate lawsuits were filed against the District alleging the District’s negligence caused the former students to suffer mold-related injuries. In April 2001, the District tendered the defense of the suits to the ISDA. On June 26, 2001, the ISDA accepted the defense of the suits against the District, subject to a reservation of rights; the ISDA retained attorney Smyth to represent and defend the District in the lawsuits. Later the District tendered the defense to its various past commercial insurers. Some agreed to defend subject to a reservation of rights.

As time passed the District reached settlements with its commercial insurers in separate negotiated settlements that included a release of the demand for defense and indemnity.

The Coverage Lawsuits

The ISDA sued the District seeking a declaration that the District’s “secret” settlements with the other three insurers breached its insurance contract with the ISDA.

The District filed an answer and a four-count counterclaim.

The circuit court entered summary judgment for the District holding the District had the right to deactivate tender of the litigation defense as to the other three insurers, and that doing so in exchange for settlement payments did not breach its policy with the ISDA. The court granted leave to the ISDA to file an amended complaint alleging the District received a “double recovery” from its settlement with the other insurers and the unspecified insurance proceeds it received from the ISDA.

The ISDA remained the lone insurer that defended and indemnified the District in the lawsuits, which settled for $90,000 in September 2007. The ISDA alleges it paid “$550,889 in defense fees and expenses related to the Mold Lawsuits, and $90,000 to settle the Mold Lawsuits,” for a total expenditure of $640,889.

ANALYSIS

The ISDA contended that the District violated the terms of its insurance policy by entering into “secret” settlements with the other insurers and tendering the defense of the mold litigation to the ISDA alone. It argued these actions constituted a breach of the District’s purported fiduciary duty to the ISDA, and that the District received a “windfall” in the amount of the insurance proceeds it received that exceeded the amount of its litigation costs.

The ISDA noted that the insurance agreement expressly provided the ISDA’s coverage is applicable only as excess over other applicable insurance. The ISDA policy provided: “Coverage provided by this Plan shall apply only as excess over other insurance and/or coverage applicable to a loss hereunder regardless of whether such other coverage provides primary, excess, umbrella or contingent coverage. When both this coverage and other insurance apply to the loss on the same basis, whether excess or contingent, the Agency shall not be liable under this Plan for a greater proportion of the loss than that stated in the [contribution by equal shares provision].”

It argued the District breached the policy’s provision of “other insurance” when the District, through its settlements with the commercial insurers prevented the ISDA from seeking equitable contribution from these other insurance companies for the mold litigation. The District countered that it had the unfettered right to tender the defense of the lawsuits to any of its insurers.

“Other insurance” excess clauses are designed to override an insured’s right to choose among co-insurers. Such provisions, as in this case, attempt to render otherwise primary insurance as excess over any other collectible insurance, most often with statements in the policy that declare the insurer’s coverage to be excess over any other valid and collectible insurance available to the insured. An “other insurance” provision does not in itself overcome the right of an insured to tender defense of an action to one insurer alone.

The issue decided by the Court of Appeal was whether an insured’s right to selective tender among chronologically concurrent policies extends to consecutive ones such as the policies at issue in this case. Finding no Illinois Supreme Court precedent the court noted that the selective tender rule is only applicable to concurrent insurance coverage and not consecutive primary or excess coverage policies where other primary coverage is available.

CONCLUSIONS

The Court of Appeal concluded that the District was not entitled to judgment as a matter of law. It found that the circuit court erred in granting summary judgment to the District based on its purported right to selectively tender the defense of the mold lawsuits to the ISDA as a consecutive insurer. The ISDA was correct that an insured party may not receive a double recovery for the same “harm or injury” and the case was remanded to the trial court to resolve who paid what to whom.

The Court of Appeal declined the District’s invitation to extend the targeted tender rule beyond cases involving concurrent insurance policies, as the only context in which the Illinois Supreme Court has applied the rule. Because the District’s insurance policies were all consecutive, the selective tender rule did not apply to compel the ISDA to defend alone, without the prospect of equitable contribution from other insurers, the mold lawsuits against the District.

ZALMA OPINION

This decision teaches many lessons about insurance, not the least of which is that multiple insurers for a single insured worked adverse to each other to mold special deals that had nothing to do with insurance. The underlying lawsuits for injuries allegedly resulting from mold infestation settled for only $90,000 yet the expenses and legal expenses was more than $550,889.

Insurers are professional at resolving disputes. Had the insurers and the District sat together with the plaintiffs unified against the allegedly injured persons they would have settled early, probably for less than $90,000 and certainly for less than $550,889 in expenses. Insurance claims presented by professional coverage counsel should never be considered a method for an insured to profit. Rules like the selective tender rule accepted in Illinois should not be used by an insured to profit.

The Court of Appeal saw the problem and sent the case back to the trial court to resolve the issue.

The covenant of good faith and fair dealing incorporated by law into every insurance contract is defeated by the selective tender rule because it sets the insured and the insurer adverse to each other.

Insurance claims situations should not be an adversary relationship. Courts should not be asked to waste their time dealing with insureds and insurers who — rather than treating each other with the utmost good faith — seek to profit from an ability to drag insurers whose policies have long expired into a dispute and extort money from them to avoid the cost of defense and indemnity of a lawsuit that had the parties worked together could have been resolved quickly and cheaply.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2784 0 http://zalma.com/blog/?p=2780 http://zalma.com/blog/?p=2780#comments Wed, 04 Apr 2012 13:57:03 +0000 Barry Zalma http://zalma.com/blog/?p=2780 Continue reading →]]> A Proposal to Defeat Insurance Fraud

Insurance Fraud is Endemic

Zalma on Insurance in Top 50

Insurers and prosecutors have attempted to be proactive in the fight against insurance fraud by filing cases against medical and legal professionals who commit fraudulent claims. Lawsuits and prosecutions naming dozens of defendants are filed gaining enormous publicity for the insurer suing the fraud perpetrators or the prosecutors charging the crime of insurance fraud.

As readers of Zalma on Insurance and Zalma’s Insurance Fraud Letter (ZIFL) are aware that the mass prosecutions and civil suits are difficult to present. In fact as I reported in the April 1, 2012 issue of ZIFL State Farm lost most of a major insurance fraud case because it could not present evidence against all of the defendants in in State Farm Fire and Casualty Company v. Allied and Associates, Gary M. Lappin, Janel Sykes, Derwin Sykes, No. Case Number 11-10710 (E.D.Mich. 03/19/2012).

If Kept Simple Insurance Fraud Is Easy to Prove

To prove civil insurance fraud an insurer need only prove:

• A misrepresentation or concealment of a material fact.
• The misrepresentation or concealment made with knowledge of the truth with an intent to deceive.
• The insurer was deceived to its detriment.

For example a claimant presents a claim for medical treatment for bodily injuries in an automobile  accident supported by medical bills from Dr. Quack who reports he treated the claimant with massage and acupuncture three times a week from the date of the accident for two months. The insurer takes the statement of the claimant who admits he only saw Dr. Quack twice and set on a heating pad for ten minutes and the claimant signed the statement under oath.

Investigation by the insurer determines that Dr. Quack submitted to the insurer similar invoices for 150 claimants who received no treatment and the SIU investigators were able to get the testimony of an employee of Dr. Quack to confirm the billings were false.

The insurer’s lawyer wants to file a 150 count suit against Dr. Quack because it will reach news outlets and gain counsel and the insurer fame for a fight against insurance fraud. As the State Farm case proved, that is not necessarily a wise option.

A Proposal to Defeat Insurance Fraud

Insurance fraud is a lucrative business. Perpetrators can make millions of dollars easily with little fear of prosecution. To avoid the problem faced in the State Farm case I propose the following:

1. File a single lawsuit against the claimant and Dr. Quack for a single cause of action for fraud.
2. Sue only Dr. Quack and the single claimant.
3. Bring the case to trial as fast as possible.
4. Refuse all attempts to settle.

The pleading can be simple and allege only that Dr. Quack and the claimant presented a claim for proceeds of an insurance policy with knowledge that the claim was false and fraudulent. The allegation should simply state that Dr. Quack billed for medical services not provided and demand as damages the amounts paid, the costs of investigation, and punitive damages equal to three times the amounts paid.

If there are 150 acts of fraud the insurer should file 150 separate actions. The cases can be tried by the least experienced lawyers in the insurer’s house counsel or at an independent law firm. Trial should be estimated at less than two days.

Prosecutors, also, should avoid the temptation to make the case large, complex and convoluted. For example, if in California, Penal Code Section 550 provides that all that is needed to prove a criminal act of insurance fraud is:

(1) Knowingly present or cause to be presented any false or fraudulent claim for the payment of a loss, including payment of a loss under a contract of insurance.

* * *

(8) Knowingly submit a claim for a health care benefit which was not used by, or on behalf of, the claimant.

All that is required to prove that Dr. Quack committed the crime is invoice(s) submitted in an amount over $400 and the testimony of the patient. Charging Dr. Quack with the single count will be difficult to defend. If an employee of Dr. Quack testifies on how the false bills are created will be sufficient to convict and the first year prosecutor will have no difficulty proving his case.

Conclusion: Keep It Simple, Stupid!

Keeping the suit or prosecution simple will have a deterrent effect, will please the trial court since it can be tried quickly without drama, publicity and a need to find a jury that can serve for months.

The civil cases can be simple and without a great deal of damages alleged. If each claimant has presented a false claim between $400 and $5000 it might be best to bring the action in small claims, municipal or justice courts.

By keeping it simple the civil lawyer or the prosecutor can have a strong deterrent effect on insurance fraud. A single conviction of a doctor, chiropractor, nurse, lawyer or other professional for insurance fraud, no matter how small, is a crime of moral turpitude that can cause the professional to lose his or her license to practice. Multiple convictions or civil judgments for insurance fraud will almost make the loss of license a certainty.

It is time that insurers fight back against insurance fraud perpetrators intelligently. Small judgments can be collected.  Pursuing the fraud perpetrators is inexpensive and can be done, in volume.

If the evidence exists — whether against third-party or first-party fraud — suits should be filed against the fraud perpetrators to recover money paid or investigation costs incurred to avoid paying the fraud. Attempted fraud is as much a crime as fraud committed successfully. Don’t give up. If the jury does not agree use that experience in the next case against Dr. Quack to prove the case.

Barry Zalma

© 2012 – Barry Zalma

Mr. Zalma is the author of “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers that can be purchased at its web site at http://www.stpub.com

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The New York Appellate Division was asked to resolve whether the use of expert witnesses in determining cases claiming damages as a result of exposure to mold. It stated that although previous decisions dismissed a case because of insufficient expert testimony it never disavowed the underlying theory that exposure to mold may, under certain circumstances, give rise to respiratory and other ailments.

Finding in Brenda Cornell, Plaintiff-Appellant v. 360 West 51st Street Realty, LLC, et al., Defendants, No. 113104/04 4810 (N.Y.App.Div. 03/06/2012), the motion court erred in finding that plaintiff’s proof was not “strong enough to constitute a causal relationship,” or that the methodologies used to evaluate her condition failed to meet the standard imposed on courts to limit expert testimony. It concluded that the focus of the inquiry into the expert’s qualifications should not be upon how widespread a theory’s acceptance is, but should instead consider whether a reasonable quantum of legitimate support exists in the literature for an expert’s views.

Since plaintiff’s expert’s opinions relating plaintiff’s condition to the mold infestation found some support in existing data, studies and literature, including studies that have found a statistically significant relationship between mold and various respiratory maladies, the appellate court concluded that standard is satisfied.

FACTS

Plaintiff lived in an apartment rented from the defendants since 1997. The apartment is located directly above the basement area of the building. Plaintiff testified that she had occasion to walk through the public areas of the basement throughout her tenancy and described the area as damp, musty, and harboring bugs and mice. Floods in the summer of 2002 and 2003 resulted in water damage in the basement stairwell and on the walls of the basement. During the summer of 2003, a steam pipe broke in plaintiff’s apartment, releasing steam. In July 2003, after the pipe broke and water leaked in the basement, plaintiff noticed a small amount of mold in her bathroom. Plaintiff testified that when she entered the bathroom she began to feel ill, experiencing a body rash, shortness of breath, fatigue, disorientation and headaches. She testified that the landlord placed a dehumidifier in the bathroom and advised her to wash the area with bleach. Plaintiff did so and her symptoms disappeared.

On October 7, 2003, plaintiff left the apartment due to difficulty breathing. In November 2003, plaintiff informed defendant landlord that she was unable to live in the apartment due to the ongoing renovation work and was withholding rent for the month of November. Plaintiff moved in with a friend and never again slept in the apartment.

Expert Testimony

At the Civil Court trial, plaintiff’s experts testified that the damp conditions in the basement had created the ideal environment for growth of fungus, and that the contractors disturbed years of spores and dust when they cleaned out the basement.

Plaintiff relied on the affidavit of her treating physician, Dr. Eckhard Johanning. Dr. Johanning opined that exposure to damp buildings with excessive and atypical mold contamination was a recognized cause of respiratory health complaints and conditions such as asthma, rhino-sinutis, bronchitis, allergy, infections and irritant-type reactions of the skin and mucous membranes.

Dr. Johanning opined, with a reasonable degree of medical certainty, that plaintiff’s irritative and allergic-type symptomatology was caused by exposure to building dampness and excessive and atypical mold exposure, over time, at her apartment. In arriving at his conclusion concerning plaintiff’s physical health and its cause, Dr. Johanning considered plaintiff’s medical and occupational history and history of environmental exposure, other competing/confounding environmental/occupational exposures, a detailed physical examination of plaintiff, diagnostic laboratory studies, the medical and scientific literature, and details of the environmental and exposure data.

Dr. Johanning conducted a number of different blood tests/panels that included an evaluation of the liver, kidneys and immunological system, hormones (to assess thyroid function), protein chemistry, heavy metal analysis, urinalysis, allergy specific IgE and IgG, and respiratory function tests such as spirometry, inhaler studies and diffusion tests, and other examinations. Dr. Johanning opined that plaintiff still exhibited immune mediated hypersensitivity reactions (IG antibodies) to microbes typically found in very wet and damp environments, consistent with her medical history and exposure.

Dr. Johanning stated there was “no question” that the conditions existing in plaintiff’s apartment, including dust, microbial growth, mold, heavy metals and a diversity of fungi and bacteria that had come up through the floorboards and the air shaft in the apartment as a result of demolition work in the basement, contamination from flooding, as revealed by long-term water damage, as well as dust, standing water, moisture and streaking on the walls, “had a host of deleterious effects” on plaintiff’s health.

Basis for Expert Opinion

Forming his opinions, Dr. Johanning relied on a number of peer-reviewed studies, including a 2004 publication of the Institute of Medicine in the National Academies, entitled Damp Indoor Spaces and Health, relied upon by the Fraser plaintiffs, as well as two studies which post-date Fraser, a 2007 study entitled Excess dampness and mold growth in homes: An evidence-based review of the aeroirritant effect and its potential causes (28 Journal of Allergy and Asthma Proceedings, May/June 2007), and an article published in 2008 entitled Hydrophilic Fungi and Ergosterol Associated with Respiratory Illness in a Water-Damaged Building (116 Environmental Health Perspectives, June 2008). The first study reviewed the major epidemiological and biological studies, concluding that “[t]he preponderance of epidemiological data supports a link between exposure to dampness and excess mold growth and the development of aeroirritant symptoms,” and that studies “support the role of VOCs [volatile organic compounds] in contributing to the aeroirritant symptoms of occupants of damp and mold-contaminated homes.” The authors noted, in reviewing the data, that “[m]ultiple studies [] have found a dose-response relationship between the numbers of indicators of dampness present and aeroirritant symptoms.” These studies found statistically significant relationships between visible mold growth and eye, nose and throat/respiratory symptoms.

The second study found that among workers in a building with long-term water damage, “respiratory illnesses showed significant linear exposure-response relationships to total culturable fungi.” The authors stated that they had found “significant linear exposure-response relationships between various microbial measurements (total fungi, fungi requiring Aw o 0.8, hydrophilic fungi, ergosterol and endotoxin) in dust and health outcomes (respiratory cases, epi-asthma cases, and post-occupancy asthma cases).” The authors found that the associations between health outcomes and fungi were mostly driven by exposure to fungi requiring Aw o 0.8, and specifically hydrophilic fungi in both floor and chair dust, that exposure to hydrophilic fungi in floor and chair dust was associated with about a two-fold increase in the chances of being a post-asthma occupancy case, and that of all the environmental variables, hydrophilic fungi in floor dust were most strongly associated with post-occupancy asthma cases.

The scientific evidence shows that exposure to molds, particularly the types of molds whose presence in plaintiff’s apartment was confirmed by sampling, i.e., aspergillus/penicillum, stachybotrys and chaetoium, can cause the types of ill effects experienced by plaintiff. Evidence offered on the motion easily satisfied the test of scientific reliability required by precedent.

The appellate court concluded that the Plaintiff adequately established specific causation. The evidence confirmed the presence of these types of molds in plaintiff’s apartment. Plaintiff’s expert opined that plaintiff’s exposure to these fungi, including their by-products such as allergens, mycotoxins, and microbial volatile organic compounds, caused plaintiff’s ailments. Plaintiff’s expert opined that plaintiff still exhibited immune mediated hypersensitivity reactions, as confirmed by IG testing, to microbes typically found in very wet and damp environments.

It is undisputed that exposure to toxic molds is capable of causing the types of ailments from which plaintiff suffers. Plaintiff’s expert, via differential diagnosis, arrived at the scientifically sound conclusion that exposure to the toxic molds in plaintiff’s apartment was a cause, within a reasonable degree of medical certainty, of her documented medical ailments.

Plaintiff’s expert and defendant’s experts all agree that mold is capable of causing the ill-health effects experienced by plaintiff. Defendant’s expert opined that “[m]olds can cause a wide spectrum of illnesses, including allergies, irritation, hypersensitivity pneumonitis and direct infection.”

The complaint was reinstated as against defendant 360 W. 51st Street Corp., and otherwise affirmed, without costs.

ZALMA OPINION

This decision has put the fear of litigation to owners of apartments and condominium developments in New York state because the original case keeping out the doctor’s testimony had dampened the number of cases. The fear is probably overstated. This case found extreme exposure of mold and fungi spores to a person who was amenable to disease-like symptoms from the exposure. That the doctor, in this case, was able to show some causal relationship from the exposure to mold and the illnesses complained of by the plaintiff.

This is the rule of law across the country whether applying Frye or Daubert. It is nothing new other than the fact that the court accepted as reliable the peer reviewed articles cited by the plaintiff’s expert, and the severity of the exposure. If the court, using its discretion, believes expert testimony should be submitted to the trier of fact because it is based on sufficient scientific background it will be admitted and if not, as in the previous New York case, it will not be admitted.

Barry Zalma

© 2012 – Barry Zalma

Mr. Zalma is the author of “Mold: A Comprehensive Claims Guide” published by Specialty Technical Publishers that can be purchased at its web site at http://www.stpub.com

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Don’t Deceive Court About Terms of Policy

Zalma on Insurance in Top 50

The Eighth Circuit Court of Appeal was called upon to resolve an issue of coverage raised by the bankruptcy of an insured who had no ability to pay the self insured retention (SIR) it agreed to pay at the time it acquired the insurance in Gulf Underwriters Insurance Company v. Lowell P. Burris; Joyce P. Burris, No. 11-1967 (8th Cir. 03/27/2012).

Lowell Burris was seriously injured in August 2001 when he fell from a ladder manufactured in Wisconsin by Versa Products, Inc. (“Versa”), and purchased from Menard, Inc. (“Menard”). In March 2003, when Burris’s attorney allegedly wrote Versa asserting a product liability claim, Versa and an affiliate were named insureds and Menard was an additional insured under a “claims made” Commercial General Liability insurance policy issued in Wisconsin by Gulf Underwriters Insurance Company (“Gulf”). The policy included a $50,000 SIR endorsement.

Gulf sued seeking declaratory judgment that the policy does not afford coverage to them or Menard, Inc. for any claim made by Burris under the terms of the Gulf Policy. The district court granted Gulf’s motion for a summary declaratory judgment on the ground that Versa’s dissolution after expiration of the policy meant that the insured “cannot meet its obligations under the SIR,” a material breach that terminates Gulf’s obligations under the policy.

Policy Interpretation

Wisconsin courts apply well-known principles of contract interpretation in resolving insurance coverage disputes. The Eight Circuit stated that  the SIR is all the court needed to decide the issue raised on appeal. It provided:

This endorsement forms a part of the policy to which it is attached. Please read it carefully.

SELF-INSURED RETENTION (WITH AGGREGATE SELF-INSURED RETENTION) DEFENSE COSTS CONTRIBUTING TO RETENTION LIMIT

In consideration of the premium charged, it is hereby agreed that such coverage as is afforded by this policy shall be excess of a $50,000 Self-Insured Retention each “occurrence.” It is also agreed that all expenses and costs under the Supplementary Payments section stated in the Coverage Form (Section 1) shall contribute to the exhaustion of the $50,000 Self-Insured Retention Limit and all such expenses and costs shall be entirely borne by the insured.

All the terms of this policy including, but not limited to, those with respect to notice of “claim” or “suit” and the Company’s right to investigate, negotiate, defend and settle any “claim” apply irrespective of the application of the Self-Insured Retention.

The Company may, but is not obligated to, pay all or part of the Self-Insured Retention to effect settlement of any “claim,” “suit” or expense. Upon notification of the action taken, the insured shall promptly reimburse the Company for such Self-Insured Retention amount paid by the Company. Failure of the insured to pay such Self-Insured Retention amount within ten (10) days after receipt of a written request for such payment shall subject the policy to cancellation in accordance with the terms and conditions relating to non-payment of premium.

This endorsement does not in any way relieve the insured of his responsibility to report any incident that might give rise to a “claim” as stated elsewhere in this policy.

The Self-Insured Retention obligation to this contract shall be considered to be an executory contract under all circumstances and payments on this obligation shall be paid by the insured. Failure to make the payment entitles the insurer to terminate the contractual obligation between the parties as a failure to the Self-Insured Retention endorsement is a material breach as to the entire contract. In the event of a bankruptcy filing, the contract is deemed executory as under 11 U.S.C. 365, and the payments of the Self-Insured Retention shall be made on a monthly basis and treated as an administrative expense under 11 U.S.C. 507(a)(1).  (Emphasis added)

The Trial Court Ruling

The district court ruled, that the policy provides no coverage for the claim asserted by Burris solely because the SIR expressly provides that Versa’s inability to comply with its SIR obligations “is a material breach as to the entire contract” that terminates Gulf’s obligations under the policy.

Analysis

The Eighth Circuit looked past the basic condition to the remainder of the SIR that included the following statement: “All the terms of this policy . . . apply irrespective of the application of the Self-Insured Retention.”

Regardless of the SIR the coverage of third-party liability claims continues to be defined exclusively by the provisions of the policy’s Commercial General Liability Coverage Form. By its language it is clear that the policy’s drafters did not intend the self-insured endorsement to affect Gulf’s obligations under the policy to third party claimants.

In Wisconsin, “Where the endorsement expressly provides that it is subject to all terms, limitations, and conditions of the policy, it does not abrogate or nullify any provision of the policy unless it is so stated in the endorsement.” Inter-Ins. Exch. of Chi. Motor Club v. Westchester Fire Ins. Co., 130 N.W.2d 185, 188 (Wis. 1964).

Gulf Deceived the Trial Court

Gulf deceptively omitted from the SIR excerpts quoted in its briefs to the district court and to the Eighth Circuit. That paragraph provides in part: “Failure of the insured to pay such Self-Insured Retention amount within ten (10) days after receipt of a written request for such payment shall subject the policy to cancellation in accordance with the terms and conditions relating to non-payment of premium.”

The inconsistent termination/cancellation provisions within the SIR itself create an ambiguity that must be resolved in favor of the insured. As Gulf and its attorneys must have known, every court in the country to consider a related issue has ruled that insurance policies for which the policy periods have expired and the premium has been paid are not executory contracts, despite continuing obligations on the part of the insured.

Wisconsin has direct action statutes that allow an injured party to join the liability insurer in a negligence action and recover for a covered loss even if the insured is insolvent or has been given an absolute release. Alternatively, the injured party may sue the insurer after recovering a judgment against the insured, if execution against the insured is returned unsatisfied for any reason.

Gulf also failed to disclose to the courts that Wisconsin prohibits declaratory judgment actions by insurers raising coverage issues prior to the determination of the insured’s liability to a third party.  Given the number of deceptive misstatements and non-disclosures in Gulf’s presentation of the SIR issue to the district and to the Eighth Circuit and the existence of a “preferred procedure to determine insurance coverage” under Wisconsin law, the Eighth Circuit concluded that it must exercise its discretion to deny Gulf a declaratory judgment resolving other coverage issues that might have been suitable for declaratory relief in other circumstances.

The Eighth Circuit invited the district court to issue an order to show cause why Gulf and/or its attorneys should not be ordered to reimburse Burris and his wife for their reasonable attorney’s fees and costs in defending this declaratory judgment action.

ZALMA OPINION

Deceiving a court is probably the greatest sin a litigant or its lawyers can commit in litigation. There is no excuse to do so and it could have been severely punished. To attempt to deceive a court of appeal, after successfully deceiving the trial court, when all that was required to be caught was for the court to read the entire SIR endorsement is not only contumacious it is just plain stupid.

Counsel and Gulf should breath a sigh of relief that all the Eighth Circuit did to punish them for their wrongful conduct was to suggest the trial court order them to pay the plaintiffs’ attorneys fees.

Lawyers and parties who intentionally deceive — by commission or omission — a court should be punished to deter future attempts at deception.

 

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The Colorado Court of Appeal was called upon to determine whether an “absolute pollution” exclusion (APE) applied to a suit for bodily injuries exposed to raw sewage. Plaintiffs, Shadi Figuli, Joshua Figuli, and Jean Chu, appeal the district court’s summary judgment in favor of defendant, State Farm Insurance Companies, concluding that raw sewage is a pollutant excluded from coverage by State Farm policies’ absolute pollution exclusion in Shadi Figuli, Joshua Figuli, and Jean Chu v. State Farm Mutual Fire & Casualty, D/B/A State Farm Insurance, 12 COA 53 (Colo.App. 03/29/2012).

Background

In 2004, the Figulis became ill while living in a rental property owned by Chu. The property was covered by a rental dwelling policy with State Farm, and Chu also had a personal liability umbrella policy.

After testing on the property revealed the presence of toxic mold and raw sewage, the Figulis filed suit against Chu for their injuries. Specifically, the Figulis alleged Chu “did not disclose to [them] (at any time) that the property had, in the past, been contaminated by raw sewage and/or other hazardous materials, and had not been properly remediated before it was re-rented.” They further claimed that Chu “failed to disclose and/or concealed other serious problems with the property, including several water leaks” which resulted in toxic mold.

Chu advised State Farm of the Figulis’ claims and requested State Farm defend and indemnify her. State Farm denied Chu’s claim, citing three separate coverage exclusions in the policies. First, both the rental and umbrella policies included an endorsement excluding coverage for fungus, including mold.

Second, the umbrella policy excluded coverage “for any loss caused by [the insured's] business pursuits or arising out of business property.” Third, the exclusion at issue here, the absolute pollution exclusion (APE) included in the rental policy, states in pertinent part:

1. Coverage L – Business Liability and Coverage M – Premises Medical Payments do not apply to:

        i. bodily injury or property damages arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants:

        (1) at or from premises owned, rented or occupied by the named insured; . . . .

As used in this exclusion: “pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. “waste” includes materials to be recycled, reconditioned or reclaimed.

Based upon this exclusion, State Farm concluded the Figulis’ claimed injuries from “raw sewage and/or other hazardous materials” were injuries arising from the “discharge, dispersal, spill, release or escape of pollutants” and, therefore, were not covered by the policies.

Chu and the Figulis agreed to arbitrate their dispute. At the completion of arbitration, the Figulis were awarded $130,000 plus costs and interest, for a total of $178,500, confirmed by order of the district court. Plaintiffs then filed the current action against State Farm alleging breach of contract based upon the denial of coverage. The district court granted summary judgment in favor of State Farm.

ANALYSIS

An insurance policy is a contract, the interpretation of which is a legal matter that appellate courts review de novo (as if it was first presented to the appellate court).

 The Absolute Pollution Exclusion

Plaintiffs asked the court to determine whether water and sewage, which overflowed from a residential toilet or sewer, and the bacteria and parasites that it carried, are “pollutants” for the purposes of Ms. Chu’s insurance coverage, and the standard pollution exclusion, contained in her policies.

The Court of Appeal concluded the APE is unambiguous when applied to raw sewage and therefore State Farm properly denied Chu’s claim.

In contract interpretation courts of appeal begin by giving words used their plain and ordinary meaning unless the intent of the parties, as expressed in the contract, indicates that an alternative interpretation is intended. In Colorado, the plain language of the APE is not limited solely to environmental or industrial contexts.

Finding that the APE is unambiguous when applied to raw sewage the court of appeal relied on the policy definition of “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including . . . waste.” “Waste” is defined in the policy as including, but not limited to, materials to be recycled, reconditioned, or reclaimed. Referring to basic dictionary definitions the Court of Appeal noted that the plain meaning of the term “sewage” is waste, and waste is clearly included in the definition of “pollutants” under the policy.

The Court of Appeal noted that raw sewage is considered a pollutant under both the Clean Water Act and the Colorado Water Quality Control Act. Additionally, the definition of “waste” includes both “excrement” and “sewage.” A pollutant must also be an irritant or contaminant. These are the essential characteristics of a pollutant under the policy. The policy does not define “irritant” or “contaminant” yet the sewage that backed-up was a contaminant and that the tenant’s bodily injury arose from its discharge, dispersal, spill, release, or escape of the sewage.

Raw sewage, therefore, constitutes a pollutant under the APE and the movement of the raw sewage which overflowed from a residential toilet or sewer constituted a discharge, dispersal, spill, release or escape of pollutants within the meaning of the APE.

Based upon this conclusion the district court correctly held State Farm had no duty to defend or indemnify Chu and properly granted summary judgment in State Farm’s favor.

Also note our report on bat guano, as a pollutant, at http://zalma.com/blog/?p=2686 where the Supreme Court of Wisconsin held: “[t]hat bat guano falls unambiguously within the policy’s definition of “pollutants” was not enough to resolve the dispute. The court needed to determine whether the Hirschhorns’ alleged loss resulted from the “discharge, release, escape, seepage, migration or dispersal” of bat guano under the plain terms of the policy’s pollution exclusion clause.” Since human excrement is no less toxic than bad guano, which the plaintiffs in the Wisconsin case stipulated was true, there should be no surprise by this decision.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

In this, the seventh issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), ZIFL reports on:

1.    An insurer that sues its insureds or vendors for insurance fraud must do so with detailed evidence that will convince a trier of fact. Use only of an expertwitness is not suficient.

2.    Chapter VI of the serialized novel “Murder and Insurance Don’t Mix.”

3.    Information about new ISO anti-fraud sytems.

4.    Zalma on Insurance – the blog and Zalma Books.

5.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 387 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 are available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Zalma on Insurance in Top 50

Barry Zalma, Inc.

The Maine Supreme Judicial Court was asked to resolve an insurance coverage issue raised by an assault and battery in The Travelers Indemnity Company v. Michael A. Bryant et al., No. Docket: Cum-11-380 (Me. 03/22/2012) when the assault and battery occurred outside the scope of employment of the tortfeasor.

Michael A. Bryant, an owner and employee of Prime Cut Meat Market, assaulted another motorist in an apparent incident of road rage. Prime Cut and its employees were insured by a policy issued by The Travelers Indemnity Company. The injured motorist and his wife appeal entry of summary judgment in favor of Travelers on its complaint for a declaratory judgment as to its duty to indemnify Bryant pursuant to the policy.

BACKGROUND

On September 3, 2007, Bryant was traveling from a campground with his son, in a truck that he owned, on Route 85 near Raymond. The side of the truck was emblazoned with decals that said either “Prime Cut Meat Market” or “Meat Market.” Bryant was co-owner of Prime Cut and was sometimes paid by the business as an hourly employee. Bryant purchased the truck before his involvement with Prime Cut. The truck was registered in his name. Prime Cut did not pay or reimburse Bryant for the decals on his truck, nor did Prime Cut pay the truck’s loan payments, gas, or maintenance.

While stopped at a traffic light on Route 85, Bryant exited his truck and approached the driver’s side of Francis Latanowich’s vehicle, which was stopped just ahead of Bryant’s vehicle at an intersection. Bryant struck Latanowich repeatedly in the head and chest because he “wanted [him] to know” that his driving had put other drivers, including Bryant, at risk. In Bryant’s own words, he took “it upon [himself] to try to set [Latanowich] straight.”

The Assignment of Rights

Latanowich and his wife, Donna, sued Bryant, Prime Cut, and their own automobile insurance carrier, Commerce Insurance Company, for, among other things, assault and battery, false imprisonment, negligence and negligent infliction of emotional distress. Prime Cut successfully moved for summary judgment, and the Latanowiches stipulated to a partial dismissal with Commerce Insurance Company. The Latanowiches and Bryant agreed to a settlement that included Bryant assigning all of his rights related to potential insurance coverage to the Latanowiches.

On July 23, 2010, Travelers filed a complaint against Bryant and the Latanowiches seeking a declaratory judgment that it had no duty to indemnify Bryant for claims arising from the altercation because Bryant was not an insured under its policy issued to Prime Cut for purposes of that conduct. The trial court concluded that the policy language did not cover the incident, and it granted Travelers’s motion for summary judgment. The Latanowiches appeal.

DISCUSSION

Unambiguous contract language must be interpreted according to its plain meaning. Any ambiguity in an insurance contract is construed strictly against the insurer and liberally in favor of the insured.

Coverage for partners is provided “only with respect to the conduct of your business,” and employees are covered only for “acts within the scope of their employment . . . or while performing duties related to the conduct of your business.”

Because his assault of Latanowich was not in respect to the conduct of Prime Cut’s business, Bryant was not insured as a partner when he assaulted another motorist. Whether or not Bryant was en route to Prime Cut, his actions in assaulting Latanowich were not taken “with respect to the conduct” of the meat market’s business. Similarly, Bryant’s acts were not covered as those of an employee because the assault was not “within the scope of [his] employment” and did not constitute “performing duties related to the conduct” of Prime Cut’s business.

Neither the assault nor Bryant’s motive for it were related to the conduct of Prime Cut’s business or within the scope of his employment with Prime Cut.
Bryant admitted he took it upon himself to try to “set Latanowich straight.”

An ordinary person would not think that the policy’s language would cover his assault of another motorist, especially where the employee was off the clock and returning from a personal camping trip, and where the employee exited his vehicle in the middle of the road to set another driver straight, notwithstanding that the employee’s independently owned and maintained vehicle was marked with the name of his employer and that he was on his way to the employer’s premises.

Pursuant to the unambiguous language of the policy, the Supreme Judicial Court concluded that the trial court correctly concluded that Bryant’s assault of Latanowich was not covered by the policy and properly entered summary judgment.

ZALMA OPINION

Many people believe that a suit against an insurance company for bad faith refusal to defend its insured cannot be lost and will usually allow recovery of damages in excess of the injuries actually incurred. Most, like the Latanowichs, are sorely disappointed. Clearly, Mr. Bryant committed an intentional tort that can never be covered by an insurance policy since, to do so, would breach the public policy of almost every state. In addition, coverage under the Travelers policy only applied when the person seeking insurance was in the course and scope of his employment.

Beating a person about the head on a public roadway because he was not driving safely and needed to be set straight could not conceivably be in the course and scope of his employment.

Unless Bryan had no assets it made little sense to let him go free from liability to gamble on getting a big verdict against his putative insurer. In this case the person who battered the plaintiff got away with his tort and the Latanowichs’ gamble failed.

The prudent party, before giving a defendant a covenant not to execute in exchange for an assignment of his rights against his insurer should always:

1. Obtain a copy of the policy.
2. Analyze the policy as it relates to the facts.
3. Seek the advice of an insurance coverage expert.
4. Check the assets of the defendant to determine if he or she has sufficient assets to pay any judgment.

Failure to do so will result in the injured party getting nothing.

I’ll be out of town for a couple days so this may be my last post of the week.

Zalma on Insurance in Top 50

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2759 3 http://zalma.com/blog/?p=2756 http://zalma.com/blog/?p=2756#comments Wed, 28 Mar 2012 14:00:19 +0000 Barry Zalma http://zalma.com/blog/?p=2756 Continue reading →]]> Insurance Agent Should Not Steal From an Old Lady

Zalma on Insurance in Top 50

Aaron Pittman (defendant) appealed from judgments entered upon jury convictions for 1) insurance fraud, 2) obtaining property by false pretenses, and 3) exploitation of an elder adult. He unsuccessfully asked the North Carolina Court of Appeal to reverse his convictions in State of North Carolina v. Aaron Pittman, No. COA11-1114 (N.C.App. 03/20/2012).

FACTS

In late 2003 defendant was employed as an insurance salesman. Around this time, he went to the home of Effie Satterwhite, a woman in her eighties who was limited in her abilities to read and write. Defendant spoke to Satterwhite about purchasing insurance, and Satterwhite decided to buy a $10,000.00 burial insurance policy from defendant. Defendant helped Satterwhite complete the forms. The policy listed Satterwhite’s half-sister, Sally, as the beneficiary.

Defendant continued to have a relationship with Satterwhite after he sold the policy to her. After some time, defendant introduced Satterwhite to his wife, Mildred Dew. Satterwhite then developed a relationship with defendant and Dew, and the couple occasionally cleaned Satterwhite’s house. During one of his visits, defendant took copies of Satterwhite’s driver’s license and some of her financial records and began a series of activities that wiped oup much of Ms. Satterwhite’s assets.

For example defendant sold Satterwhite two additional insurance policies, 1) another $10,000.00 life insurance policy and 2) a $50,000.00 annuity.  These policies also listed Sally as the beneficiary. However, sometime later Dew was made the beneficiary on all three of Satterwhite’s policies. Both Satterwhite’s and Dew’s signatures appeared on the change forms, and Dew was listed as Satterwhite’s niece. After that, Dew began taking money out of the cash values of the life insurance policies and withdrawing money from the annuity.

By March 2008, the annuity was “totally cashed out” and had “no value” remaining.

In 2010 Satterwhite went to her local bank to withdraw money. She was informed by the teller that she did not have enough money in her account to complete her withdrawal. Satterwhite, alarmed and spoke with the teller manager. The manager informed Satterwhite that defendant was a joint owner on her account, and that defendant had opened a checking account and linked it to her account. At that time, the local police department was contacted, and Detective Ricky Cates was assigned to the case.

Detective Cates discovered that defendant had changed the address listed on Satterwhite’s account so that the monthly statements were being sent directly to him. Detective Cates also discovered that defendant had linked his account to Satterwhite’s under the guise that he was her son. A review of Satterwhite’s bank records also revealed that defendant had made a series of large cash withdrawals from her account.

THE ARREST AND TRIAL

Defendant and Dew were then arrested. At the time of his arrest, defendant was in possession of Satterwhite’s driver’s license and the title to her car. Defendant and Dew were each charged with:

1. two counts of insurance fraud,
2. one count of obtaining property by false pretenses, and
3. one count of exploitation of an elder adult.

Prior to trial, the State filed a motion to allow for joinder of defendant and Dew for trial and the trial court granted the motion. On 28 February 2011 the case came on for trial by jury. At trial, the State offered into evidence prior statements made by Dew. These statements, in sum, established:

1. that “her husband, Aaron Pittman told her to sign the form[s],” and
2. that “she thought it was wrong, but she trusted her husband.”

Defendant testified at trial in his own defense. On 3 March 2011, the jury found defendant guilty. The trial court then sentenced defendant to  96 to 125 months imprisonment for insurance fraud and obtaining property by false pretenses and to 21 to 26 months imprisonment for exploitation of an elder adult. These sentences were ordered to be served consecutively.

APPEAL

Defendant argued that the trial court violated North Carolina law by granting the State’s motion for joinder.  Joinder decisions are in the sound discretion of the trial court. According to North Carolina General Statutes, charges against two or more defendants may be joined for trial if the charges are part of a common scheme or plan and public policy strongly compels consolidation as the rule rather than the exception when each defendant is sought to be held accountable for the same crime or crimes.

Here, defendant and Dew were charged with the same crimes, and these crimes arose out of the same common scheme. Defendant sold the policies to Satterwhite, and Dew signed the paperwork necessary to add herself as the beneficiary on the policies.

The Court of Appeal found that the record clearly established that defendant did not dispute the fundamental accuracy of the State’s showing that:

1.  he sold Satterwhite multiple insurance policies and an annuity;
2. he later changed the beneficiaries associated with those policies to Dew and converted Satterwhite’s bank accounts from individual accounts solely owned by Satterwhite to joint accounts owned by both defendant and Satterwhite; and
3. he obtained money from the insurance policies, the annuities, and the joint accounts and used that money for personal purposes.

The essential difference between the evidence presented by the State and the evidence presented on behalf of defendant was that the State’s evidence tended to show that Satterwhite never authorized or approved of defendant’s actions while the evidence presented on defendant’s behalf tended to show that he had been acting on Satterwhite’s behalf, in Satterwhite’s best interests, or with Satterwhite’s consent.

The central issue that the jury was required to resolve was not whether the relevant financial transactions occurred but whether Satterwhite had authorized or approved of those transactions.

When viewed in this context, Dew’s statements likely had little bearing on the jury’s evaluation of the credibility of defendant’s claim to have acted in Satterwhite’s best interests or with her consent. The appellate court concluded that Dew’s statements did no play a significant role in the jury’s determination of the issue of defendant’s guilt given that Dew’s statements shed little or no light on the intent with which defendant acted. As a result it concluded that the trial court’s joinder decision did not impermissibly prejudice defendant.

The convictions were affirmed and defendant stays in jail.

ZALMA OPINION

Insurance fraud by an insurance agent is sufficient to give a bad name to the entire insurance industry. When the insurance agent takes advantage of a little old lady who trusted him only to find that he depleted her assets it is unconscionable. Every person involved in the insurance industry, especially agents and brokers, should cheer the result of this case and use all of their wits and energies to make sure that agents or brokers like Mr. Pittman are never allowed to commit such a crime successfully and complain that the sentence handed down to Mr. Pittman was too little too late.

For more information about insurance fraud and how it is being fought by the industry and government agencies subscribe to Zalma’s Insurance Fraud Letter.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The Connecticut Court of Appeal was asked to resolve a dispute over who was entitled to recover from an excess insurance policy for damage to property in James M. Jancewicz et al. v. 1721, LLC, et al., No. AC 32719 (Conn.App. 03/27/2012). Plaintiffs, James M. Jancewicz and Kimberly A. Jancewicz, appeal from the trial court’s judgment awarding the defendants, 1721, LLC (1721), and Daniel Del Grosso, excess insurance proceeds stemming from a settlement of damages done to property owned by 1721, which is secured by a purchase money mortgage held by the plaintiffs. The plaintiffs claim that the court improperly (1) awarded the excess insurance proceeds to the defendants despite language in the mortgage directing that such proceeds be paid to the plaintiffs and (2) failed to award them attorney’s fees on the defendants’ unsuccessful counterclaim.

FACTS

In 2006, 1721 purchased from the plaintiffs certain property located at 495 East Main Street in Norwich (the “property”). A small commercial building that formerly served as a pizza restaurant is located on the property. The plaintiffs took back a purchase money mortgage in the property as a part of the sale. The note secured by this mortgage became due and payable on March 1, 2009. When the note became due, 1721 was unable to make the required balloon payment, but it continued to make monthly payments.

On April 16, 2009, a car struck the building located at 495 East Main Street, damaging it. The city of Norwich issued a permit to the defendants on October 21, 2009, allowing them to repair the damage sustained by the building. The defendants repaired the building, expending $7000 to do so. Following the completion of the work, a building official for the city of Norwich certified that the building had been repaired. 1721 received an insurance proceeds check in the amount of $57,920.69, made payable to 1721 and the plaintiffs, which the defendants requested that the plaintiffs execute to pay for the repairs. The plaintiffs refused to sign the check.

The plaintiffs initiated foreclosure proceedings against the defendants by a complaint filed November 16, 2009. The foreclosure was uncontested. During the foreclosure proceeding, the court found the total value of the property to be $145,000. The court established this valuation solely for the purpose of the foreclosure proceeding, and the parties agreed that they could submit different valuations at future proceedings.

At a hearing on July 28, 2010, the court found that the actual cost of the repairs, together with overhead, was $9400, and that the repairs fully restored the property. The court ordered that the plaintiffs pay the defendants this amount to compensate them for the repairs. At a hearing on September 8, 2010, the court awarded the balance of the insurance proceeds to the defendants.

ANALYSIS

Construction of a mortgage deed is governed by the same rules of interpretation that apply to written instruments or contracts generally, and to deeds particularly. The primary rule of construction is to ascertain the intention of the parties. This is done not only from the face of the instrument, but also from the situation of the parties and the nature and object of their transactions.  A promissory note and a mortgage deed are deemed parts of one transaction and must be construed together as such. If a contract is unambiguous within its four corners, intent of the parties is a question of law requiring plenary review.

The plaintiffs first claim that the court improperly awarded the excess insurance proceeds to the defendants because the language of the contract provides, in part: “If the restoration or repair is not economically feasible or [the plaintiffs'] security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with any excess paid to [1721]. …”

The plaintiffs argue that, because the court found that their security was not lessened, the second sentence of paragraph four, which directs that excess insurance proceeds be distributed to 1721, does not apply. According to the plaintiffs, the general rule is that, absent satisfaction of the entire mortgage debt by the mortgagor, excess insurance proceeds must be distributed to the mortgagee when the mortgage does not contain an agreement to the contrary.

Although no single provision of the mortgage deed is dispositive of the issue before the court of appeal, the intent of the parties readily can be ascertained by considering paragraph four of the mortgage within the context of the entire deed. The mortgage does not reference any right in the plaintiffs to insurance proceeds, except in three enumerated circumstances:

1. where restoration or repair is economically unfeasible or the plaintiffs’ security would be lessened;
2. if 1721 abandons the property or does not answer within thirty days a notice from the plaintiffs that the insurance carrier has offered to settle a claim; or
3. if the property is acquired by the plaintiffs.

The mortgage, therefore, creates a right to insurance proceeds in 1721 that is altered only if one of three enumerated circumstances arises. As none of these circumstances occurred in the present case, the court correctly determined that any excess insurance proceeds should be distributed to the defendants.

Insurance, with regard to a mortgage, is obtained as additional collateral procured to protect the debt in accordance with the mortgage. Therefore, claims regarding insurance concern the property. The plaintiffs’ did not purchase insurance in its own name but relied on the purchase of insurance by 1721.  Rather, since insurance against the risk of loss of property is a contract of personal indemnity, in this case the appellate court was presented with the issue of the distribution of proceeds from properly obtained insurance by 1721. It concluded that since the security was not impaired because 1721 completed the repairs the plaintiffs were not entitled to “excess” insurance proceeds and were allowed to foreclose returning to them the property that secured the debt.

ZALMA OPINION

Many people believe that “property insurance” insures property. It does not. Rather, it is a contract of personal indemnity that insures a person or entity against certain enumerated risks of loss.

A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

As the California Supreme Court observed in Garvey v. State Farm Fire and Casualty Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 03/30/1989), a first party insurance policy provides coverage for loss or damage sustained directly by the insured (e.g., life, disability, health, fire, theft, and casualty insurance).

There are instances where, because of contractual provisions or equitable considerations, the insured holds the proceeds of a fire insurance policy in trust for or otherwise subject to the claim of others who have an interest in the property covered by the subject policy. The plaintiffs, in this case, could not find the equitable considerations since they received the full security, a piece of land with a building fully repaired. They wanted to profit from the insurance that was acquired by 1721 and the court properly refused to allow them to take advantage of the borrower.

Insurance counsel and insurance claims personnel should never assume who is entitled to the proceeds of an insurance policy. If the insured and mortgagee cannot agree they should, as did the insurer in this case, put both names on the check or pay the disputed funds into court with an interpleader action stating the insurer has no interest in the funds but cannot safely pay one over another.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

Under federal law, states participating in the Medicaid program are obligated (with some exceptions) to seek reimbursement from third-party tortfeasors for health care expenditures made on behalf of Medicaid beneficiaries who are tort victims. At the same time, however, states are prohibited (with some exceptions) from seeking reimbursement “from the personal property of” Medicaid beneficiaries themselves for health care expenditures made on behalf of those beneficiaries. In E.M.A., A Minor, By and Through v. Lanier M. Cansler, In His Official, No. 10-1865 (4th Cir. 03/22/2012), the Fourth Circuit was asked to resolve the question of how to apportion a Medicaid lien with recovery from a tortfeasor.

FACTS

The minor appellant, E.M.A., sustained serious injuries at birth due to the negligence of the medical professionals who attended to her delivery. As a result of E.M.A.’s injuries, the North Carolina Department of Health and Human Services (“DHHS”), through the state Medicaid program, paid more than $1.9 million in medical and health care expenses on her behalf. Meanwhile, E.M.A., through her guardian ad litem, and her parents, Sandra and William Earl Armstrong, individually (“Armstrong”), instituted a medical malpractice action in state court. In due course, they settled the action for a lump sum of approximately $2.8 million (a sum in excess of the total Medicaid expenditures of approximately $1.9 million but well below the full value of all the tort claims). The settlement agreement did not allocate separate amounts for past medical expenses and other damages.

DHHS subsequently asserted a statutory lien on the settlement proceeds pursuant to North Carolina Statutes (referred to herein as “the North Carolina third-party liability statutes”), which provide that North Carolina has a subrogation right to, and may assert a lien upon, the lesser of its actual medical expenditures or one-third of the Medicaid recipient’s total recovery. Thus, under the circumstances described, where DHHS’s actual medical expenditures are greater than one-third of the settlement funds, the North Carolina third-party liability statutes effect an unrebuttable presumption that the state is entitled to one-third of the total settlement proceeds recovered by E.M.A. and her parents.

This amount, $933,333.33 (one-third of the $2.8 million lump-sum settlement), has been paid into the registry of the state court, where the funds have remained during the pendency of this action.

E.M.A. was born on February 25, 2000 with injuries that necessitated substantial medical treatment. As a result of the injuries she suffered at birth, E.M.A. is legally deaf and blind, and she is unable to sit, walk, crawl, or talk. Additionally, E.M.A. suffers from mental retardation and a seizure disorder. She requires between 12 and 18 hours of skilled nursing care per day.

On February 21, 2003, E.M.A. and her parents filed a lawsuit in Catawba County Superior Court alleging claims for medical malpractice. The malpractice suit sought damages on behalf of E.M.A. for her physical and developmental injuries, lost wages, pain and suffering, and future medical expenses starting at her majority. Sandra and William Earl Armstrong sought damages for past medical expenses for E.M.A.’s care and treatment, medical expenses through E.M.A.’s eighteenth birthday, and damages for their own emotional distress.

After three years of litigation, the parties settled the medical malpractice case. Prior to consummating the settlement, Armstrong were aware that DHHS had paid more than $1.9 million for the costs of E.M.A.’s medical care. Armstrong contended that they gave notice of the settlement negotiations and of the mediation process to DHHS pursuant to the North Carolina Rules for Mediated Settlement Conference, but no representative of DHHS ever participated in or attended the settlement discussions.

Neither the parties to the settlement nor the court allocated the settlement funds among the distinct claims or categories of damages. To be sure, however, Judge Kincaid recognized that DHHS had asserted a lien against the proceeds of the settlement.

ANALYSIS

The outcome of the appeal turned upon the court’s application of federal Medicaid law, as interpreted by the U. S. Supreme Court. E.M.A. and her parents argue on appeal that DHHS’s lien against E.M.A.’s portion of the settlement proceeds violates federal Medicaid law because the lien encumbers funds that are not payment for medical expenses already incurred.

The appellate court vacated the judgment because the North Carolina third-party liability statutes, as applied in this case, fail to comply with federal Medicaid law. Federal Medicaid law limits North Carolina’s recovery to settlement proceeds representing payment for medical expenses. In the event of a lump-sum settlement, as in this case, the sum certain allocable to medical expenses must be determined, in the absence of a stipulation by the affected parties, by judicial determination or some similar adversarial process, before the state may recoup its Medicaid outlays.

Although participating states are required under federal Medicaid law to seek recovery from liable third parties the federal statute places express limits on the State’s powers to pursue recovery of funds it paid on the recipient’s behalf.

The U.S. Supreme Court has characterized the third-party liability provisions in federal Medicaid law as an exception to the anti-lien provisions. At the same time, the Supreme Court has emphasized that this exception is strictly limited – a state cannot force assignment of, or place a lien on, any property that does not constitute reimbursement for medical expenses.

North Carolina’s Measure of Recovery

Under the state’s third-party liability statutes, North Carolina has a subrogation right to, and may assert a lien upon, the lesser of its actual medical expenditures or one-third of the Medicaid recipient’s total recovery. With commendable candor, the Secretary concedes that the statutory presumption that the state’s recovery of one-third of an unallocated lump-sum tort settlement is fair and appropriate rests on nothing more than the state’s notion of how attorneys and insurance adjusters typically value tort cases concluding that three times the special damages is often used as a rule of thumb for settling personal injury claims.

The interplay among the above-described federal and state legal principles creates a measure of tension. There is no question that the State can require an assignment of the right, or a chose in action, to receive payments for medical care. The State can also demand that the recipient “assign” in advance any payments that may constitute reimbursement for medical costs.

The decision of the U.S. Supreme Court must be understood to prohibit recovery by the state of more than the amount of settlement proceeds representing payment for medical care already received. The North Carolina statute’s one-third cap on the state’s recovery against a Medicaid recipient’s settlement proceeds permits DHHS to assert a lien against settlement proceeds intended (or otherwise properly allocable) to compensate the Medicaid recipient for other claims, such as pain and suffering or lost wages.

Decision

Since the general anti-lien provision in federal Medicaid law prohibits a state from recovering any portion of a settlement or judgment not attributable to medical expenses, DHHS’s lien on E.M.A.’s settlement proceeds in this case violates federal law.

The appellate court expressed no view as to whether allocation disputes of this type must be adjudicated by a court, or may instead be resolved through other “special rules and procedures.” It held merely that in determining what portion of a Medicaid beneficiary’s third-party recovery it may claim in reimbursement for Medicaid expenses, the state must have in place procedures that allow a dissatisfied beneficiary to challenge the default allocation.

In sum, E.M.A.’s argument that DHHS cannot assert a lien against her portion of the settlement proceeds because a minor has no cause of action for past medical expenses under North Carolina common law fails because the state Medicaid statutes at issue fully abrogate the common law. The North Carolina third-party liability statutes as applied in this case, fail to comply with federal Medicaid law as interpreted by the Supreme Court.

Accordingly, for the reasons set forth, the appellate court vacated the judgment of the district court and remanded the case for an evidentiary hearing at which the district court shall determine the proper amount of DHHS’s Medicaid lien in this case in accordance with Supreme Court precedent and the views expressed in the opinion.

ZALMA OPINION

North Carolina’s lien came to the Fourth Circuit because it attempted to apply an insurance adjuster’s rule of thumb to a recovery of indemnity liens. Although the rule of thumb that a plaintiff usually recovers three times medical special damages that rule of thumb, where there are severe injuries, is honored more in the breach than in application. With $1.9 million in medical specials the settlement is usually based on the assets available to the defendant rather than some multiplier of special damages.

Where the North Carolina legislature went wrong was to apply the rule of thumb to all injury settlements rather than set up a procedure to determine what part of a settlement should be applicable to a Medicaid lien. Although the rule of thumb applied to soft tissue injury claims when I was an adjuster it has no place in the type of injury suffered by the child in this case.

Medicaid liens exist and cannot be ignored by counsel for injured parties. When reaching a settlement with tortfeasors the parties, and the court dealing with the settlement, should agree on the amount of damages to attribute to medical special damages and the amount to allocate to other damages like pain and suffering or should, as the Fourth Circuit required, set up a procedure where a fair distribution of funds can be determined.

The declaratory relief action and appeal to the Fourth Circuit would have unnecessary if the DHHS and the parties agreed on a proper distribution so that the severely injured child received the most possible from the tortfeasor and to allow her to avoid seeking further benefits from the Medicaid program.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

When a person is uninsured and injures someone the injured parties who are also uninsured must be creative to obtain damages for their injuries. Without primary insurance or uninsured motorist coverage the injured parties are usually limited to a suit to gain the assets of the person responsible for their injuries. Usually, an uninsured person has insufficient assets to indemnify the injured parties. The following case got injured parties some money because their lawyer was creative and persistent.

FACTS

Michael Kuester leased a car from Nissan in 2007. The lease agreement required him to obtain motor vehicle liability insurance. Kuester failed to maintain a liability policy and was thereafter in an accident which injured Deanna Brown and her passenger Cynthia Eulenbach. As Kuester was uninsured, Brown and Eulenbach sued Nissan and its insurer, Tokio Marine & Nichido Fire Insurance Co., Ltd. In Deanna Brown v. Tokio Marine & Nichido Fire Insurance Co., Ltd. and, No. 2011AP454 (Wis.App. 03/21/2012) the Wisconsin Court of Appeal was asked to determine whether the lessor’s insurance was required to respond to the injured persons.

On January 30, 2007, Kuester entered into a thirty-nine-month lease for a Nissan Altima. On November 23, 2007, Kuester swerved across the center line of traffic and hit Brown’s vehicle head on, seriously injuring Brown and her passenger Eulenbach. At the time of the accident, Kuester, despite a contractual obligation in the lease, did not have a personal auto insurance policy in force.

Brown and Eulenbach filed suit against Kuester and a direct action against Tokio Marine (which had previously issued a $5 million business auto coverage policy to Nissan). Kuester did not answer. Tokio Marine answered that its policy did not provide coverage to Kuester.

The Policy

The Tokio Marine policy provides that an “insured” is anyone using a “covered auto” with Nissan’s permission. Two distinct endorsements to the policy are at issue in this case. The first is the “Contingent Coverage for ‘Leased Autos’” endorsement, which excludes coverage for “any person operating a ‘leased auto.’” Both parties agree that Kuester, as a lessee, falls within this exclusion.

The second endorsement is a two-page endorsement called “Wisconsin Changes,” which provides that “[t]he following is added to Who Is An Insured: Anyone else is an ‘insured’ while using a covered ‘auto’ [Nissan] own[s] with [Nissan's] or any adult ‘family member’s’ permission.” Brown and Eulenbach argue that this endorsement brings Kuester back into coverage under the Tokio Marine policy because, as a lessee, Kuester had Nissan’s permission to use its leased automobiles. The Wisconsin Changes endorsement also makes the Tokio Marine policy compatible with Wisconsin law.

Tokio Marine argued that:

1. as a lessee, Kuester was excluded as an insured and therefore the policy does not provide coverage;
2. Brown and Eulenbach could not bring a direct action against Tokio Marine because the policy was not issued or delivered in Wisconsin; and
3. even if coverage existed, Tokio Marine’s exposure was limited to the statutory minimum amounts of $25,000 per person and $50,000 per accident as set forth in Wis. Stat. § 344.01(2)(d) (2007-08).

Brown and Eulenbach responded that the plain language of the policy’s Wisconsin Changes endorsement added Kuester back in as an additional insured. They also argued that even if the Wisconsin Changes endorsement did not add Kuester back in, Wis. Stat. § 632.32(3), Wisconsin’s “omnibus coverage statute,” provided coverage to Kuester.

Trial Court Decision

The circuit court ruled that:

1. the Wisconsin Changes endorsement did not override the coverage exclusion for lessees;
2. the policy was subject to Wisconsin law; and
3. liability was limited to the statutory minimum amounts of $25,000 per person and $50,000 per accident.

Brown and Eulenbach appealed.

Analysis

The appellate court applied a three-part test to determine if an insurance policy provides coverage. First it looked to see if the insurance policy makes an initial grant of coverage based on the facts.  If it does not no more analysis is required. If the claim does trigger an initial grant of coverage, secondly the court must then determine if there are any exclusions that preclude coverage. Third the court looks to see if any of the exclusions have exceptions that would reinstate coverage. An exception only applies to the exclusion clause within which it appears; in other words, an exception to an exclusion cannot trump the insurance policy or a separate exclusion.

The Tokio Marine policy provides that an “insured” is anyone using a “covered auto” with Nissan’s permission. As a “leased auto” is covered under the policy, and as Kuester was a lessee, the court assumed, without deciding, that the initial terms of the policy provide coverage. A three-page endorsement at the end of the policy entitled “Contingent Coverage for ‘Leased Autos,’” states that coverage does not extend to lessees.

An exception pertains only to the exclusion clause within which it appears. The Wisconsin Changes endorsement is separate from the lessee exclusion endorsement. The Wisconsin Changes endorsement says nothing about lessees and thus is unrelated to the lessee exclusion endorsement. The Court of Appeal concluded, therefore, that the Tokio Marine policy does not provide coverage for Kuester.

Brown and Eulenbach argue that, regardless of whether the Tokio Marine policy covers Kuester, coverage is mandated by Wisconsin’s omnibus coverage statute which provides that every automobile and motor vehicle insurance policy issued or delivered in Wisconsin must include coverage for anyone operating the vehicle.

When a policy is issued and delivered outside of Wisconsin, the omnibus coverage statute applies if it was incorporated into the insurance contract. Given that the Wisconsin Changes endorsement expressly conforms the policy to Wisconsin law, the court was compelled to hold that Tokio Marine incorporated the omnibus coverage statute into the policy.

Although the omnibus coverage statute applies, it does not mandate coverage for Kuester. Tokio Marine’s lessee exclusion conforms to the omnibus coverage statute and the statute does not mandate coverage for Kuester. Wisconsin Statatutes require a lessor, before leasing a vehicle, to file a certificate with the Department of Transportation verifying that the vehicle has liability insurance. The statute, in relevant part, reads: “No lessor … may for compensation … lease any motor vehicle unless there is filed with the [D]department [of Transportation] … a certificate for a good and sufficient bond or policy of insurance issued by an insurer …. The certificate shall provide that the insurer which issued it will be liable for damages caused by the negligent operation of the motor vehicle in the amounts set forth in Wis. Stat. § 344.01(2)(d).”

Nissan violated this statute when it leased a vehicle to Kuester without filing a certificate of insurance with the Department of Transportation. The statute mandates coverage by the lessor of  $25,000 per person and $50,000 per accident. The purpose of the statute is to protect people harmed by the negligence of a lessee.  Violation of this statute by a lessor does not, however, create unlimited liability. Lessors are not the alter egos of their negligent lessees. When Nissan leased the vehicle to Kuester Tokio Marine is liable to Brown and Eulenbach in the amounts of $25,000 per person and $50,000 per accident.

CONCLUSION

The Tokio Marine policy does not provide coverage to Kuester, as it contains an express exclusion for lessees but it does provide limited coverage to Nissan.

ZALMA OPINION

Automobile lessors always require the lessee to provide liability insurance equal to that required by state law. Nissan’s lease did the same. However Nissan failed to ascertain that the lessee maintained insurance protection. Because Nissan failed to fulfill the statutory requirement of advising the state it had insurance it failed to fulfill the state statute and was obligated to provide the minimum insurance requirements of the state.

Automobile lessors need to closely watch each lessee to make sure that each fulfill the insurance requirement. Insurers of the lessors, like Tokio Marine, need to carefully write their policies to avoid a liability they did not intend to take. The appellate court showed how they could do so and we expect that the next generation of the policy will be rewritten to avoid the exposure.

The two injured parties now have available an insurer with up to $25,000 in coverage each to pay for their injuries if they can prove liability.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The First Circuit Court of Appeal was called upon to resolve an insurance coverage dispute concerning the scope of a “loss of use” provision in Vicor Corporation v. Vigilant Insurance Company; Federal Insurance, No. Nos. 09-1470, (1st Cir. 03/16/2012). The appeal arose from wireless communication network outages in 2003. The outages were traced to the failure of a component part, known as a power converter, manufactured by appellee/cross-appellant Vicor Corporation and sold to Ericsson Wireless Communications, which incorporated the power converter into radio base stations (“RBS”) critical to Ericsson’s customers’ wireless networks. In May 2004, as a result of the network failures, Ericsson sued Vicor in California state court. They settled this suit (“the Ericsson litigation”) in 2007 for $50 million. Vigilant Insurance Company and Federal Insurance Company, two of Vicor’s liability insurers, paid $13 million of the settlement. Vicor contributed the remaining $37 million.

Vicor subsequently sued seeking indemnification from its insurers for the $37 million of its own funds that it paid to Ericsson. In addition to Federal and Vigilant, Vicor also sued an excess carrier, appellant/cross-appellee Continental Casualty Company (collectively “the insurers”). After eight days of trial, a jury awarded Vicor $17.3 million. The district court granted the insurers partial post-trial relief, reducing the verdict by $4 million and entering judgment for Vicor in the amount of $13.3 million plus interest. All parties filed timely appeals and cross-appeals raising multiple issues.

Facts

Vicor is a manufacturer of electronic equipment. The Vicor power converters at issue in this litigation break down input power supplies into power levels needed by various other component parts. Ericsson’s business includes the design, manufacture and sale of electronic equipment, including radio base stations, which are used to set up and operate cellular telephone towers and networks. Ericsson purchased Vicor power converters for use in Ericsson RBSs, which Ericsson sold to wireless communication providers worldwide. Trial testimony suggested that power converters that Vicor had sold to Ericsson began failing in October 2002 and that Vicor became aware in May 2003 that some of these failures were related to a manufacturing change in a component computer chip. In October 2003, severe outages occurred.

As a result of the network outages triggered by the RBS failures, Ericsson provided compensation to two of its customers. The record reflects that Ericsson paid approximately $9.3 million to one and spent $5 to $6 million to repair the Vicor products provided $3.3 million in free equipment.

In May 2004, Ericsson sued Vicor on several theories of liability, including breach of contract, breach of warranty, negligence, unfair competition, misrepresentation and fraud. In a February 7, 2007 memo, Vicor’s defense counsel summarized Ericsson’s damage claim, as set forth in its interrogatory answers. The claim totaled approximately $1.1 billion.

Vicor and Ericsson successfully resolved their differences through mediation, settling the Ericsson litigation for $50 million.

Vicor’s Lawsuit

After settling with Ericsson, Vicor filed this action against the insurers in Massachusetts federal district court, seeking reimbursement of the $37 million it had paid to Ericsson. Vicor sought a declaratory judgment that its payments were covered losses under the policies, as well as seeking damages for breach of contract.

The Insurance Policies

As relevant to this litigation, Vigilant issued two primary general liability policies to Vicor. Each policy was subject to general liability limits of $1 million per occurrence and $2 million aggregate. In addition to the general liability coverage, the Vigilant policies insured against Information and Network Technology Errors or Omissions (“E&O coverage”), providing liability coverage for “financial injury” caused by a “wrongful act,” as defined by the policy. The E&O coverage was subject to a $10 million policy limit.

Federal issued two excess and umbrella general liability policies that contained a general liability limit of $20 million per occurrence and in the aggregate.

Continental issued an excess liability policy with an $8 million limit to Vicor covering October 1, 2003 to October 1, 2004. The Continental policy is excess to the coverage provided by the Vigilant and Federal policies covering the same time period. As an excess policy, the Continental policy only provides coverage if a covered loss during the policy period exceeds the combined Vigilant-Federal limit.

Trial

The crux of the dispute in this case concerns the policy language addressing coverage for “loss of use of property that is not physically injured.” Of the money contributed by Vigilant and Federal to the Ericsson settlement, $3.14 million was considered to be for “physical injury to tangible property.” Vicor claimed at trial that the insurers owed it the remaining $37 million because

The insurers’ position is that repair costs, including emergency response costs, do not constitute loss of use damages.

Over the insurers’ objections, the district court ruled that three of Vicor’s specific damage claims could go to the jury under the loss of use rubric: emergency repair costs in the amount of $5 to $6 million; the $9.5 million settlement between Cricket and Ericsson; $3.3 million in the delivery of emergency equipment to China Unicom.

The jury returned a verdict the day after it was instructed awarding Vicor $8 million in loss of use damages for the 2002-2003 policy period, and $9.3 million for the 2003-2004 policy period.

Discussion

The insurers argue that the district court erred by including emergency response costs within the definition of loss of use damages. The insurers’ position is premised on the idea that loss of use damages are subject to an implied temporal limitation that confines coverage to damages incurred due to the inability to use the failed equipment until it is replaced or repaired. In other words, because repair costs represent the cost of ending the loss of use period, such costs are not themselves damages for loss of use.

As recognized by the district court, the archetypal example of loss of use damages comes in the context of a damaged automobile. Simply put, the cost to rent a replacement vehicle while the damaged vehicle is being repaired would represent loss of use damages; the actual cost of repairs would not.

In this case, the “emergency repairs” allowed by the district court are not loss of use damages. It is not enough to demonstrate, as Vicor attempts to do, that there was a “loss of use” of certain property (the power converters or the wireless networks) and that Vicor subsequently paid damages. The claimed damages must be tied to the actual period during which the use of the non-physically injured property was lost and to the loss of use itself, in the context of a damaged vehicle loss of use damages compensates plaintiff for the finite period in which the vehicle is simply unavailable for use.

The goal of liability insurance is to protect the insured from claims of injury or damage to others, but not to insure against economic loss sustained by the insured due to repairing or replacing its own defective work or products. The instruction presented to the jury by the trial judge used the example of replacing a defective power converter with a new one as a non-covered “repair,” it then went on to carve out an “emergency repairs” exception to the proscription on indemnity for general repair costs.

The First Circuit concluded that the district court’s jury instruction referencing “emergency repairs” was erroneous. Given that the emergency repair costs were pursuant to the jury instructions a centerpiece of the putative loss of use damages considered by the jury, the error was prejudicial, and therefore it had no choice but to vacate the judgment and require a new trial.

The First Circuit instructed the trial court that, on remand, the district court should fashion jury instructions making clear that classic loss of use damages (such as lost profits or the rental value of substitute property) that are incurred while repairs are pending may be recovered by an insured, but the actual costs of repairs may not. The district court also may, and probably should, instruct the jury regarding the duty to mitigate loss of use damages and may explain that the costs of reasonable mitigation measures are recoverable, provided that the mitigation measures are distinguishable from ordinary repairs and result in a net savings.

The Weakness of the Settlement

Although Vicor and Ericsson settled the underlying suit for $50 million in March 2007, they created no formal allocation of the payments between covered and uncovered claims. As a result the insurers were required to rely upon their independent investigation. Based on that investigation the primary insurers Vigilant and Federal determined that the failure of the Vicor power converters caused slightly more than $3 million in third-party property damage that would be covered under the general liability policies. They also paid the remaining $9.7 million remaining on the technology liability coverage. Vicor agreed to supply $37 million to fulfill the terms of the settlement.

Privilege

The parties argued mightily pre-trial over the attorney client privilege and the work product protection. The First Circuit noted that Massachusetts recognizes an exception to the attorney client privilege that renders the privilege inapplicable to disputes between clients. Therefore, when a lawyer represents multiple clients having a common interest, communications between the lawyer and any one or more of the clients are privileged as to outsiders, but not to the multiple clients represented.

As a result, when an attorney has been retained to represent both insured and insurer in a third party action, communications by either party will not be privileged even if their interests later diverge. Communications between an insured and its attorney connected with the defense of underlying litigation are normally not privileged vis-a-vis the insurers in subsequent litigation.

An attorney retained by an insurer to represent the insured as the attorney for both and the fact that the insurers tendered the underlying defense pursuant to a reservation of rights does not defeat any claim of a common interest. It is undisputed that the primary insurers paid defense counsel and partially funded the settlement with Ericsson. The trial record reflected multiple letters, reports and other communications between underlying defense counsel and the insurers regarding such matters as liability assessment, strategic litigation planning and calculations of potential damage outcomes. All were marked as “privileged and confidential,” and the parties agree they were privileged as to third-parties, such as Ericsson.

Plaintiffs cannot have it both ways. They cannot make use of the benefit of the common interest exception to avoid waiver of the attorney-client privilege as to third parties and simultaneously assert the privilege against the parties with whom they share a common interest.” Accordingly, the First Circuit concluded that the district court erred, and Vicor cannot rely on the attorney-client privilege to shield all communications between it and underlying defense counsel.

Resolution of the work-product privilege issue required less discussion. In the context of coverage litigation, it is a touchstone of such a claim that Vicor must demonstrate that its attorneys prepared the putatively shielded documents in anticipation of a lawsuit with the insurers. In this case, events provide fairly clear lines of demarcation. Documents produced while the insurers were providing a defense are unlikely to be protected; those produced during the periods when the insurers denied coverage – or refused to provide indemnity – are likely to be protected.

The fact that both the insured and insurer are deemed to be clients does not mean that all communications are excepted from the applicable privileges, or that the insurers are necessarily entitled to the entire defense file, as they claim. From the current record, however, the First Circuit was unable to make the necessary judgments about which materials are subject to disclosure. It concluded that the district court abused its discretion in denying the insurers’ motion to compel in its entirety, and upon remand, should tailor a discovery order consistent with this opinion, should the parties not be able to reach substantial agreement on their own. See Fed. R. Civ. P. 37(a)(1) (requiring parties to confer regarding discovery disputes or attempt to do so prior to filing motion to compel).

ZALMA OPINIONS

Although this case dealt with large sums of money with the parties represented by well respected and competent counsel, the dispute that resulted in the trial, disputed jury instructions, and prejudice requiring reversal and new trial because the parties, at the time they settled the underlying case, failed to allocate the $50 million settlement to avoid this suit.  Had the parties done the appropriate allocation of damages at the mediation they would have totally avoided the lawsuit that resulted in this appeal.

Perhaps if, after the reservation of rights, independent counsel was demanded and appointed by Vicor, as insured, and separate monitoring counsel, by the insurers, they would have both been independently represented at the medication, the settlement funds would have been allocated, and an agreement reached not only with the underlying plaintiff, Erickson, but also between the insurers and Vicor. Clearly, the settlement of a claim for more than $1 billion settled for $50 million was such a good deal that Vicor was willing to put up $37 million of its own money. If it intended to recover that $37 million from its insurers in this subsequent suit it should have set the suit up by properly allocating the payment. If Ericson was willing to accept the $50 million it meant nothing to it how the payment was allocated.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Indiana Doctor Guilty of Health Care Fraud

Dr. Kamal Tiwari, a Bloomington, Indiana doctor pleaded guilty to federal charges of unlawful drug distribution and health care fraud. Dr. Tiwari pleaded guilty to two counts as part of an agreement with prosecutors March 9, 2012 in U.S. District Court in Indianapolis.

A grand jury indicted Tiwari, 60, last year on 13 counts alleging that he prescribed narcotics when not medically necessary and defrauded insurers by performing unnecessary procedures. The U.S. attorney’s office said Tiwari would face more than six years in federal prison and have to pay more than $1.2 million in restitution if Judge Sarah Evans Barker accepts the agreement.
Tiwari surrendered his state medical license pending the outcome of his trial. The Indiana attorney general’s office alleged that Tiwari’s practices had contributed to the deaths of several patients.

Five Years in Prison for 79-Year-Old Doctor

Lewis Meyer Jacobs, a 79-year-old doctor was sentenced to five years in prison for running a pill mill out of his North Philadelphia medical practice. Jacobs pleaded guilty on Sept. 15 to federal charges of conspiracy to distribute and to possess with intent to distribute, and actual distribution of controlled substances, including OxyContin and Percocets.

Besides the prison term, U.S. District Court Judge J. Curtis Joyner ordered Jacobs to pay $328,000 in restitution to the IRS and to forfeit the $1.26 million he made illegally between 2005 and 2010.

12 Years For Defrauding Medicare of $7 to $20 Million

Arthur Manasarian, a 49-year-old Armenian national and previous resident of California was sentenced Friday by Chief United States District Court Judge Lisa Godbey Wood to 12 years in prison for his role in a conspiracy to defraud Medicare of about $7.5 million through phony medical businesses in Brunswick and Savannah, as well as in Los Angeles and Albuquerque, New Mexico.

Manasarian, who immigrated to the U.S. from Armenia and who lived in Los Angeles until the time of his arrest, previously pleaded guilty to conspiracy to commit health care fraud and aggravated identity theft. According to the evidence presented at the guilty plea and sentencing hearings, from 2007 to 2008, Manasarian and others opened a medical equipment company in Brunswick known as Brunswick Medical Supply. Once opened, he and others stole the identities of hundreds of Medicare beneficiaries; stole the identities of dozens of doctors; and used the stolen information to submit millions of dollars in phony claims to Medicare for health care services that were never provided.

Manasarian used the stolen identities of doctors and patients from multiple different states, including Alaska, California, New York and Ohio, and even submitted claims for people who were dead at the time they were alleged to have been provided medical equipment.

Manasarian was also involved with at least seven other phony health care businesses located in Georgia, California and New Mexico. He was responsible for between $7 million and $20 million worth of fraudulent claims submitted to Medicare. He and others were paid by Medicare about $1.5 million for the fraudulent claims.

Medicaid Recovers $1.9 Million from 30 Health Care Providers in South Carolina

More than 30 South Carolina health care providers must repay nearly $1.9 million they inappropriately billed to the state Medicaid agency, according to state health officials and documents recently obtained by The Post and Courier.

Three of the providers must appear before the state Board of Medical Examiners, and their licenses could be revoked, according to documents prepared by the S.C. Department of Health and Human Services. The state also referred three providers to the Medicaid Fraud Control Unit in the S.C. attorney general’s office. State Medicaid officials declined to say whether those are the same three providers who will appear before the medical board. The state declined to identify the providers in question.

The state already has recovered about $1.7 million from the providers. The state’s February report was prompted by a nationwide investigation by U.S. Sen. Charles Grassley, R-Iowa. Grassley sought information from each state about doctors who have the highest rates of prescribing commonly abused prescription drugs to people enrolled in Medicaid, the government-funded health insurance program for the poor and disabled.

The state, per Grassley’s request, in 2010 compiled a list of the 10 providers who billed Medicaid the highest amounts for each of eight prescription drugs during 2008 and 2009, according to the documents. State officials investigated 34 of the 83 providers who appeared on those lists for possible Medicaid abuses.

ZIFL can only wonder why the scofflaws are not identified and why – if they stole over $1.7 million – they are still allowed to practice in the state to defraud others so they have enough funds to pay the fines. The best disinfectant for insurance, Medicare and Medicaid fraud is the light of day. They should be held up to the front pages of every newspaper in the state.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Zalma on Insurance in Top 50

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

In 2008 I wrote an article about the so-called tort of bad faith called “It’s Time to Put a State Through the Heart of the Tort of Bad Faith.” It is time to review its conclusions, and repeat and add to the arguments of the earlier article, since no court has, to date, agreed with me.

The reason for this article, and its predecessor, is to remind those who understand insurance and the law of insurance, that insurance is a contract where one agrees to indemnify another against certain specified risks of loss that are contingent or unknown at the time the contract is made. Since “indemnity” puts one back in the position that existed before the loss insurance should never pay more and neither party to the contract of insurance should profit from breach of the contract.

Contract vs. Tort Damages

When US law was first organized based on English Common law if a contract was breached the only contract damages could be recovered by the aggrieved party. Tort damages were limited to tortious conduct — negligence or intentional torts like battery, assault, or trespass. The two categories of damages were mutually exclusive.

In a typical contract, one party has a duty to perform (construct a building, deliver goods, convey real estate, pay indemnity) and the other party has a duty to pay money.  Breach by the performer may take the form of nonperformance, defective performance, or delay in performance.  The primary purpose of damages for breach of a contract is to protect the promisee’s expectation interest in the promisor’s performance.  Damages should put the plaintiff in as good a position as if the defendant had fully performed as required by the contract.

The Law of Unintended Consequences

Insurance, like all parts of modern society, is subject to the the painful effects  of the law of unintended consequences.

The “Law” can be defined as the understanding that actions of people — and especially of government or the courts — always have effects that are unanticipated or unintended. Insurance is controlled by the courts, through appellate decisions and by governmental agencies through statute and regulation. Compliance with the appellate decisions, statutes and regulations – different in the various states – is exceedingly difficult and expensive.

In the USA alone people pay to insurers more than 700 billion dollars in premiums and insurers pay out in claims as much or more than they take in. Profit margins are small because competition is fierce and a year’s profits can be lost to a single firestorm, earthquake,  hurricane or a flood.

INSURANCE IS NEEDED TO OPERATE A MODERN SOCIETY

Neither the courts nor the governmental agencies seem to be aware that in a modern, capitalistic society, insurance is a necessity.  No person would take the risk of starting a business, buying a home or driving a car without insurance. The risk of losing everything would be too great. By using insurance to spread the risk among all the costs of taking the risk to start a business, buy a home or drive a car becomes possible.

Insurance has existed since a group of Sumerian farmers, more than five thousand years ago, scratched an agreement on a clay tablet that if one of their number lost his crop to storms the others would pay part of their earnings to the one damaged. Over the eons insurance has become more sophisticated but makes essentially the same deal as did the ancient Sumerian farmers.

An insurer, whether an individual or a corporate entity, takes contributions (premiums) from many and holds the money to pay those few who lose their property from some calamity, like fire. The agreement, a written contract to pay indemnity to another in case a certain problem, calamity or damage occurs by accident, is called insurance.

In a modern industrial society almost everyone is involved in or with the business of insurance. Insurers provide protection, among many other things, against:

1. the risk of becoming ill,  
2. losing a car in an accident,     
3. losing business due to fire,     
4. becoming disabled,     
5. losing their life,     
6. losing a home due to flood or earthquake, or
7. being sued for accidentally causing injury to another.

The persons insured are dependent on their insurer to take the risk the insureds are not willing to take alone, spread that risk among many, and make a profit so it is available to pay indemnity when the loss occurs.

Insurance contracts can be simple or exceedingly complex, depending upon the risks taken by the insurer. Regardless, insurance is only a contract whose terms are agreed to by the parties to the contract. Over the last few centuries almost every word and phrase used in insurance contracts have been interpreted and applied by one court or another. Ambiguity in contract language became certain. However, the average person saw the insurance contract as incomprehensible and impossible to understand.

Ostensibly to protect the public insurance regulators decided to require that insurers write their policies in “easy to read” language. Because they were required to do so by law insurers changed the words in their contracts into language that people with a Fourth Grade education could understand. Precise language interpreted by hundreds of years of court decisions were disposed of and replaced with imprecise, easy to read language.

The Effect of the Law of Unintended Consequences

The law of unintended consequences arose and took over. Instead of protecting the consumer the imprecise language mandated in an attempt to force insurers to deal “fairly” with their insureds, resulted in thousands of lawsuits that sought to impose penalties on insurers for attempting to enforce what were claimed to be ambiguous “easy to read” language. The multiple lawsuits cost insurers and their insureds millions (if not billions) of dollars to get court opinions that interpret the language and reword their “easy to read” policies to comply with the court decisions. For more than thirty years the unintended consequence of a law designed to avoid litigation has done exactly the opposite. Not only were most contracts made uncertain by use of imprecise language insurers were punished with tort and punitive damages for refusing to pay claims they thought were not covered.

The attempts by the regulators and courts to protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent against what they perceived to be the rich and powerful insurers.

The Creation of a New Tort

In 1958 the California Supreme Court created a tort new in U.S. jurisprudence when it decided Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 658-659, 328 P.2d 198 (1958).

A tort is a civil wrong from which one person can receive damages from another for multiple injuries. The tort was called the “Tort of Bad Faith” and was created because an insurer failed to treat an insured fairly and the court felt that traditional contract damages were insufficient to properly compensate the insured whose claim was denied. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the common law applied for the years before Comunale was decided, damages for emotional distress and punitive damages to punish the insurer for what the court concluded was its wrongful acts.

Insureds, lawyers for insureds, regulators and courts across the U.S. cheered the action of the California Supreme Court and most of the states adopted the tort created by the California Supreme Court as years passed.

After the creation of the tort of bad faith, if an insurer and insured disagreed on the application of the policy to the factual situation, damages were no longer limited to contract damages as in other commercial relationships. If the court found that the insurer was wrong it could be required to pay the contract amount AND damages for emotional distress, pain, suffering, punishment damages, attorney’s fees and any other damages the insured and the court could conceive. It was hoped that the tort of bad faith would have a salutary effect on the insurance industry and force insurers to treat their insureds fairly. However, when claims for $40.00 wrongfully denied resulted in $5 million verdicts, “fairness” found a new definition. Juries, unaware of the reason for and operation of insurance decided that insurers that did not pay claims were evil. Juries, with vigor, punished insurers severely even when the insurer’s conduct was correct and proper under the terms of its contract. The massive judgments were publicized and many insurers decided fighting insureds in court was too risky and expensive. If an insured sued for bad faith,  regardless of how correct was the position of the insurer on the contract, the insurer would pay to settle.

Most of the massive verdicts were reversed or reduced on appeal. The bad actors raised their premium and lost little business. Other insurers, faced with the massive verdicts allowed fear to control reason, and paid claims that were improper or fraudulent. The extra cost was passed on to all insurance consumers, not to the insurers who acted improperly.  The bad actors, in fact, profited. They continued their wrongful acts and paid the few insureds that sued.

Honest and professional insurers paid fraud fraud perpetrators and claims the policy never intended to cover, for fear of being painted with the same brush as the bad actors. Those who exercised good faith were punished and those who dealt with insureds in bad faith profited.

The law of unintended consequences struck. The tort of bad faith, designed to help the innocent, resulted in punishing the honest and professional insurers, honoring the insurers who acted in bad faith with profit. Also, because of the fear of punishment with bad faith suits, insurers allowed many frauds to succeed rather than face potential tort damages. Insurers whose contract terms and conditions were clear and unambiguous were ignored to avoid litigation.

Basic contract law in all contracts other than insurance contracts in cases involving a failure to perform the most the plaintiff expected was money damages measured by the difference between the contract price and the cost of completing the contract by another.

In construction contracts, for example, damages for defective or incomplete construction generally are measured by the cost of repair or the cost of completion. In contracts for the sale of goods, on the other hand, damages for nonconformity with the contract generally are measured by the diminution in value of the defective goods. The purpose of both measures is to place the plaintiff in as good a position as if the defendant had performed the contract according to its specifications.

The general rule of damages in tort is that the injured party may recover for all detriment caused whether it could have been anticipated or not while contract damages are limited to that anticipated by the contract.

In Comunale insureds were allowed to recover against insurers in both tort and contract. By so doing the California Supreme Court changed everything when it held:

Although a wrongful refusal to settle has generally been treated as a tort (see Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136, 1138; Anno., 131 A.L.R. 1499, 1500), it is the rule that where a case sounds both in contract and tort the plaintiff will ordinarily have freedom of election between an action of tort and one of contract. (Eads v. Marks, 39 Cal. 2d 807, 811 [249 P.2d 257]. ) An exception to this rule is made in suits for personal injury caused by negligence, where the tort character of the action is considered to prevail (Huysman v. Kirsch, 6 Cal. 2d 302, 306 [57 P.2d 908]; Krebenios v. Lindauer, 175 Cal. 431 [166 P. 17] ), but no such exception is applied in cases, like the present one, which relate to financial damage (cf. County of Santa Clara v. Hayes Co.,43 Cal. 2d 615, 619 [275 P.2d 456]; Jones v. Kelly, 208 Cal. 251, 255 [280 P. 942]).

Comunale was allowed to sue both in contract and tort and obtain contract, and tort damages, for the breach of the contract of insurance and its implied covenant of good faith and fair dealing.

In California the Comunale decision established that breach of an implied covenant, that is, breach of contract, as the theoretical basis of the claim allowed the plaintiff to recover contract and tort damages. This was a major change in jurisprudence and because a few people were harmed by bad actors in the insurance industry created an evil system that allows a few to grow rich from insurance claims while those who invest in insurance or who seek only the indemnity promised by the insurance policy, are subject to the law of unintended consequences.

Where the Tort of Bad Faith Is Now

In more than 60 years of application across the U.S. the tort of bad faith has not, in my opinion, had a salutary effect on the insurance business or the people and businesses who are insured. Insurance costs more than is reasonable or necessary so that sufficient funds exist to pay claims and tort damages from those insureds who believed they were done wrong.

Suits relating to claims presented for the 1994 Northridge earthquake in California are still pending seeking tort and punitive damages for failure to pay what the insureds’ believed they were owed. In Louisiana and Mississippi multiple millions were paid to settle claims that flood damage was covered as a result of hurricane Katrina although the policies excluded flood and the plaintiff insureds failed to buy flood insurance.

Abuse of insurers is so rampant and so successful that lawyers argue of multimillion dollar fees and have even attempted to (or successfully) bribed judges to increase their recovery.  The tort of bad faith is like the mythical Vampire:  It hides in the dark. The truth about the tort of bad faith will die only if it is put into the light of day. It does not solve the problem anticipated. Rather it makes a few lawyers very rich, a few insureds receive indemnity for which they did not bargain and makes the cost of insurance to those who wish only to receive the benefits of the contract prohibitive.

In New York, for example, the courts were unwilling to adopt the widely-accepted tort cause of action for “bad faith” in the context of a first-party claim, because they recognized that to do so would constitute an extreme change in the law of the state. New York accepted the more conservative approach adopted by the minority of jurisdictions that the duties and obligations of the parties [to an insurance policy] “are contractual rather than fiduciary” [Beck v Farmers Ins. Exch., 701 P2d 795, 798-799 [Utah 1985]].

New York refused to allow a tort to be created out of a breach of contract. [Batas v. Prudential Insurance Company Of America, 281 A.D.2d 260, 724 N.Y.S.2d 3 (N.Y.App.Div. 03/20/2001). However:

Nothing inherent in the contract law approach mandates this narrow definition of recoverable damages. Although the policy limits define the amount for which the insurer may be held responsible in performing the contract, they do not define the amount for which it may be liable upon a breach. [Acquista v. New York Life Insurance Company, 285 AD2d 73 [1st Dept 2001]

The Court in Acquista, supra. looked at damages broadly but was still unwilling to adopt the widely-accepted tort cause of action for “bad faith” in the context of a first-party claim, because it recognized that to do so would constitute an extreme change in the law of  New York. It allowed the insured to recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain for and settle claims in good faith. Essentially, the court accepted the more conservative approach adopted by the minority of jurisdictions that the duties and obligations of the parties to an insurance policy are contractual rather than fiduciary.

Later, in Bi-Economy Market, Inc. v. Harleysville Insurance Company of New York, No. 14 (N.Y. 02/19/2008) in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy’s allegations that Harleysville breached its duty to act in good faith, the appellate court held that Bi-Economy’s claim for consequential damages including the demise of its business, were reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment. New York, still has problem with the tort.

Since there is no separate tort for bad faith refusal to comply with an insurance contract, this claim should have been dismissed (see New York Univ. v Continental Ins. Co., 87 NY2d 308, 318-320; Johnson v Allstate Ins. Co., 33 AD3d 665; Zawahir v Berkshire Life Ins. Co., 22 AD3d 841, 842). Contrary to the plaintiffs’ contentions, they do not have a claim for consequential damages beyond the limits of the policy for the claimed breach of contract (cf. Acquista v New York Life Ins. Co., 285 AD2d 73, 82). [Paterra v. Nationwide Mutual Fire Insurance Co., 2007 NY Slip Op 01847, No. 2006-04562 (N.Y.App.Div. 03/06/2007)]

“Fair” Requires Equal Application of the Law to All Parties

In California, and most states that allow a breach of an insurance contract to support a tort cause of action, only allow it to go in one direction.  Insurance litigants are not equal. An insured can obtain tort damages for bad faith breach of the insurance contract but an insurer may not receive tort damages for bad faith breach of an insurance contract.

The inequality of treatment of insurers and insureds resulted in a distinction between tort and contract liabilities that convinced one state supreme court to reject comparative bad faith as a defense in a bad faith action against an insurer because “the [insurer's] tort cannot be offset comparatively by the [insureds’] contract breach.” It characterized the differing legal concepts as “apples and oranges.” [Stephens v. Safeco Ins. Co. of America (Mont. 1993) 852 P.2d 565, 568-569]. In addition a different court rejected a comparative bad faith defense for an insured’s misperformance of its contractual duties in a bad faith action against the insurer for refusal to defend. [First Bank v. Fidelity and Deposit Ins. (Okla. 1996) 928 P.2d 298, 306-309]

In California, the decision in Agricultural Ins. Co. v. Superior Court (1999) 70 Cal.App.4th 385 agreed. Agricultural involved a bad faith action arising out of an insurance claim for earthquake damage. After the insurer paid the claim in part controversies arose, ultimately leading to the insured’s suit for breach of contract and bad faith. The trial court stayed the action to allow the insurer to complete its investigation. The insurer did, and then cross-complained, contending that the insured’s claim was in significant part falsified. Making a false claim is a ground usually sufficient to allow the insurer to declare the policy void and deny all payments.

The insurer pleaded various contract theories, and also the tort theories of fraud and what was called “reverse bad faith,” i.e., tortious breach of the covenant of good faith and fair dealing by the insured. The insured demurred to the tort theories, and the trial court sustained the demurrers without leave to amend. The decision made the following amazing conclusion:

Although there is an implied covenant of good faith and fair dealing in every contract, although each party is bound by it, and although this principle applies to insurance contracts (see, e.g., Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 797), the potential liability for breach is different for insurers and insureds. In summary, an insured may be held liable in contract for breaching the covenant, but cannot be held liable in tort. (Emphasis added)

The Fourteenth Amendment to the U.S. Constitution provides, in part:

No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. (Emphasis added)

If the law allows an insured to sue for tort damages as a result of a breach of the covenant of good faith and fair dealing equal protection should allow an insurer to sue the insured for tort damages as a result of the breach of the same covenant. Our system of constitutional law does not allow one litigant to be more equal than others. Insurers are clearly not as equal as their insureds with regard to the tort of bad faith. Even when there is clear evidence that the insured breached the covenant of good faith and fair dealing the insurer is only entitled to contract damages while the insured, whose insurer acted in breach of the covenant can be awarded tort and punitive damages.

Although the courts may not think so, the insured’s breach of the covenant of good faith and fair dealing should also be separately actionable as a contract claim. Some forms of misconduct by an insured will void coverage under the insurance policy. (Imperial Cas. & Indem. Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 182). However, the court in Agricultural believed that contract remedies “adequately serve to protect an insurer from the insured’s misconduct without creating the logical inconsistencies and troublesome complexities of a defense of comparative bad faith.”

In so doing the California court ignores the logical inconsistencies and troublesome complexities of the tort of bad faith when it finds an insurer breached the covenant. What is tortious conduct by an insurer should be tortious conduct by an insured. Damages available to the insured should be available to the insurer.

In Kransco v. American Empire Surplus Lines Insurance Company, 23 Cal.4th 390, 2 P.3d 1, 23 Cal.4th 951, 97 Cal.Rptr.2d 151 (Cal. 06/22/2000) the California Supreme Court agreed with Agricultural and held that “[A]n insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of ‘insurance bad faith.’” Since Kransco the courts support the inequity by claiming that there is a fundamental disparity between the insured who performs its basic duty of paying the policy premium and the insurer, which, depending on a number of factors, may or may not have to perform its basic duties of defense and indemnification under the policy. An insured is believed to not be on equal footing with its insurer. Because the court believes that the relationship between insured and insurer is inherently unequal, the inequality rests on contractual asymmetry. An insurer’s tort liability for breach of the covenant is believed to be predicated upon special policy factors inapplicable to the insured. But that is so with regard to all contracts where a manufacturer’s breach of a contract is inherently unequal to the breach of the purchaser of its product, but they are treated equally.

An insurer can commit the tort and is obliged to pay tort and punitive damages. An insured, who is totally evil, whose only interest in the insurance agreement is to defraud the insurer, who refuses to cooperate with the insurers investigation, who does everything possible to harm the insurer, cannot commit the tort.

This decision is as logical as stating that only black men can commit a battery while black women, white or Asian men and women cannot commit the tort of battery regardless of how hard the victim is battered. It is a statement that equal protection applies to all citizens of the U.S. except insurers since only they can only be the tortfeasor but can never the victim.

Because of the lack of equal protection, plaintiffs’ lawyers and their clients are able to take advantage of insurers and use their wits and energies to set up the insurer for bad faith.

In Wade v. Emcasco Insurance Co., 483 F.3d 657 (10th Cir. 04/10/2007) the Tenth Circuit recognized that the undisputed evidence in the record showed that Plaintiff’s counsel’s sole reason for rejecting the insurer’s offer of settlement made after the running of an arbitrary deadline was his hope to pursue a bad faith claim against the insurer. As a result it refused to allow the plaintiff to pursue the bad faith case. The Tenth Circuit also noted that although the impetus for insurance bad faith claims derives from the idea that the insured must be treated fairly and his legitimate interests protected.  It is designed as a shield for insureds – not as a sword for claimants. “Courts should not permit bad faith in the insurance milieu to become a game of cat-and-mouse between claimants and insurer, letting claimants induce damages that they then seek to recover, while relegating the insured to the sidelines as if only a mildly curious spectator.”

The California Supreme Court recognized, in a footnote to a dissent, in 1985 the problem when Justice Kaus wrote:

It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.  [White v. Western Title Insurance Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

ZALMA OPINION

It is time to put a stake in the heart of the tort of bad faith. Insureds who are wronged by their insurer should limit their recovery to contract damages. They should be compelled to waive the tort and sue in assumsit. If the tort of bad faith must exist it must be applied equally. The abuse of the tort of bad faith has become so extreme that the tort must be eliminated or otherwise made fair.

If there is a tort of bad faith – as the courts seem to believe – the Fourteenth Amendment to the U.S. Constitution requires equal protection. An insurer who is wronged by its insured should have the same right to tort damages and punitive damages for breach of the covenant as can the insured. Americans do not live on George Orwell’s “Animal Farm”. No litigant is more equal than another.

The tort of bad faith has served its purpose. Its abuse, as Justice Kaus reported in 1985, continues unabated with no hazard to the abuser. It should be killed, buried and never allowed to rise again with a stake through its heart covered in garlic and doused in holy water.

In the alternative, if there must be a tort of bad faith, then it should be applied equally. There should be no call for comparative bad faith but only that any party to a contract of insurance treated in bad faith by the other should be entitled to recover the same damages, both contract and tort damages.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Barry Zalma

The Eleventh Circuit Court of Appeal was asked to resolve an insurance coverage dispute that required it to determine, under Florida law, what constitutes “property damage” under a post-1986 standard form commercial general liability (“CGL”) policy with products-completed operations hazard (“PCOH”) coverage in Amerisure Mutual Insurance v. Auchter Company, A Florida Corporation, No. 10-10960 (11th Cir. 03/15/2012). Specifically, whether such a policy issued to a general contractor provides coverage when a claim is made against the contractor for damage to the part of the completed project performed by a subcontractor, but not to any other project component, caused by a subcontractor’s defective work.

The district court, ruling on cross-motions for summary judgment, held that the damage at issue was not covered under the policy, granted the insurer’s motion, and entered a declaratory judgment for the insurer.

FACTS

On April 17, 1997, the Amelia Island Company (“Amelia”) entered into a contract with the Auchter Company (“Auchter”), a general contractor, for the construction of an inn and conference center (the “Inn”) on Amelia’s property in Nassau County, Florida. Auchter entered into a subcontract agreement with Register Contracting Company (“Register”) to install the Inn’s roof. Amelia did not require Auchter to obtain a performance bond to cover Auchter’s contractual obligations.

The Inn would be constructed with a barrel tile roof. This roof was made from concrete, S-shaped tiles installed in an interlocking fashion and in overlapping rows. The tiles were to be installed by screwing them to the roofing substrate, which provides the roof’s water resistance.  Auchter hired Register to install the entire roof-including the roofing substrate system and the roofing tiles-at the Inn.

During September and October 1997, Register installed the roof’s substrate in preparation for installing the roof tiles. Register then began installing the roof tiles in November 1997, completing work on the Inn’s roof in January 1998.
Beginning in August 2002, the concrete tiles on the Inn’s roof began dislodging from the roof. Amelia contacted Auchter to make repairs. On two occasions-August 18, 2002, and April 4, 2003-roofers conducted temporary repairs on the affected areas. During the 2004 hurricane season, however, Hurricanes Frances, Ivan, and Jeanne skirted the Amelia Island area, causing even more tiles to come off the roof. Some of these tiles hit other tiles on the roof, cracking them. Although the exact number of tiles lost during this time is unknown, Amelia’s counsel has suggested the number exceeds 25 percent. Amelia then contracted for additional temporary repairs to remedy the tile losses.

Between 2002 and 2008, Amelia paid $78,007.56 to various contractors to rectify the roof’s failure. In response to these expenses, Amelia contacted Auchter, arguing that Auchter was liable for the repairs. Auchter and Amelia were unable, however, to agree regarding the cause of the roof’s failure.

INSURANCE

Amerisure Mutual Insurance Company and Amerisure Insurance Company (“Amerisure”) had issued successive CGL and umbrella liability (“UL”) policies to Auchter, Amerisure defended Auchter in the arbitration proceedings under a reservation of rights. On June 25, 2008, Amerisure filed a declaratory judgment action in the United States District Court for the Middle District of Florida seeking a declaration that Amelia’s claim against Auchter was not covered by the insurance policies Amerisure issued to Auchter. Specifically, Amerisure argued that Amelia’s claim against Auchter was not for “property damage” as required to trigger coverage under the policies. If the district court granted Amerisure’s requested relief, Amerisure would have no duty to indemnify or defend Auchter in its dispute with Amelia.

Amerisure insured Auchter between May 1, 2002, and January 1, 2006, through a series of CGL and UL policies. The CGL policy provides, in relevant part, “[Amerisure] will pay those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance applies. . . . This insurance applies to . . . ‘property damage’ only if . . . the ‘property damage’ is caused by an ‘occurrence[.]‘” The CGL defines “property damage” as “[p]hysical injury to tangible property, including all resulting loss of use of that property. . . . or . . . [l]oss of use of tangible property that is not physically injured.” An “occurrence” is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

ARBITRATION AWARD

While the declaratory judgment action was pending, the arbitration between Amelia and Auchter took place. The arbitrator conducted a two-day hearing at which counsel for Amelia and Auchter made appearances. The arbitrator found Auchter liable to Amelia for $2,167,313.67 in damages for the defective installation of the roof, which constituted a breach of Auchter’s contract with Amelia. Specifically, the arbitrator found that the requirement of compliance with the 110 mile an hour wind velocity was a condition of the contract and that the failure itself combined with other evidence such as missing screws and excessively loose tiles constitute proof by a preponderance of the evidence that the roof was not installed in accordance with contract requirements.

The amount of damages was supported, in part, by evidence that the entire roof had to be replaced. For one, the roof design did not permit inspection and replacement of defectively installed tiles on an individual basis. Individual replacement was impossible because “in order to determine whether all tiles have been properly nailed or screwed down, it would be required to remove the tiles in the next tier, in essence requiring removal of the entire roof.”  Moreover, tiles identical to those used on the Inn’s roof were unavailable.

Amelia then demanded payment of the award. Auchter, however, made no payment. On August 7, 2009, Amelia converted the arbitrator’s award to a final judgment against Auchter in state court. This judgment includes the full amount awarded by the arbitrator plus interest and fees. Thus, Amelia has a state court judgment in hand that it is prepared to execute, but has not yet executed against any party.

Although named as a defendant, Auchter, which the record indicates has ceased doing business, hired no counsel and took no part in the suit.

ANALYSIS

Both Amerisure and Amelia conceded that the crux of the dispute was whether the roof had suffered “property damage.” In support of its position, Amerisure argued that Amelia’s claim was essentially one to recover the roof it had paid for but not received; any damage was limited to the roof itself. In response, Amelia argued that the plain meaning of “property damage” under the CGL imposes no requirement that “other” property be damaged to trigger coverage. Even if such a requirement existed, Amelia argued, the cracked and lost roofing tiles themselves would constitute damaged property and would be covered because no CGL exclusion applied.

The parties did not dispute that the subcontractor’s installation of the roofing tiles was defective or that the defective installation constituted an “occurrence” under the CGL. It was also undisputed that the tiles themselves were non-defective.  On February 4, 2010, the district court entered its order granting Amerisure’s motion for summary judgment, ruling that the damage to the roof was not “property damage,” and that Amerisure had no continuing duty to defend or to indemnify Auchter regarding the arbitrator’s award.

The Florida Supreme Court exercised its jurisdiction to address whether a post-1986 standard form commercial general liability (CGL) policy with products-completed operations hazard coverage, issued to a general contractor, provides coverage when a claim is made against the contractor for damage to the completed project caused by a subcontractor’s defective work. The supreme court ultimately answered this question in the affirmative.

A performance bond, unlike a CGL, does not protect the contractor or his subcontractor from liability. The CGL insurer, on the other hand, indemnifies the insured, and does so only for resulting “property damage” arising after the project is completed. Because of this distinction, a variety of deficiencies that do not constitute “property damage” may be covered by a performance bond, and not all deficiencies cause additional property damage. Unfortunately none of the parties bought a performance bond so the Eleventh Circuit was limited to deciding upon the applicability of the CGL.

The Eleventh Circuit held that a post-1986 standard form commercial general liability policy with products completed-operations hazard coverage, issued to a general contractor, provides coverage for a claim made against the contractor for damage to the completed project caused by a subcontractor’s defective work provided that there is no specific exclusion that otherwise excludes coverage.

CONCLUSION

The Eleventh Circuit reasoned that the Florida Supreme Court drew a distinction between a claim for the cost of repairing the subcontractor’s defective work, which is not covered under a CGL policy, and a claim for repairing the structural damage to the completed project caused by the subcontractor’s defective work, which is covered.  If a subcontractor is hired to install a project component and, by virtue of his faulty workmanship, installs a defective component, then the cost to repair and replace the defective component is not “property damage.”

The only damages Amelia alleged are those to correct the faulty roof supplied by Auchter’s subcontractor. In so claiming, Amelia is effectively seeking to secure the roof that Auchter should have installed in the first instance: one that conformed with the contract specifications. Amelia’s claim is thus simply a claim for the cost of repairing the subcontractor’s defective work. Amelia’s claim all along has been solely to remedy the installation of a defective component, which in this case is the roof as a whole.

Because the Inn’s roof was an amalgamation of scores of interlocking roofing tiles and other roofing materials, the roofing tiles themselves are not the relevant components in this case. They are simply some of the raw materials from which this particular roof was made. Rather, the relevant component in this case is the Inn’s entire roof itself.

Amelia hired Auchter to provide an Inn with a roof; Auchter hired Register to construct that roof-not simply to install tiles. The entire roof’s faulty construction rendered the roof defective-a defect that, as the parties acknowledge, can be remedied only through total reconstruction.

If the defective roof had resulted in physical injury to some other tangible property, there would have been property damage, but because Amelia seeks only to remedy the defect-in effect, to obtain the non-defective roof that should have been built in the first place-there is none. Faulty workmanship to one part of a project (the roof, for example) can lead to damage to another part of the project (such as stucco walls which may leak from faulty roof construction).

Under Auchter’s CGL policies, the damage to the stucco walls would be “property damage” within the meaning of the policy, but would ordinarily be excluded under the “your work” exclusion, unless the stucco walls had been constructed by a subcontractor, in which case the damage could be covered by the subcontractor exception to the “your work” exclusion.

ZALMA OPINION

This suit should never have been filed. A CGL is not, nor can it ever be, a performance bond. As filed and argued the only damage claimed by the plaintiff was to the roof and, therefore, there was no “property damage” to property not the work of the roofer.

Coverage might have been found if the plaintiff alleged, or extrinsic evidence established, damage to other parts of the hotel like water damage to the interior of the hotel because of the failure of the roof.

Zalma on Insurance in Top 50

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Barry Zalma, Inc.

The Connecticut Supreme Court was asked by the United States Court of Appeals for the Second Circuit, to explain the proper construction of terms in a homeowners insurance contract under Connecticut law in Arrowood Indemnity Company v. Pendleton, No. SC 18658 (Conn. 03/27/2012) .

The predecessor insurance companies to the plaintiff, Arrowood Indemnity Company, brought a declaratory judgment action in the United States District Court for the District of Connecticut claiming that they did not have a duty to defend or to indemnify the defendants, Pendleton King, Daphne King and their minor child, Pendleton King, Jr. (Pendleton, Jr.) (collectively, the Kings), for any liability arising out of injuries sustained by a third party while Pendleton, Jr., was driving his parents’ all-terrain vehicle (ATV) on a private road in a private residential community where the Kings resided because the accident had not occurred “on an insured location” and the Kings’ notice of a claim was untimely.

The District Court rendered summary judgment in favor of the plaintiff who then appealed to the Circuit Court of Appeals, which certified the following three questions of unresolved state law to the Supreme Court:

1. With respect to a claim for negligent entrustment under a liability policy that excludes coverage for ‘[a]rising out of . . . [t]he entrustment by an insured’ ‘to any person,’ ‘of a motor vehicle’ other than ‘[a] motorized land conveyance designed for recreational use off public roads, not subject to motor vehicle registration and . . . [o]wned by an insured and on an insured location,’ is the insured location
1. the place where the entrustment of the vehicle took place, or
2. the place where the vehicle is garaged, or
3. the place where the accident occurred?
2. In the absence of a policy definition of ‘premises’, should a private road located within a residential development owned by the insured’s homeowners association be considered ‘premises used . . . in connection with a [residence] premises’ under the terms of a home-owner’s insurance policy if the portion of the road where the liability arose is not regularly used by the insured, although other portions of the road are so used?
3. Under Connecticut law, where a liability insurance policy requires an insured to give notice of a covered claim ‘as soon as practical,’ do social interactions between the insured and the claimant making no reference to an accident claim justify a delay in giving notice of a potential claim to the insurer?

The Second Circuit noted that Connecticut trial courts had adopted conflicting approaches to the first certified question and that it could find no Connecticut case law resolving the second and third certified questions.

FACTS

The record certified by the Second Circuit contains the following undisputed facts relevant to resolving these questions:

The plaintiff provides homeowner’s insurance that covers the Kings’ residence. This residence is located in Deer Park, a private residential development in Greenwich that is managed by an incorporated homeowners association. Pursuant to a warranty deed, the Kings have a right to travel along the private roads leading from their premises to and from the public road. The residence is situated on Deer Park Court, which terminates at one end at Midwood Road. The northern portion of Midwood Road is a dead end; the southern portion of Midwood Road leads to the development’s exit and a public roadway.

The present litigation arose out of an incident that occurred in 2002. Pendleton, Jr., then fourteen years old, was driving an ATV owned by his parents and using a nine foot rope attached to the ATV to tow his friend, Conor McEntee, on a skateboard. While the two boys were on the dead-end portion of Midwood Road north of the Kings’ residence, McEntee let go of the tow rope and subsequently fell, suffering a severe head injury that resulted in hospitalization and a temporary coma. The accident occurred approximately fifty to seventy-five feet from the Kings’ property. Following the accident, the King and McEntee families socialized, and the McEntees did not indicate that they intended to bring an action related to the accident. More than one year after the accident, however, a letter from an attorney representing the McEntees alerted the Kings that an action might be filed, at which point the Kings, through New England Brokerage Corporation notified the plaintiff of the potential claim. The present declaratory judgment action followed.

POLICY

The relevant provisions of the exclusions section of the policy provide that

“1. Coverage . . . do[es] not apply to bodily injury or property damage . . .

    ”f. Arising out of:

    ”(1) The ownership, maintenance, use, loading or unloading of motor vehicles or all other motorized land conveyances, including trailers, owned or operated by or rented or loaned to an Insured;

    ”(2) The entrustment by an Insured of a motor vehicle or any other motorized land conveyance to any person . . . .

    ”This exclusion does not apply to . . .

    ”(2) A motorized land conveyance designed for recreational use off public roads, not subject to motor vehicle registration and:

    ”(a) Not owned by an Insured; or

    ”(b) Owned by an Insured and on an Insured location . . . .”

ANALYSIS

There is no dispute in this case that the ATV at issue qualifies as “[a] motorized land conveyance designed for recreational use off public roads, not subject to motor vehicle registration” and that the Kings owned the ATV. To fall within the scope of coverage, therefore, the ATV also must have been “on an [i]nsured location . . . .”

Answer to First Question

The first question concerned the point in time to which the phrase “on an [i]nsured location” refers. Specifically, in the context of a claim that an act of negligent entrustment ultimately led to an ATV accident, the Supreme Court must determine whether coverage depends on where the ATV was at the time of the accident or where it was at the time of entrustment. The Supreme Court concluded that the natural and ordinary meaning of the phrase “on an [i]nsured location” unambiguously refers to the location of the ATV at the time of the accident giving rise to the insurance claim.

Having determined that the ATV must be “on an [i]nsured location” at the time of the accident for coverage to apply, We conclude that, although the precise meaning of the phrase “[a]ny premises used by you in connection with [the residence] premises” is uncertain, the broader meaning of the essential term that this phrase helps to define-”[i]nsured location”- is sufficiently clear to exclude the private road at issue in the present case.

According to the Second Circuit’s decision, the homeowners association, which is incorporated, owns this road. Nothing in the record demonstrates that the Kings’ ownership of the residence premises conferred to them authority over this stretch of road; nor do we see any indication that the Kings bore a heightened level of personal responsibility for the location. The limited easement expressed in the Kings’ warranty deed does not give them a sufficient interest in the accident site, a dead-end stretch of road beyond the scope of that easement, to render it an insured location. Under the terms of the insurance contract at issue in this case, the accident site therefore is not covered.

The Notice Condition

As the Second Circuit noted, “Connecticut requires two conditions to be satisfied before an insurer’s duties can be discharged pursuant to the ‘notice’ provision of a policy:

1. an unexcused, unreasonable delay in notification by the insured; and
2. resulting material prejudice to the insurer.

The burden of establishing timely notice or lack of prejudice to the insurer rests with the insured.”

The Third Question

The third certified question asks whether “social interactions between the insured and the claimant making no reference to an accident claim justify a delay in giving notice of a potential claim to the insurer . . . .”  Notwithstanding the severe nature of this accident, the Kings suggest that no notice was required prior to their having been contacted by an attorney representing the McEntee family approximately one year after the accident because, subsequent to the accident, they had socialized with the child and his family and these interactions did not create the impression that an action would be brought.

The Kings’ argument fails to recognize that the notice requirement turns not on an insured’s subjective assessment of how likely a claim is to be brought, but rather on whether a reasonable person would recognize that “liability may have been incurred”.

There is no indication that through these social interactions the victim assumed total liability or otherwise disclaimed ability to bring a claim. Although the social interaction may have made a claim seem less likely, it did not defeat the reasonable conclusion that liability may have been incurred or that a claim for damages could possibly arise from the accident. Therefore, the social interaction between the Kings and the McEntees would not justify a delay in giving notice of a potential claim.

The Supreme Court concluded:

(1)     the relevant location is the site of the accident;
(2)     such a private road does not fall under the coverage provision; and
(3)     social interaction making no reference to an accident does not justify delayed notice, but an insurer must prove prejudice to disclaim its obligation to provide coverage based upon untimely notice.

ZALMA OPINION

The Circuit Court did a service to the state of Connecticut by clearing up three questions of law, all of which may seem obvious but, as the citation by the Supreme Court of multiple appellate decisions was not clear in the state. Now it is clear and the type of dispute is resolved. It also established that Connecticut requires an insurer claiming late reporting must prove prejudice as a result of the late report.

Zalma on Insurance in Top 50

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The Seventh Circuit was called upon to resolve, using the law of Illinois, the proper interpretation of the pollution exclusion in a general liability insurance policy. The most common policy is the “commercial general liability policy” drafted by the Insurance Services Office and purchased by businesses to insure against losses arising out of general business operations. The policies at issue in Scottsdale Indemnity Co. and v. Village of Crestwood, et al, No. 11-2385, 11-2556, 11-2583 (7th Cir. 03/12/2012) were “public entity general liability policies,” which are issued to municipalities to cover analogous risks and contain the same pollution exclusion as the commercial general liability policy.

FACTS

Two insurers sued for a declaration that they have no duty either to defend a series of tort suits brought against their insureds (the Village of Crestwood, Illinois, and past and present Village officials) or to indemnify the insureds should the plaintiffs in those suits prevail. The trial court found that the allegations in the tort complaints triggered the pollution exclusion, granted summary judgment for the insurers, and multiple appeals followed.

Crestwood is a small Chicago suburb that supplies its residents with water obtained from both Lake Michigan and wells that it owns, and bills the residents for the water. According to the tort complaints, in 1985 or 1986 Crestwood’s mayor and other Village officials learned from state environmental authorities that one of the wells was contaminated by perc (PCE- perchloroethylene, also known as tetrachloroethylene) a solvent widely used in dry cleaning. Perc is a common contaminant of soil and groundwater and is more difficult to clean up than oil spills and is a carcinogen.

Perc used by a nearby dry-cleaning establishment had leaked into the groundwater tapped by the well. Village officials promised the state authorities that the well would be used only in emergencies. But instead, for reasons of economy, the well continued to be used as a source of the daily Village water supply-without disclosure to the Village’s residents. The well remained in use until 2007, and not until 2009 was it sealed.

Hundreds of Crestwood residents, having learned of the contamination of their water supply from a series of articles in the Chicago Tribune, sued the Village and past and present Village officials in an Illinois state court seeking damages for injury to health. In a parallel suit the State of Illinois seeks an injunction requiring the Village to finance “a site inspection to determine the nature and extent of contamination” and take “all necessary steps to remediate the contamination.” All these suits are pending.

THE POLICIES

The defendants’ insurance policies (primary policies issued by Scottsdale and excess policies issued by National) exclude from coverage ” ‘bodily injury,’ ‘property damage,’ or ‘personal injury’ arising out of, or ‘wrongful act(s)’ which result in the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time,” and also exclude from coverage expenses arising from orders for “cleaning up . . . or in any way responding to, or assessing the effects of pollutants.” “Pollutants” are defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” There are slight differences in the wording of the various policies but they are immaterial and we ignore them.

ANALYSIS

There is no doubt that perc is a “contaminant” within the meaning of the policies; and the tort plaintiffs are complaining about its “dispersal” by the Village from the contaminated well to their homes via the system of water mains that connects the well to the homes. The Seventh Circuit refused to stop there and affirm the trial court. It saw a problem from a literal reading of the pollution exclusion that could exclude coverage for acts remote from the ordinary understanding of pollution harms and unrelated to the concerns that gave rise to the exclusion.

The Seventh Circuit supposed a tanker truck filled with perc crashes into a bridge abutment, spilling its liquid cargo, and another vehicle skids on the wet surface of the highway into the abutment, injuring the driver. Perc is both a contaminant and a cause of the bodily injuries in this example. But it would be absurd to argue that a claim arising from such an accident would be within the pollution exclusion, since in no reasonable sense of the word “pollution” was the driver a victim of pollution.

There is nothing unusual about paint peeling off of a wall, asbestos particles escaping during the installation or removal of insulation, or paint drifting off the mark during a spray painting job. A reasonable policyholder, some courts believe, would not characterize such routine incidents as pollution.

The Supreme Court of Illinois has interpreted the pollution exclusion to be limited to harms arising from traditional environmental pollution. The Seventh Circuit believes that a more perspicuous formula than “traditional environmental pollution” would be “pollution harms as ordinarily understood.”

With such a definition in mind, the Seventh Circuit looked to the reasons for exclusions from insurance coverage. The reasons do not include fear by insurance executives of losses by insureds. The business of insurance is covering losses. The more policies written, the better from the insurance company’s standpoint – but this is provided the company can estimate within a reasonable range the size of the losses that it is likely to be required to reimburse the policyholders. Otherwise it can’t set premiums that will be high enough to compensate it for the risk of having to reimburse the losses it’s insuring, without being so high that no one will buy its polices.

Insurance companies use statistical methodologies (actuarial science) to calculate “expected losses” – the sum of the insured losses, if they occur, discounted (multiplied) by the probability of loss. The higher that probability or the greater the loss if it occurs, the steeper the insurance premium must be in order to be compensatory. Insurers do not write policies when they can’t calculate expected losses, since without such a calculation the determination of how high a premium to charge would be arbitrary. So for example they will not insure property against fire for more than the property is worth – overinsurance would induce property owners to be less careful about preventing fires, and how much less careful they would be and how that would affect fire losses would be very difficult to predict.

The effect of insurance on an insured’s behavior and hence on the risk is called “moral hazard.” A related problem, also illustrated by fire insurance, goes by the name of “adverse selection.” Insurers of pollution liability would encounter difficulty in estimating the expected loss from pollution and calculating the premium accordingly. Environmental damage is often very difficult to detect until it has become extensive, let alone to predict, or estimate its likely extent, in advance. The financial consequences can be horrific and are unpredictable. Most of those consequences are felt at the clean-up stage, and the insureds in this case would like us to confine the pollution exclusion to those costs, noting that the creation of expansive clean-up liability under federal law triggered the modern compendious pollution exclusion at issue in this case.

The exclusion was first introduced into general commercial liability policies in 1970. But it was the passage in 1980 of CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601 et seq.), the federal toxic-waste statute, and the threat and later the reality of government-ordered cleanup costs imposed by CERCLA, that prompted the industry to adopt the current, broader exclusion. When CERCLA was first enacted, insurers couldn’t calculate the costs it would impose on insureds, and while they could have dealt with this uncertainty by amending their liability policies to authorize retroactive calculation of premiums for pollution insurance, instead they limited their risk by excluding coverage of pollution harms in the broadest possible terms. To make assurance doubly sure they added an exclusion for clean-up costs that was separate from the exclusion for bodily-injury costs.

The insurers in this case invoke both exclusions because one of the plaintiffs in the suits against the insureds, the Illinois EPA, is seeking an injunction that would command the Village to take “all necessary steps to remediate the contamination,” and those steps would impose clean-up costs on the Village.

The main reason for the broad pollution exclusion is the adverse-selection problem. It is true that there is adverse selection only where the adverse factor, such as a pre-existing medical condition or the very low value placed by a property owner on his property, is invisible to the insurer, who therefore can’t adjust the insurance premium to the greater risk of loss from insuring those people – can’t in other words separate its high-risk customers from its low-risk ones and charge different premiums to the different groups.

But invisibility is a problem with pollution insurance too, as this case illustrates dramatically: deliberate concealment by the insureds of the pollution is alleged. If insurers can’t determine how likely a would-be buyer of insurance is to pollute, coverage would force enterprises that have a slight risk of liability for causing pollution damage to subsidize the premiums of high-risk potential polluters. Insurers could have excluded coverage just for knowing or deliberate polluting, which would have done the trick in this case but would not be a complete solution to the adverse-selection problem. A shopper for pollution insurance who knows that he has a high risk of accidentally polluting and being sued for it would, if able to buy the insurance at the normal premium, contribute to the premium spiral that we’ve described. Forcing him to self-identify as a potential polluter by buying a pollution-coverage rider to his general liability policy (as otherwise he will fall within the pollution exclusion) separates high- and low-risk polluters.

The Village “caused” the contamination of its water supply (it could have sealed the well a quarter of a century ago, when it discovered the well was contaminated) in a perfectly good sense of the word, the defendants did not introduce the contaminant into the soil or groundwater. The contamination had an infinity of authors, not only the Village and its officials but also the inventor of perc, the founder of Crestwood, and maybe Jean Baptiste Point du Sable, who built a farm at the mouth of the Chicago River in the 1780s and is thought to be the first permanent non-native settler of the Chicago area.

The pollution exclusion would mean little if the insured were required to have been the original author of the pollution in order to be within the exclusion. Groundwater contamination, with resulting contamination of drinking water, is extremely common and a fertile source of environmental litigation.

The insureds argue finally that this is not a pollution case at all, because the amount of perc in the Village’s water supply was below the maximum level permitted by environmental regulations. But either the perc caused injuries, maybe because the relevant regulations are too lax, or it did not and the tort suits will fail.

At issue is only that the suits are premised on a claim that the perc caused injuries for which the plaintiffs are seeking damages. If that claim triggers the pollution exclusion the insurers owe nothing.

Although an insurer’s duty to defend his insured depends on what the complaint alleges rather than on the facts that emerge over the course of the litigation and that might or might not give rise to a duty to indemnify, it is doubtful that the plaintiffs could have drafted complaints that did not reveal that this was a pollution case. The complaints actually filed describe in copious detail the conduct giving rise to the tort suits, and in doing so inadvertently but unmistakably acknowledge the applicability of the pollution exclusion.

ZALMA OPINION

The Seventh Circuit, showing an unusual and thorough knowledge of insurance, underwriting, the use of actuarial science to set premium and the reasons for exclusions concluded that allegations of damage caused by pollution deprives the insured of contract. The Seventh Circuit, as a result the eight corners rule, limited its analysis to the allegations of the complaint.

Insurance, as the court made clear, is a business where an insurer assumes a risk intelligently, based upon actuarial science. When the risk cannot be estimated by an actuary the insurer excludes the risk because it is impossible to calculate its exposure.

The case provides an excellent, short form, definition of the business of insurance and prevented an insured who, if the allegations are believed, intentionally poisoned the citizens of the insured community.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

March 15, 2012

In the sixth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), reports on:

1.    How the incompetence of those in control of the Medicaid system make insurance fraud against the Medicaid system easy by paying for treatment of people who are dead and listed on the Social Security database as dead.

2.    A physician who is imprisoned because he hired a patient to remodel his property while filing reports with the workers’ compensation system that the patient was totally disabled.

3.    Chapter V of the serialized novel “Murder and Insurance Don’t Mix.”

4.    Analysis of State of Ohio v. Glenn A. Hess where a conviction for insurance fraud was upheld.

5.    Analysis of an insurer’s suit against health care providers for fraud that failed for lack of preparation and insufficient evidence.

6.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 377 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 are available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Zalma on Insurance in Top 50

The Wisconsin Supreme Court was asked to determine the proper measure of damages in an action to recover under an injured party’s underinsured motorist (UIM) coverage in Lindy Orlowski v. State Farm Mutual Automobile Insurance Company, 2012 WI 21 (Wis. 03/07/2012). Orlowski sought recovery under a UIM policy for medical bills generated by her health care providers that they had agreed before her injury to accept less so that the bills submitted bore no relationship to the actual amount charged.

The injured party, Lindy Orlowski (Orlowski), submitted a claim to State Farm Mutual Automobile Insurance Company (State Farm) under her UIM coverage after exhausting the policy limits of the underinsured motorist. Pursuant to the arbitration provision in the UIM coverage portion of her policy, Orlowski and State Farm submitted the question of damages to an arbitration panel. The panel concluded that the court of appeals decision in Heritage Mutual Insurance Company v. Graser, 2002 WI App 125, 254 Wis. 2d 851, 647 N.W.2d 385, precluded Orlowski from recovering under her UIM coverage the value of medical expenses that were written off by her medical provider.

Orlowski petitioned the circuit court for modification of the arbitration award arguing that the panel erroneously relied on Graser. The circuit court agreed and modified the arbitration award to include the value of the written-off medical expenses. The court of appeals noted that Orlowski’s policy required the arbitration panel to award the amount that she was “legally entitled to collect” from the underinsured motorist, which is controlled by this court’s precedent on the collateral source rule and tort damages.

The Supreme Court reaffirmed what its prior precedent clearly established: “an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses” and concluded that the arbitration panel’s decision in this case was properly modified by the circuit court allowing Orlowski to recover for amounts her health care providers had written off. 

BACKGROUND

On December 30, 2004, Orlowski was involved in a motor vehicle accident caused by an underinsured driver. Orlowski recovered damages up to the limits of the underinsured driver’s insurance. Orlowski had health insurance coverage with United Healthcare, which paid a portion of Orlowski’s medical expenses as a result of the accident. She also had an automobile insurance policy with State Farm including UIM coverage.

After exhausting the underinsured motorist’s coverage, Orlowski submitted a claim to State Farm to recover under her UIM coverage. The arbitration panel awarded Orlowski $11,498.55 for medical services provided to her as a result of the accident: $9,498.55 for the medical lien claimed by United Healthcare and $2,000 for Orlowski’s out-of-pocket medical expenses. The arbitration panel did not include in its award the amount of Orlowski’s medical expenses that had been written off by her medical provider because of discounts through her health insurance coverage with United Healthcare.

At Orlowski’s request, the arbitration panel submitted a supplemental decision concluding “that the necessary and reasonable value of the medical services provided to Mrs. Orlowski as a result of the accident is [$72,985.94].” The dispute in this case is over the $61,487.39 in medical expenses that were written off by Orlowski’s medical provider – the difference between the reasonable value of medical expenses and the $11,498.55 in medical expenses that the panel awarded to Orlowski.

ANALYSIS

The Wisconsin Supreme Court explained that in Wisconsin the proper measure of medical damages is “the reasonable value of medical services rendered.”  It decided that allowing an insured to reap the benefits of the premiums he or she paid is particularly relevant to the recovery of written-off medical expenses under UIM coverage. To ensure full coverage, the injured party has paid two premiums: (1) to a health insurer for coverage for medical expenses including the benefit of having some of those medical expenses written off by the medical provider, and (2) to an automobile insurer to be indemnified for damages, including medical expenses, caused by an underinsured motorist.

State Farm claimed that applying the collateral source rule in this case, where Orlowski seeks to recover under her UIM coverage, would give her a “windfall” or double recovery since she would collect about 5/6 of the medical bills earned by her doctors because she paid a premium for the lower bills. The Supreme Court concluded that since Orlowski paid a premium for both of the health insurance and auto policies “she should receive the benefit from both.”

The award of the arbitration panel was modified because the panel exceeded its authority and manifestly disregarded the law when it failed to award the reasonable value of medical services without a reasonable legal basis.

CONCLUSION

The Supreme Court reaffirmed what its prior precedent established: an injured party is entitled to recover the reasonable value of medical services, which, under the operation of the collateral source rule, includes written-off medical expenses.

ZALMA OPINION

I respectfully disagree with the Supreme Court of Wisconsin. They appear to have ignored the fact that insurance is not a wager — one may not pay a premium with the intent or ability to profit. If Ms. Orlowski had insured a $10,000 Ford for $100,000 she can only recover its value if damaged or destroyed. The fact that she paid a premium for more than its value has no effect on the recovery. Similarly, the fact that she paid a premium for health insurance that negotiated rates 1/6th of the amounts billed by the doctors does not entitle her or the doctor to recover the other 5/6th of the bill.

In California, the Supreme Court reached the opposite result in Rebecca Howell v. Hamilton Meats & Provisions, No. S179115 (Cal. 08/18/2011) to that reached by the Wisconsin Supreme Court.  It said:

The collateral source rule, which precludes deduction of compensation the plaintiff has received from sources independent of the tortfeasor from damages the plaintiff “would otherwise collect from the tortfeasor” (Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 6 (Helfend)), ensures that plaintiff here may recover in damages the amounts her insurer paid for her medical care. The rule, however, has no bearing on amounts that were included in a provider’s bill but for which the plaintiff never incurred liability because the provider, by prior agreement, accepted a lesser amount as full payment. Such sums are not damages the plaintiff would otherwise have collected from the defendant. They are neither paid to the providers on the plaintiff’s behalf nor paid to the plaintiff in indemnity of his or her expenses. Because they do not represent an economic loss for the plaintiff, they are not recoverable in the first instance. The collateral source rule precludes certain deductions against otherwise recoverable damages, but does not expand the scope of economic damages to include expenses the plaintiff never incurred. (Emphasis added)

Although, as a citizen of the state of California I may seem prejudiced toward my state’s Supreme Court’s ruling, I am not.

I am concerned about the Wisconsin court’s conclusion because it ignores the fact that bodily injury recovery for pain and suffering are usually calculated by the trier of fact by applying a multiplier to the general damages – the medical bills. Therefore, by allowing the trier of fact to consider medical bills, as written, rather than the amount the provider actually agreed to pay allows multiple windfalls to the plaintiff. First, the plaintiff is issued payment to reimburse the plaintiff for damages never incurred and that will never be paid and second the bills presented that have no relation to the actual amount owed, encourage fraud.

If the plaintiff, knowing that the doctor will accept 25% or 50% of the amount billed, and presents the bill to the trier of fact as if it is a sum owed has deceived the trier of fact and acted fraudulently. If, on the other hand, the plaintiff submits a bill for $10,000 in medical services and tells the trier of fact that she is only obligated to pay $5,000 the reasonable and prudent trier of fact will only award what is owed.

Submitting to a trier of fact, as did Ms. Orlowski, a bill from medical providers that was six times greater than that the providers accepted as full payment for their services, was a misrepresentation of a material fact sufficient to allow an insurer to declare the policy void and expose Ms. Orlowski — but for the actions of the Supreme Court — to prosecution for insurance fraud. In Wisconsin, now, an insured can gamble by buying UIM and health insurance coverage that she can profit from an accident.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2709 2 http://zalma.com/blog/?p=2704 http://zalma.com/blog/?p=2704#comments Wed, 14 Mar 2012 13:56:26 +0000 Barry Zalma http://zalma.com/blog/?p=2704 Continue reading →]]> When You A Vacate Settlement Agreement You Must Give Back The Money

Zalma on Insurance in Top 50

Usually a settlement agreement between an insured and insurer resolves the entire dispute and both sides go on to live the rest of their life. Insurance claims, even after they are settled will come back to life, like Lazarus, to hector the insurer and squeeze more money from its limited assets.

The Louisiana Court of Appeal was called upon to resolve a dispute between Francisco Galacia (“Galacia”) and his insurer, Louisiana Citizens Property Insurance Corporation (“LCP”), from the trial court’s decision to grant the Motion to Vacate Settlement filed by LCP and in conjunction therewith, to dismiss Plaintiff’s complaint with prejudice for Plaintiff’s failure to comply with the court’s order to return the settlement funds to LCP. In Francisco Galacia v. Louisiana Citizens Property Insurance Corp., No. 2011-CA-1125 (La.App. Cir.4 03/07/2012) Galacia, a Hurricane Katrina, claimant asked to vacate the settlement and let him litigate for more but keep the money received in the settlement because he had applied it to repairs.

FACTUAL BACKGROUND

Galacia owned two properties located in Orleans Parish, Louisiana that he claimed were damaged in the storm. Both properties were insured under the same LCP policy.

Galacia sought damages for these properties in a mass joinder suit filed in Civil District Court, Parish of Orleans against LCP. During the pendency of this action Galacia reached a settlement agreement with LCP. Galacia received $59,903.99 and executed a Receipt, Release and Indemnity Agreement. The Agreement in part released LCP from: “all claims and demands for loss and damage to property . . .  located [in] New Orleans, Louisiana 70119, and all other losses and damages covered under Louisiana Citizens Property Insurance Corporation. . .”

Thereafter, Galacia left the mass joinder litigation and filed the present lawsuit against LCP for damages to one of his properties. In response, counsel for LCP sent a letter to Galacia’s attorney advising that the claims asserted in the suit had already been settled. Galacia’s attorney then filed a Motion and Order to Dismiss With Prejudice, which was granted by the trial court. A few months later, Galacia’s attorney decided that the lawsuit had been improperly dismissed and accordingly, filed a Motion for Relief From Judgment and Motion to Re-Open Case.

The motion contended that the settlement agreement covered only one of his two properties and that Galacia never intended for the settlement to cover any of the damage to the other property. In support of this position, Galacia noted that only one of the two properties was explicitly named in the settlement agreement.

In response, LCP filed a Motion to Vacate Settlement, citing the parties’ lack of consent to the settlement agreement, and also sought an order that Galacia return the $59,903.99 he received in settlement funds. On December 10, 2010, the trial court vacated the settlement and ordered Galacia to tender the $59,903.99 to LCP within thirty days of the judgment. Galacia did not return the settlement funds and instead, filed a Supplemental and Amended Petition for Damages asserting claims for damage to both properties.

LCP filed an ex parte order re-urging its Motion to Dismiss when the funds were not returned; and on June 13, 2011, the trial court signed a judgment dismissing Galacia’s lawsuit with prejudice.

LCP’S EVIDENTIARY BURDEN OF PROOF

The burden of proof is on the party urging the exception of res judicata to prove its essential elements by a preponderance of the evidence. LCP did not file nor did the trial court grant any peremptory exceptions to enforce the settlement agreement. Therefore, the only issue the Court of Appeal needed to resolve was whether the trial court had a sound legal basis to grant LCP’s Motion to Vacate the Settlement Agreement.

At the time that LCP filed its Motion to Vacate, the trial court, upon Galatia’s own motion, had already granted him relief from abiding by the very same settlement agreement that LCP sought to vacate. The Court of Appeal, therefore, concluded that the judgment that released Galacia from the settlement agreement also released LCP. As there was no enforceable settlement agreement when LCP filed its Motion to Vacate, LCP was relieved of any evidentiary obligation to prove that the agreement should be vacated in its entirety.

MEETING OF THE MINDS

Galacia also claimed that the trial court erred when it found that there had been no meeting of the minds about the one of the properties. He argued that the “unambiguous” language of the settlement agreement showed that the parties intended to only settle the one property claim because that was the lone property expressly named in the release.

The Court of Appeal found no merit to the argument. The language of the settlement agreement is clearly not ambiguous. Galacia interpreted the agreement to cover only one property while, in contrast, LCP believed the release’s language covered all other losses and damages under the policy, including both properties.

Galacia effectively forfeited any argument to claim that the parties had a meeting of the minds when he requested relief from the agreement. The parties clearly had different interpretations of the settlement agreement. The trial court correctly determined that there cannot be consent where there is no meeting of the minds. Accordingly, the trial court did not err in vacating the settlement agreement.

FAILURE TO RETURN SETTLEMENT FUNDS

Galacia’s finally claimed that the trial court abused its discretion when it dismissed his claims with prejudice because he failed to return the settlement funds.

An appellate court generally reviews a judgment of dismissal under the abuse of discretion standard.

The record reveals that Galacia never made an effort to return any portion of the settlement funds. Galacia’s insistence that the trial court should have imposed a lesser sanction because he allegedly used the settlement funds to repair one of the properties overlooks that he was not legally entitled to those funds.  Simple equity dictates that LCP would be prejudiced if Galacia were allowed to retain settlement funds to which he was no longer entitled and to which LCP no longer had an obligation to pay. Galacia cannot keep the settlement funds and pursue litigation against LCP at the same time.

ZALMA OPINION

Insurance claims are not a lottery or gamble. They are designed to indemnify a person whose property is damaged by an insured against peril. Galacia entered into a settlement agreement with a state funded insurance company, applied to funds to repair one of two properties, found it was not enough and tried to sue to get money for the second property. He wanted to have his cake after already eating it.

The court intelligently put a condition on giving Galacia the right to pursue LCP for more — it required him to return the settlement since he obtained a rescission of the settlement agreement — because as an equitable remedy both parties must be put back in the state they were before the settlement. He refused and lost.

The lesson is if a party wishes to back out of a settlement agreement — rescind that contract — the party must be ready to return all consideration received. To do otherwise would be unfair.

Insurers are not bottomless pits of money that can be tapped as often as wished if you have a lawyer — they are businesses who must enforce the terms of every contract.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The Ohio Court of Appeal was required to resolve a dispute between Westfield Insurance Co. (hereinafter “Westfield”) and its insureds over the entry of judgment after an appraisal award was entered. Westfield appealed the trial  court’s judgment entry awarding plaintiffs Carl and Mona Stuckman (hereinafter “the Stuckmans”) $35,956.78, plus prejudgment statutory interest from April 14, 2008, for the loss they sustained from a fire at their home, which was covered under the terms of their insurance policy with Westfield.

In Carl Stuckman, et al v. Westfield Insurance Company, 2012 -Ohio- 986. (Ohio App. Dist.3 03/12/2012) the Court of Appeal was asked to eliminate pre-judgment interest and take into consideration prior payments and the deductible amount that was the obligation of the Stuckman’s.

FACTS

On April 14, 2008, the Stuckmans suffered damages as a result of a fire at their home in Bucyrus, Ohio. The Stuckmans and Westfield were unable to agree on the amount of loss, and consequently, Westfield demanded an appraisal under the terms of the insurance policy.

On December 2, 2008, the Stuckmans filed a declaratory action in the trial court asking the court to declare the appraisal provision of the insurance contract ambiguous and unenforceable, or, in the alternative, for the trial court to appoint an umpire and declare the appropriate procedure for the appraisal.  The complaint prayed further for the trial court to declare the Stuckmans’ right to recover under other sections of the insurance policy and to award the Stuckmans damages, costs, and prejudgment interest from April 14, 2008.

On January 30, 2009, Westfield filed its answer setting forth several defenses and requesting an appraisal as provided for in the insurance policy. On June 1, 2009, the trial court held a hearing for the purpose of appointing an umpire as provided for in the insurance policy. Thereafter, by journal entry dated June 10, 2009, the trial court appointed David Dolland to serve as umpire. In relevant part, the trial court’s entry further provided that “[t]he manner in which the appraisal is to be conducted is set forth in the subject policy of insurance.” The trial court explained this process in its journal entry as follows:

Plaintiff’s selected appraiser Patrick Murphy and Defendant Westfield’s selected appraiser John Anich will separately set the amount of loss on each of the issues to be determined by appraisal. If the two appraisers agree on the amount of any of the losses at issue to be determined by appraisal, then as to any such agreement, the two appraisers will issue a report accordingly and that will be the amount of any such loss. If the two appraisers fail to agree on the amount of any of the losses at issue to be determined by appraisal, then they will submit their differences to the umpire. A decision agreed by either of two appraisers and the umpire will set the amount of any such loss.

THE APPRAISAL AWARD

Since the parties’ appraisers could not agree on the amount of loss, the umpire issued an appraisal award on January 27, 2010, concurring with the appraisal submitted by Westfield’s appraiser, John Anich, for the following:

A. Dwelling- Replacement cost repairs: $31,845.56

Depreciation: – 5,102.23

Actual Cash Value Loss: $26,743.23

B. Contents-Replacement cost to clean: $3,813.45

(Actual cash value loss)

C. Additional Living Expense: $5,400.00

TOTAL: $35,956.68

Below these calculations, appears the following statement: “[t]his appraisal award is made without consideration of the deductible. The signatures of any two of the below three persons constitutes the amount of loss.”

On February 3, 2010, the trial court issued judgment in favor of the Stuckmans as follows: $26,743.33, less any amount previously paid by Westfield, for Dwelling coverage; $3,813.45, less any amount previously paid by Westfield, for Contents coverage; and $5,400.00, less the $1,000.00 deposit paid by Westfield to Housing Headquarters that is refundable directly to Plaintiffs, for Additional Living Expense coverage. If and when Plaintiffs complete repairs to the dwelling, they will be entitled to recover the Depreciation holdback of $5,102.23.

THE POST JUDGMENT MOTIONS AND APPEAL

On February 26, 2010, the Stuckmans filed a motion for reconsideration of the trial court’s judgment entry arguing that the trial court inappropriately deducted sums “previously paid by Westfield” from the appraisal award without any evidence in the record to support these deductions.

On March 4, 2010, Westfield filed a motion for leave to oppose the Stuckmans’ motion for reconsideration.

The Court of Appeal overruled the Stuckmans’ assignments of error concerning the enforceability of the appraisal provision and the trial court’s alleged lack of instruction to the appraisers concerning the appropriate procedure for the appraisal since the trial court clearly followed the terms of the insurance policy.

Prior to the trial court’s September 21, 2011 hearing upon remand, Westfield presented evidence of payments it made to the Stuckmans totaling $35,456.78 – the total amount of the appraisal award minus the $500 deductible. Despite this evidence, the trial court entered judgment in favor of the Stuckmans for $35,956.78, the total amount of the appraisal award without regard to the $500 policy deductible or Westfield’s previous payments, plus statutory interest from April 14, 2008, the date of the fire thereby doubling the Stuckman’s recovery.

Since the trial court had evidence of Westfield’s payments at the September 21, 2011 hearing – evidence the trial court did not have when it entered judgment on February 3, 2010 – it should have deducted Westfield’s payments from the appraisal award for purposes of its judgment. The trial court also should have subtracted the $500 deductible from the appraisal award, as the Stuckmans concede on appeal.

The Court of Appeal returned the case to the trial court to enter judgment after taking into consideration the amounts already paid and the deductible. In essence, finding that the Stuckmans’ have been paid in full on their claim and the appraisal award.

ZALMA OPINION

Appraisal is usually the fastest, quickest, and most fair method of determining the amount of loss when the insured and the insurer cannot agree. This case reveals that some people refuse to accept a win and insist on moving for new trial, and taking the case up on appeal rather than accept the award. There is no question that we live in a litigious society. It does seem somewhat ridiculous to litigate to this extent — suit, motions, trial, appointment of appraisers, inability to appoint an umpire, an order for appraisal and court appointed umpire, appraisal, motions, and two appeals — over a little less than $36,000.

If appraisal is used properly the two appraisers meet, review the scene and usually agree on the amount of loss. When they can’t agree they present their differences to the umpire (chosen by the two appraisers) who resolves the dispute. In such a situation both the insurer and the insured can accept the award and both go home disappointed.

The lesson to be learned from this case is that a system designed to help resolve disputes about the amount of loss quickly and fairly can be abused to the point where the expense of appraisal far exceeds its value.

It is necessary for insurers to avoid this type of problem is for the insurers to hire competent and experienced claims personnel who can “adjust” a claim with an insured to their satisfaction. The need for appraisal usually arises because of the incompetence or lack of experience of the claims staff or the greed of the insured who insists on considering the claim an adversary proceeding.  Many problems like this case can be resolved by a staff of competent and experienced claims handlers.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

In Michigan the Court of Appeal was asked to determine whether a person close to or touching a vehicle is “occupying” it or is “in, on or upon” the vehicle for the purpose of determining the availability of coverage, in Westfield Insurance Company v. Ken’s Service and Mark Robbins, No. 300941 (Mich.App. 03/08/2012). In reaching its decision the Court of Appeal applied a precedent from the Michigan Supreme Court applying policy language as written.

In my home state, the California Supreme Court, in E.M.M.I. Inc. v. Zurich American Insurance Company,  32 Cal. 4th 465, 9 Cal Rptr 3d 701 (Cal. 02/23/2004) decided that “in, on or upon” did not necessarily mean what it said. When a he jewelry salesman left his jewelry in his car with the keys in the ignition and the engine running while he went to check on a clanking noise a thief jumped in the car and drove away with the jewelry. The insurer, that excluded losses where the insured was not “in, on or upon” the vehicle at the time of theft, refused to pay. The Supreme Court, finding coverage, concluded:

[T]he salesman here did not intend to and did not abandon his vehicle when he walked to the rear to inspect the tailpipe area. His intent and conduct was solely to attend to his vehicle without abandoning it or the jewelry locked in the trunk.

For the reasons above, we conclude that the vehicle theft exclusion is ambiguous and did not clearly and plainly apprise the insured that coverage would be lost by merely stepping out of the car. Construing the exception in the insured’s favor, we hold that E.M.M.I.’s salesman, who was approximately two feet from and actually attending to his vehicle when the theft occurred, came within the scope of the exception to the vehicle theft exclusion.

In Michigan, in a declaratory judgment action involving underinsured motorist coverage with almost identical policy language to that in the E.M.M.I. case in California the circuit court granted plaintiff Westfield Insurance Company’s motion for summary disposition because, at the time of the accident, the injured party was not “in, on or upon” his vehicle.

BASIC FACTS

On December 19, 2009, defendant Ken’s Service, a tow truck company, dispatched one of its employees, Mark Robbins, to assist a police officer, Roderick Vessey, in removing his vehicle from a ditch on US-131. When he arrived at the scene, Robbins got out of the tow truck and connected the tow cables to the police vehicle. While he was operating the control levers positioned on the side of the tow truck, another driver, Ashley See, sideswiped the tow truck and collided with Robbins. Robbins suffered substantial injuries, including a broken right arm and a protruding break of the right tibia/fibula. Robbins represents that he is “crippled for life.”

Harold Ingersoll owned the car that Ashley See was driving. Ingersoll’s insurance company, Auto-Owners Insurance, agreed to tender the full $100,000 limits of the policy to settle the claim. Robbins sought additional compensation from Westfield Insurance, Ken’s Service’s insurer, based on underinsured motorist coverage obtained for the tow truck. Ken’s Service had underinsured motorist coverage in the amount of $1,000,000. The uninsured/underinsured motorist endorsement insured anyone “occupying” a covered “auto”. Further, the endorsement defined “occupying” to mean “in, upon, getting in, on, out or off.”

Westfield Insurance refused to pay based on its determination that Robbins was not “occupying” the vehicle at the time of the accident. Westfield Insurance then commenced this action for a determination of its obligations to Robbins under the insurance contract.

Ken’s Service and Robbins moved for summary disposition. They claimed that Robbins was leaning on the tow truck for balance and support when See struck him and that this occurred while he was operating the towing controls, which were located on the driver’s side of the truck.

Westfield Insurance responded, arguing that Robbins was not occupying the tow truck when See struck him. Westfield Insurance asserted that Robbins clearly had both feet on the ground and had been outside the truck for several minutes when he was hit and injured.  The trial court interpreted the contract to mean that Robbins could only prevail if he could demonstrate that he was “occupying” the vehicle by being “upon” it when struck. The trial court focused on the word “occupying” and determined that coverage should depend on a person’s connectedness with the activity of being a driver or passenger of the vehicle. According to the trial court, if the activity or physical contact was incidental to being a driver or passenger, then the person would be occupying the vehicle and therefore would be insured. The trial court ruled that Robbins was not covered under the policy.

INTERPRETATION OF THE CONTRACT LANGUAGE

Courts treat insurance contracts no differently than any other contract. Accordingly, an appellate court should give contractual language that is clear and unambiguous full effect according to its plain meaning unless it violates the law or is in contravention of public policy. A court cannot infer the parties’ “reasonable expectations” in order to rewrite a clear and unambiguous contract.

The Michigan Supreme Court interpreted the identical contractual language at issue in this case in Rednour v Hastings Mutual Ins Co., 468 Mich 241; 661 NW2d 562 (2003).  In Rednour, an oncoming vehicle struck the plaintiff while he was changing a flat tire on the insured vehicle. The plaintiff was approximately six inches away from the vehicle when the other car struck him. He had loosened the lug nuts on the wheel and was moving towards the rear of the vehicle when the other car struck him.  The plaintiff claimed that he was an insured entitled to no-fault benefits because he was “occupying” the vehicle, as both the no-fault act and the language of the policy defined that word. Specifically, the plaintiff argued that he was “upon” the vehicle because: he was knocked into the insured vehicle and pinned between the two vehicles during the collision.

The Michigan Supreme Court held that a person did not need to be physically inside the vehicle to be “upon” it, yet it nevertheless held that physical contact alone is insufficient to show that the person was “upon” the vehicle so as to be “occupying” the vehicle. Plaintiff suggests that he was “upon” the car because he was pinned against it after being struck.

Here, the parties focused on the word “upon” and the meaning of that word. As the Michigan Supreme Court stated in Rednour, “physical contact alone may [not] be sufficient to show that the person was ‘upon’ the vehicle so as to be ‘occupying’ the vehicle.”

At the time of impact, Robbins was not in the vehicle, nor was he getting in, on, out, or off the vehicle. In fact, Robbins had been out of the vehicle for several minutes and was operating the levers of the tow truck. Thus, the appellate court concluded it had no choice but to affirm the trial court because Robbins was not “occupying” the vehicle when he sustained bodily injury.

ZALMA OPINION

The Michigan Supreme Court and Michigan Court of Appeal, dealing with injuries users of motor vehicles limited “in, on or upon to the clear and unambiguous language of the policy while the California Supreme Court, almost ten years earlier, found the same language to be ambiguous and construed a person feet away from his vehicle with the engine running so that it was easily stolen, was “in, on or upon” the vehicle.

In Michigan even if the contractual language is poorly worded, it is not ambiguous if it fairly admits of but one interpretation. The Michigan courts hold that physical contact with the insured person is required to be “upon” the vehicle, although the person need not be completely physically supported by the vehicle. Physical contact alone, in Michigan, is insufficient to show that the person was “upon” the vehicle so as to be “occupying” the vehicle.
Michigan courts, unlike the California Supreme Court, resist the request to create an ambiguity where none exists and applied the clear language of the policy they were called upon to interpret. To do otherwise removes the certainty of contract. Insureds and insurers have the right to enter into any terms or conditions they desire. It is not the appropriate province of a court to interpret insurance contracts clear on their face to provide the coverage the insured desires – after loss or injury – rather than the coverage purchased before loss or injury.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The Tennessee Court of Appeal was asked to resolve whether a private limitation of action provision of an insurance policy trumps a longer breach of contract statute of limitations enacted by the state legislature in Stanley A. Gagne v. State Farm Fire and Casualty Company, No. E2011-01117-COA-R3-CV (Tenn.App. 03/05/2012).  Gagne brought suit against State Farm, his insurance company, claiming a burglary loss. State Farm moved for summary judgment on the grounds the statute of limitations had run, but Gagne argued that under contract law the statute of limitations is six years. The Trial Court enforced the one-year statute of limitations contained in Gagne’s policy of insurance and Gagne appealed.

FACTS

Gagne, an insured of State Farm State Farm, brought this action on April 22, 2010, alleging that on April 23, 2004, he owned a home that was insured by State Farm that was burglarized. He averred that many items were taken, and that he made a demand on State Farm for the loss of property, but State Farm had not paid his claim. He concluded that State Farm had breached its contract of insurance with him. State Farm answered, admitting that it insured Gagne on the date in question, but raised the affirmative defense of the statute of limitations.

State Farm filed a Motion for Summary Judgment, asserting that Gagne’s claim was untimely and should be dismissed. It established by sworn declarations that Gagne filed a claim that his home was burglarized on April 23, 2004, after which the adjuster sent him a letter telling him that he had to submit a proof of loss form within 60 days, and attached a blank form. He also informed Gagne in the letter that he had to prepare an inventory of the lost property, and provided an inventory form. He received Gagne’s Sworn Statement in Proof of Loss on May 24, 2004.

On November 15, 2004, State Farm’s attorney wrote to Gagne regarding scheduling an Examination Under Oath. State Farm had difficulty completing its investigation due to the fact that Gagne was incarcerated during the claims process. The Examinations Under Oath were completed in 2005 and 2006.

On August 24, 2007, State Farm’s attorney sent a letter to Gagne’s attorney seeking to resolve the matter, which letter was attached. In all of the letters that State Farm sent, it was expressed that State Farm was not waiving any defenses or policy requirements. The last letter sent was on January 17, 2008, states that numerous requests had been made for supporting documentation, and that if the same was not furnished by the end of January, State Farm’s attorney would assume Gagne was no longer pursuing a claim.

Nothing further was heard from Gagne or his attorney until the Complaint was filed in 2010.

State Farm attached further documentation, including the June 7, 2004, letter to Gagne advising him the proof of loss was incomplete, and the two follow up letters sent June 28, 2004, and July 14, 2004.

Gagne’s response to the summary judgment motion was that the applicable statute of limitations was 6 years.

The Trial Court entered an Order Granting State Farm’s Motion for Summary Judgment, and held that the applicable policy had a one year limitation period. The Court held that Gagne’s complaint was untimely and granted summary judgment to State Farm.

THE POLICY

In this case, the policy explicitly provides that “No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.” Tennessee courts have uniformly held that a contractual limitation period such as the one in this policy is enforceable.

The Trial Court found the loss occurred on April 23, 2004, and Gagne’s proof of loss was received by State Farm on May 24, 2004. Thus, the 60-day immunity period began then, and ended on July 23, 2004, when the statute of limitation began to run.

The court noted that a policy for insurance is generally reviewed under contract principles. As long as its terms are unambiguous, it will be enforced as written.  It is undisputed that a contractually agreed limitations period in an insurance policy is valid and enforceable in Tennessee.

ZALMA OPINION

The primary purpose of contractual modifications of the statute of limitations is to avoid prejudice; specifically, to avoid the extra danger of fraud and mistake associated with stale claims.

Private limitations of action provisions have been recognized for more than a century. The history and development of the law with regard to the private limitation of action provision teaches that it should not be ignored. In 1868, the United States Supreme Court concluded that a 12-month private limitation of action provision should be strictly enforced in Riddlesbarger v. Hartford Insurance Company, 74 U.S. 386, 19 L. Ed. 257 (1868).

Whenever a claim is denied it is prudent for the insurer to advise the insured, in writing, that the policy contains a private limitation of action provision and state the date when the time to sue expires. Some states even require, by Regulation, that such a notice be given.

Mr. Gagne, incarcerated at the time of his claim, who failed — even with the assistance of counsel — failed to comply with the policy conditions in a timely fashion he would have had his claim resolved.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The eight corners rule of contract interpretation applied in Texas and other states limits the court’s analysis of an insurance coverage dispute to the words of the policy and the allegations of the lawsuit. It prohibits the introduction of extrinsic evidence into the analysis which leaves the defendant seeking insurance coverage at the mercy of the plaintiff.

The Fifth Circuit Court of Appeal was asked to resolve a dispute between Liberty Surplus Insurance Corporation (“Liberty”) and its insured, Technical Automation Services Corporation (“Technical) who obtained summary judgment at trial holding that Liberty had a duty to defend Technical Automation in an underlying lawsuit. In Technical Automation Services Corp v. Liberty Surplus Insurance Corporation, No. 10-20640 (5th Cir. 03/05/2012) the availability of the remedy of reformation was ignored because of a strict application of the eight corners rule that caused the trial judge to enter judgment in favor of the insured.

FACTS

The trial judge applied the “eight corners” rule of contract interpretation to determine the duty to defend, looking only to the complaint in the underlying lawsuit and the insurance policy. The judge, therefore, did not consider Liberty’s defense of mutual mistake because Liberty’s evidence created a factual dispute that was inappropriate to determine the duty to defend. Accordingly, the court granted summary judgment for the insured, Technical.

From 2003 to 2004, Liberty was Technical’s general commercial liability insurer. The 2003 insurance policy provided a basic coverage form that set forth the essential terms of the policy. It also included various endorsements that amended or supplemented the basic coverage form. Endorsement nineteen was identified as form number “ES 344 EG/RH” and entitled “Exclusion-Professional Liability.” It provided that: “with respect to any professional services shown in the schedule, this insurance does not apply to ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury’ due to the rendering of or failure to render any professional service.”

In late 2003, Technical sought to renew its coverage with Liberty for another year. After providing Technical with a policy renewal quote and an insurance binder, Liberty issued a commercial general liability policy. The basic policy stated that Liberty was obligated to defend Technical against any suit seeking damages covered by the terms of the insurance policy because of “bodily injury” or “property damage” that occurred during the policy period. The policy’s schedule of forms and endorsements identified endorsement nineteen as form number “ES 344″ entitled “Exclusion-Professional Liability,” an exclusion that would make the terms of the new policy identical to the 2003-2004 policy. In the actual policy document, however, endorsement nineteen was not an exclusion, but appeared as a “Miscellaneous Errors and Omissions Endorsement” (“E&O endorsement”), which was identified as form number “CGL 1204 0103″ and provided coverage opposite of that limited by form ES 344. This endorsement provided:

Subject to the conditions and exclusion in the Coverage Part, the coverage afforded by this endorsement shall apply to those sums which you shall become legally obligated to pay as damages as a result of any negligent act, error or omission committed by you, that results in “bodily injury” or “property damage” committed during the policy period in the conduct or operations shown in the Schedule above.

In 2005, Technical contracted with Oxy Vinyls (Oxy) to inspect and to remove a chlorine flow transmitter and to install a new transmitter at Oxy’s Deer Park Caustic Plant. Technical completed its work on February 17, 2005, during the policy’s liability coverage. On February 24, 2005, three days after Technical’s policy with Liberty expired, an Oxy employee, Juan Valdovinos, was injured by a chlorine leak at the Oxy plant. In 2007, Valdovinos brought a personal injury suit against Technical and Oxy alleging negligence by both companies. Valdovinos specifically alleged that Technical failed to calibrate the new transmitter properly and that Oxy did not provide adequate safety measures in the event of a chlorine leak.

On October 15, 2008, a representative from Liberty denied coverage for the Valdovinos lawsuit on behalf of Liberty, claiming that Valdovinos’s injury did not occur until after the policy period had expired. On March 2, 2009, Technical filed suit in the Harris County District Court seeking a declaratory judgment stating that Liberty had the duty to defend and indemnify Technical in the Valdovinos suit; it also sought damages for breach of contract. Oxy intervened in the state court action, also asserting claims for a declaratory judgment and breach of contract as an additionally insured party. Liberty removed the case to the United States District Court for the Southern District of Texas, on the grounds that the complaint alleged complete diversity of citizenship and the amount in controversy was more than $75,000.

Technical moved for partial summary judgment. It argued that Liberty was obligated to defend Technical in the Valdovinos suit, because Valdovinos raised a claim for negligence that was covered by the E&O endorsement in the liability policy. On February 19, 2010, Liberty opposed Technical’s motion and, in the same document, Liberty moved for summary judgment on the basis that the inclusion of the E&O endorsement was a mutual mistake and sought reformation of the contract. It also argued that it had no duty to defend Technical because Valdovinos’s alleged injuries took place after the policy had expired.

On June 8, 2010, the trial judge entered an order severing certain specific claims and a final judgment with respect to all other claims. The order severed Technical’s remaining indemnification claim from the claims regarding Liberty’s duty to defend Technical and Liberty’s duty to defend and indemnify Oxy. With respect to all of the claims except for Liberty’s indemnification claim, the court entered a final judgment in favor of Technical finding that Liberty had a duty to defend Technical against the claims asserted in Valdovinos’s lawsuit, and it entered final judgment in favor of Liberty on all of Oxy’s third-party claims.

ANALYSIS

On appeal, Liberty does not challenge the trial judge’s interpretation of the E&O endorsement. Liberty argued that the trial judge erred by prematurely engaging in her interpretation of the endorsement before determining whether the endorsement was a result of mutual mistake. According to Liberty, the E&O endorsement was included in the policy by mutual mistake, and a genuine issue of fact remains as to whether it was entitled to have the E&O endorsement expunged through reformation.

If a party can prove that a contract is the result of mutual mistake, it may be entitled to the equitable remedy of reformation. The objective of reformation is to correct a mutual mistake made in preparing a written instrument, so that the instrument truly reflects the original agreement of the parties.

The trial judge, applying the “eight corners” rule of contract interpretation and declining to consider parol evidence truncated her mutual mistake analysis, denied Liberty’s motion for summary judgment, accepted, for purposes of the duty to defend, the E&O endorsement as a valid part of the contract, interpreted the endorsement in favor of Technical, and granted Technical’s motion for summary judgment declaring that Liberty had a duty to defend.

Exception to Eight Corners Rule

Generally, Texas subscribes to the “eight corners” rule when deciding an insurer’s duty to defend under an insurance liability policy, which means that courts are permitted to examine only the insurance contract and the complaint against the insured in the underlying suit to determine whether there is coverage for the insured. There is a relevant exception, however.

When a mutual mistake is alleged, the first task of the court is not to apply, perfunctorily, the “eight corners” rule and then directly proceed to interpret the insurance policy. Instead, the first matter to address is whether the disputed provision results from an agreement between the parties. When mutual mistake is alleged, the task of the court is not to interpret the language contained in the contract but to determine whether or not the contract itself is valid.

The claim of mutual mistake usually requires the introduction of extrinsic evidence because a substantive mistake and the original agreement between the parties would rarely be readily apparent based on the terms of the contract itself. The Fifth Circuit concluded, therefore, that the trial judge erroneously applied the “eight corners” rule before considering Liberty’s reformation counterclaim and prematurely interpreted the E&O endorsement.

The Fifth Circuit found a genuine issue of material fact remains as to whether the E&O endorsement was included in the insurance policy by mutual mistake, which could entitle Liberty to reformation of the policy and sent the case back to the trial court.

ZALMA OPINION

The “eight corners rule” and its cousin, the “four corners rule” are invitations to a plaintiff to punish the defendant. Since coverage decisions are based solely on the wording of the complaint an unscrupulous plaintiff wishing to punish the defendant can instruct counsel to assert only intentional torts in the complaint so that the defendant’s insurer will deny coverage and the defendant — who bought insurance to protect itself — will find it must pay to defend and pay any court judgments.

This case explained a reasonable exception to the eight corners rule — reformation — to prevent an injustice.

Not all litigation against insurers raise the equitable remedy of reformation. It is time the eight and four corners rules are placed on the trash-heap of legal precedence so that litigants can use extrinsic evidence to establish coverage or lack of coverage rather than be limited to the prejudicial limitations of the plaintiffs’ pleading.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2690 0 http://zalma.com/blog/?p=2686 http://zalma.com/blog/?p=2686#comments Wed, 07 Mar 2012 14:46:52 +0000 Barry Zalma http://zalma.com/blog/?p=2686 Continue reading →]]> Bat Guano — Pollutant or Not

Zalma on Insurance in Top 50

The plaintiffs filed suit against their insurer, Auto-Owners, for breach of contract and bad faith, claiming that Auto-Owners was liable for the total loss of their vacation home that was uninhabitable and unsaleable as a result of the accumulation of bat guano between the home’s siding and walls.  The Supreme Court of Wisconsin was asked to resolve the question whether the pollution exclusion in the Auto Owners policy defeated the claim in Joel Hirschhorn and Evelyn F. Hirschhorn v. Auto-Owners Insurance Company, 2012 WI 20 (Wis. 03/06/2012).

Auto-Owners moved for summary judgment, which the circuit court initially denied. Upon reconsideration, however, the circuit court agreed with Auto-Owners that its insurance policy’s pollution exclusion clause excluded coverage for the Hirschhorns’ loss. The court of appeals reversed, concluding that the pollution exclusion clause is ambiguous and therefore must be construed in favor of coverage.

FACTUAL BACKGROUND

Beginning in 1981, the Hirschhorns owned a vacation home in the town of Lake Tomahawk, Wisconsin. At all relevant times, the home was covered by a homeowners insurance policy issued by Auto-Owners. The policy insured the Hirschhorns against the risk of loss of the home, along with structures and personal property located at the insured premises, against “accidental direct physical loss.” However, the policy contained a pollution exclusion clause that excluded from coverage any “loss resulting directly or indirectly from the “[d]ischarge, release, escape, seepage, migration or dispersal of pollutants . . . .” The policy, also defined “pollutants” as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, liquids, gases and waste and described waste as including materials to be recycled, reconditioned or reclaimed.

In May 2007, Joel Hirschhorn met with a real estate broker to list the home for sale. At that time, the broker inspected the home and saw no signs of bats. However, in July 2007, upon inspecting the home again, the broker discovered the presence of bats and bat guano. The broker attempted to remove the bats and clean the home. The broker’s efforts failed.

The Hirschhorns and their family stayed at their vacation home between August 9 and 14, 2007. During their stay, they noticed a “penetrating and offensive odor emanating from the home.” Upon leaving on August 14, 2007, they arranged for a contractor to conduct a more thorough inspection of the home. The contractor determined that the cause of the odor was the accumulation of bat guano between the home’s siding and walls. The contractor provided the Hirschhorns a remediation estimate but could not guarantee that cleaning up the bat guano would rid the home of its odor.

Subsequently, on October 23, 2007, the Hirschhorns filed with Auto-Owners a notice of property loss. The notice described the loss as resulting from the discovery of bats in the Hirschhorns’ home and specifically stated, “smell awful and [insured] cannot stay in house . . . .” Auto-Owners denied the claim three days later, reasoning that the accumulation of bat guano was “not sudden and accidental” and, in any case, resulted from “faulty, inadequate or defective” maintenance within the terms of the policy’s maintenance exclusion clause.

On November 4, 2007, the Hirschhorns entered into a contract with a builder to demolish their existing vacation home and construct a new one in its place. In his affidavit, Joel Hirschhorn explained that he thought it was more practical financially to demolish the home than to spend the money to make it habitable again.

After the home’s demolition, on February 22, 2008, Auto-Owners sent to the Hirschhorns a revised denial letter. Auto-Owners denied the Hirschhorns’ claim on the additional ground that “[b]at guano is considered a pollutant” within the terms of the policy’s pollution exclusion clause.

The parties did not dispute the material facts giving rise to the Hirschhorns’ loss. Rather, the sole issue presented to the Supreme Court was whether the pollution exclusion clause in Auto-Owners’ insurance policy excluded coverage for the loss of the Hirschhorns’ home that allegedly resulted from the accumulation of bat guano.

ANALYSIS

Since Auto-Owners’ insurance policy defines “pollutants” and lists waste as one such irritant or contaminant in its definition of “pollutant” the Supreme Court analyzed whether bat guano was the type of waste excluded by the policy.

Noting that the reach of the pollution exclusion clause must be limited by reasonableness, or everyday incidents may be characterized as pollution and the contractual promise of coverage reduced to a fantasy. For example, exhaled carbon dioxide, while potentially harmful in a confined and poorly ventilated area, is universally present and generally harmless since every animal, including people, exhale carbon dioxide. .

The ordinary meaning of “irritant” is a condition of inflammation, soreness, or irritability of a bodily organ or part. The Supreme Court concluded that bat guano falls unambiguously within the term “pollutants” as defined by Auto-Owners’ insurance policy. Bat guano is composed of bat feces and urine. Bat guano is or threatens to be a solid, liquid, or gaseous irritant or contaminant. That is, bat guano and its attendant odor make impure or unclean the surrounding ground and air space  and can cause inflammation, soreness, or irritability of a person’s lungs and skin. The Supreme Court noted that the Wisconsin  Department of Health & Family Services in cooperation with the Agency for Toxic Substances & Disease Registry, Indoor Air and Health Issues concluded that people who live around large quantities of bat wastes are more likely to become ill with histoplasmosis; people who contact mites that live in bat wastes may get skin rashes; and molds that grow in moist, warm, highly organic situations may increase asthma attacks in affected people.

The Supreme Court noted that these points cannot be seriously contested by the Hirschhorns because they alleged in their complaint that the odor of bat guano was so penetrating and offensive as to render their vacation home and unfit place to live. As a result the Supreme Court concluded that a reasonable person in the position of the insured would understand bat guano is waste. Since bat guano is composed of bat feces and urine bat guano is commonly understood to be waste.

The Hirschhorns argue, and the court of appeals agreed, that the term “waste” does not necessarily call to mind feces and urine, given the policy’s other examples of irritants and contaminants. The Supreme Court disagreed because, unlike exhaled carbon dioxide, bat guano is not universally present and generally harmless in all but the most unusual instances. To the contrary, bat guano is a unique and largely undesirable substance that is commonly understood to be harmful. A reasonable homeowner should understand bat guano to be a pollutant.

The Supreme Court’s conclusion that bat guano falls unambiguously within the policy’s definition of “pollutants” was not enough to resolve the dispute. The court needed to determine whether the Hirschhorns’ alleged loss resulted from the “discharge, release, escape, seepage, migration or dispersal” of bat guano under the plain terms of the policy’s pollution exclusion clause.

The policy does not define “discharge,” “release,” “escape,” “seepage,” “migration,” or “dispersal.” The Supreme Court was required, therefore, to construe these terms according to their plain and ordinary meanings as understood by a reasonable person in the position of the insured. As their dictionary definitions make clear, the six terms are often synonymous with one another and taken together constitute a comprehensive description of the processes by which pollutants may cause injury to persons or property.

The bat guano, deposited and once contained between the home’s siding and walls, emitted a foul odor that spread throughout the inside of the home, infesting it to the point of destruction. The Hirschhorns acknowledged as much in their complaint. They alleged that “the drapes, carpets, fabrics and fabric furnishings in the home were rendered unusable as a result of the absorption of the bat guano odor.” Accordingly, implicit in their complaint is an allegation that the bat guano somehow separated from its once contained location between the home’s siding and walls and entered the air, only to be absorbed by the furnishings inside the home.

ZALMA OPINION

Interestingly, as noted in a footnote to the opinion the Supreme Court noted that the Hirschhorns helped the court decide against their position by by conceding that a reasonable insured may understand the pollution exclusion to include human excrement. They failed to explain, however, why the policy’s definition of “pollutants” should be interpreted differently for feces and urine from humans is more a pollutant than feces and urine from to bats.

There should be no question that a collection of excrement from any animal, whether human, bird, bat or aardvark, if collected sufficiently in a home to make the dwelling incapable of sustaining life comfortably in the structure is both waste and a pollutant. The Wisconsin court clearly applied the the common meaning of a group of unambiguous terms.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The Supreme Court of Virginia was asked to overturn a trial court decision that an

Zalma on Insurance in Top 50

exclusion in an automobile insurance policy regarding coverage for medical expenses barred the policyholder from receiving any payment for medical expenses because a portion of those expenses had been paid by workers’ compensation benefits in Kevin Christy v. Mercury Casualty Company, No. 102138 (Va. 03/02/2012).

BACKGROUND

On November 23, 2005, Kevin Christy, a police officer in the Town ofAbingdon (“the Town”), was a passenger in a Washington County Sheriff’s vehicle being driven by a sheriff’s deputy. The sheriff’s vehicle was involved in an accident in which it was struck from behind while stopped. Christy suffered injuries as a result of this accident. The parties disagree as to the extent of those injuries. It is not disputed, however, that this accident arose out of and occurred during the course of Christy’s employment by the Town.

Christy was initially treated for his injuries in the emergency room of Johnston Memorial Hospital in Abingdon on November 24, 2005.

At the time of Christy’s accident, the Town obtained its workers’ compensation coverage through the Virginia Municipal League Insurance Programs (“VMLI”). At the time of his surgery, Christy received his primary health insurance through a physician-hospital organization (“PHO”) administered by John Deere Health Insurance, and subsequently by United Health Care Plan of the River Valley, Inc. Christy was also insured under an automobile liability insurance policy issued by Mercury Casualty Company which provided coverage for his two private vehicles. The Mercury Casualty policy included coverage for “medical expense benefits as a result of bodily injury caused by an accident and arising out of the . . . use of a motor vehicle as a motor vehicle” with a limit of coverage of $5000 per person for each vehicle. This policy contained a provision for the exclusion of coverage which, in relevant part, provided that the insurance does not apply “to bodily injury sustained by any person to the extent that benefits therefor[] are in whole or in part payable under any [workers'] compensation law.”

Christy concedes that he “did not pursue a [workers' compensation] claim” against VMLI. The balance of $13,458.27, after applying contract adjustments, for the claims of the hospital and Dr. McGarry for the shoulder surgery was ultimately paid or otherwise resolved by Christy and Christy’s PHO.

Christy submitted a claim to Mercury Casualty regarding his medical expenses incurred following the November 23, 2005 automobile accident, asserting that he was entitled to payment under the medical expenses coverage of his policy. On June 12, 2009, Mercury Casualty denied the claim, asserting the application of the exclusion to coverage provision of the policy and maintaining that “[t]he bills in this case were, at least in part, ‘payable’ under the workers’ compensation law.”

Christy sued the insurer and obtained a judgment for $9,500 and attorney’s fees. Mercury Casualty appealed this judgment to the Circuit Court of Washington County. The case was submitted to the circuit court on a joint stipulation of facts and supporting briefs. Following oral argument of the parties, the court issued an opinion letter dated April 29, 2010, in which it concluded that based on the unambiguous language of the exclusion, “payment of [workers'] compensation, even in part, as a result of this accident triggers the exclusion and precludes payment” by Mercury Casualty of the portion of Christy’s medical expenses not paid by VMLI. By letter opinion thereafter, the court affirmed its prior ruling, and entered final judgment granting summary judgment for Mercury Casualty on August 12, 2010.

DISCUSSION

The dispositive issue in this appeal is whether the language of the exclusion in Mercury Casualty’s policy bars recovery when its insured suffers injury in a work-related motor vehicle accident and any portion of the medical expenses incurred as a result are paid by a workers’ compensation carrier.

The Supreme Court started its analysis with the undisputed fact that the November 23, 2005 accident arose out of and occurred during the course of Christy’s employment. As such, any injury Christy sustained in the accident would be subject to coverage under the Workers’ Compensation Act. In the present case, VMLI, the workers’ compensation carrier, paid only a portion of Christy’s claimed medical expenses after concluding that Christy’s SLAP tear was a pre-existing condition.

Christy makes what the Supreme Court called a “facially appealing contention” that the language of the exclusion in Mercury Casualty’s insurance policy operates to prevent a “double recovery” in the sense that the insured is not permitted to receive full payment for medical expenses by a workers’ compensation provider as well as full payment for those expenses by his automobile insurance provider. In doing so, Christy contended that the language of the exclusion prevents a double recovery by limiting medical coverage of the policy to the extent that benefits therefor are in whole or in part payable under any workers’ compensation law.

The Supreme Court stated its opinion that the clear and unambiguous language of the exclusion in Mercury Casualty’s policy creates a limitation to the scope of coverage of the policy for medical expenses rather than a limitation on the amount of coverage in the form of a set-off against workers’ compensation benefits. In short, the language of the exclusion is clear. It applies to the circumstances under which the insured’s injuries occurred. It is not limited to whether payment under the applicable workers’ compensation law was actually forthcoming.

CONCLUSION

For these reasons, the Supreme Court affirmed the judgment of the circuit court granting summary judgment to Mercury Casualty.

ZALMA OPINION

Because of the limitation contained in his workers’ compensation policy Christy elected to go after the medical payments provision of the automobile insurance coverage for his excess medical bills not covered by workers’ compensation. He failed because, although his arguments had some charm, the language of the policy was clear. The exclusion was designed to avoid payments altogether for medical payments if the injured person had available — in whole or in part — the right to workers’ compensation benefits. It was not designed, as Christy argued, to prevent double recovery. It was designed to eliminate all coverage is some of the injured person’s injury was partially covered by workers’ compensation insurance.

The Virginia Supreme Court avoided the temptation to “be fair” and provide coverage to a person whose argument was facially appealing and applied the terms of the contract that was clear and unambiguous.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The California Court of Appeal was presented with an issue it described as an issue of first impression in California in Pacific Rim Mechanical Contractors, Inc v. Aon Risk Insurance Services West, Inc., et al, No. D058321 (Cal.App. Dist.4 02/28/2012). The case asked:

Does an insurance broker, after procuring a policy of insurance for a developer on a construction project, owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company’s subsequent insolvency?

FACTUAL BACKGROUND

A. The Construction Project and Insurance

The underlying litigation relates to a construction project (the project) in downtown San

Diego, which was completed in 2002. In June 1999 the project’s developer, cross-defendant Bosa Development California, Inc. (Bosa), engaged Aon as its insurance broker to obtain insurance for the project. Aon procured a general liability insurance policy (the policy) for the project with Legion Indemnity Company (Legion) at the request of its client, Bosa. Legion was solvent at the time it issued the policy.

In 2000 Bosa hired PacRim as one of several subcontractors to work on the project. The parties entered into a contract (the contract) in which Bosa agreed to provide PacRim with liability insurance through the policy for its work on the project. Aon, however, was not a party to the contract and PacRim was never its client. The policy was a unified, blanket insurance policy known as an Owner Controlled Insurance Program (OCIP) that provided liability insurance for every contractor and subcontractor on the project. The OCIP provided up to $25 million in liability coverage for ten years after the construction was completed – the duration of California’s 10-year construction defect statute of repose.

PacRim became an enrolled party in the OCIP by contacting Aon and providing all necessary paperwork, and in October 2000 Aon provided PacRim with a “Certificate of Liability Insurance,” indentifying PacRim as an insured, and Legion as the primary insurer.

In April 2002, during the construction project, the Illinois Department of Insurance obtained an order of conservation against Legion. In 2002, the construction project was completed.  In April 2003, after the project was complete, the Circuit Court of Cook County, Illinois, entered an order of liquidation with a finding of insolvency against Legion. In April 2002 Aon informed Bosa that Legion had been placed into rehabilitation. However, according to PacRim, neither Bosa nor Aon notified PacRim of Legion’s financial condition.

PacRim alleged, with perfect hindsight, that had Bosa or Aon informed it of Legion’s “financial condition” PacRim “could and would have immediately suspended work and insisted that Bosa obtain alternative insurance coverage for the Project.”

B. The Construction Defect Lawsuit and PacRim’s Cross-complaint

In May 2009 the project’s homeowners association filed a complaint for construction defects against Bosa and its subcontractors, including cross-complainant PacRim. Bosa filed a cross-complaint against PacRim (and its other subcontractors) seeking indemnity. PacRim then filed a cross-complaint against Bosa and Aon for declaratory relief, breach of contract, negligence, fraudulent concealment, and negligent concealment. As against Bosa, PacRim alleged that Bosa breached the contract by failing to provide and maintain insurance as required by the contract. PacRim further asserted that Bosa breached the contract by “failing to provide the required written notice of a modification or discontinuation of the required coverage.”

As against Aon, PacRim asserted that it “owed a duty of reasonable care to procure and maintain [the insurance policy] in PacRim’s favor,” which Aon breached by negligently or intentionally failing to disclose “Legion’s deteriorating financial condition and eventual insolvency.” Thus, PacRim explains its “claims against [Aon] are negligence based, not contract based.”

Aon demurred to all of PacRim’s causes of action, alleging:

1. PacRim expressly asserted in its cross-complaint it was not a party to the contract and thus Aon had no liabilities to it, and
2. even if PacRim were a party to the contract, PacRim
1. waived all rights of recovery against Aon for any coverage limitation or failure in the contract, and
2. Aon had no affirmative duty to notify PacRim of Legion’s insolvency post-issuance of the policy.

The trial court sustained Aon’s demurrer with 10 days leave to amend. The trial court found it “unnecessary to impose” on Aon a “duty to notify an insured of an insurer’s post-issuance insolvency” because Bosa was contractually obliged to notify PacRim of Legion’s insolvency; and California precedent that addressed the issue of a broker’s duty was controlling in Aon’s favor. The trial court agreed. The duty of a broker is to use reasonable care, diligence, and judgment in procuring the insurance requested by its client.

The court entered a judgment of dismissal of PacRim’s cross-complaint against Aon because it sustained the demurrer as to all of the causes of action. PacRim elected to file this appeal instead of amending its cross-complaint.

DISCUSSION

The California Court of Appeal noted that insurance brokers owe a limited duty to their clients. That duty is only to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.

PacRim did not allege that Aon failed to use reasonable care in procuring the insurance policy from Legion. Moreover, PacRim did not allege that Aon assumed any additional contractual duties beyond procuring the insurance. Since the case was decided on a demurrer the court was required to assume all allegations in the suit were true.

PacRim asked the court to create a new legal duty of notification of Legion’s conservation order and insolvency after the policy is procured, and to apply that retroactively upon Aon.

The Court of Appeal concluded that Aon had no legal duty to provide notice of the discontinuation of coverage caused by Legion’s insolvency.  That duty under Insurance Code section 677.2 rests with the insurer, Legion. Additionally according to PacRim’s own allegations, that duty rested with Bosa.

Because PacRim’s claims are based entirely on the allegation that Aon failed to satisfy a duty that California law does not recognize PacRim’s claims against Aon fail as a matter of law.

Public Policy Supports The Conclusion There Is No Duty To Notify of Insolvency

The Court of Appeal stated that it was unwilling to retroactively impose on Aon (and all other insurance brokers) the duty PacRim asked the court to impose because of considerations of public policy. The imposition of a duty requiring insurance brokers to inform an insured of “any adverse changes in the carrier’s financial capability” post-issuance of the insured’s policy is properly the function of the Legislature because it would fundamentally alter the nature and corresponding duties of insurance brokers, which would increase the costs of procuring insurance.

The duty PacRim asked the court to impose on brokers is unpredictable. What constitutes an adverse change in the insurer’s financial capability that triggers the proposed duty to notify the insured is exceedingly ambiguous and the scope of such a standard would take an unknown amount of time to define.

PacRim acknowledged that at least 10 states and Puerto Rico have elected to impose a statutory duty to notify an insured of a subsequent insolvency as soon as the agent or broker receives notice of that insolvency. California has chosen not to enact such legislation. The Court of Appeal refused to create a duty where the Legislature could have done so, but has not.

Imposing continuing duties of monitoring and notification upon the broker after issuance of the policy creates other practical difficulties. In the case of occurrence-based policies, the proposed common law notification duty could last indefinitely, well after brokers (and the client) may have ceased doing business. For example, in this case the Legion policy extended 10 years after completion of the project in 2002, more than 13 years after the policy was procured in 1999.

Although PacRim was an insured, and was given a certificate of insurance, it was not Aon’s client. Bosa was. The Court of Appeal concluded the trial court properly sustained Aon’s demurrer because it had no duty as Bosa’s insurance broker to inform PacRim of Legion’s insolvency.

ZALMA OPINION

When a party relies on an OCIP insurance contract that extends for ten years or more beyond the acquisition of the policy or the completion of a construction project it cannot rely on warnings from an insurance broker in all but ten states and Puerto Rico and should not rely in those eleven jurisdictions.

Construction defect suits after the completion of a construction project are almost a certainty regardless of the quality of the construction work.

A prudent contractor or subcontract protected by such a contract should check the solvency of the insurer annually by making a simple inquiry in Google, Bing, Yahoo, or the web site of the insurer. Ignorance is not bliss. Had PacRim done such an independent check it could have immediately suspended work and insisted that Bosa obtain alternative insurance coverage for the Project or if, as in this case, if it was declared insolvent after the completion of the contract it could have insisted that Bosa obtain alternative insurance coverage or buy its own. It did not protect itself and tried to pass that responsibility to Aon.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

DEEP WATER CRIME

Zalma on Insurance in Top 50

In this, the fifth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL) reports on the crime of insurance fraud reminding its readers that insurance fraud continues, without any cognizable abatement. Insurers must remain vigilant in the effort to limit the success of fraud perpetrators.

The current issue reports on the discovery of a lake full of cars in Florida, that some frauds never go away with a report on litigation to recover monies stolen by Insurance scofflaw Martin Frankel; Chapter IV of the serialized novel “Murder and Insurance Fraud Don’t Mix”; a report on the dumbest of all frauds attempted; the importance of whistle blowers to the success of Justice Department fraud prosecutions and recovery of funds from fraud perpetrators and, as usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 367 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-book “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and is available from http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 are available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Zalma on Insurance in Top 50

For years many insurers licensed a software program known as Colossus^® to assist their claims personnel in evaluating the settlement value of bodily injury claims. It was hoped that Colossus would allow young, inexperienced insurance adjusters to adjust personal injury claims with the same valuations as that reached by experienced and well trained adjusters.

According to the developer, “Colossus^® is the insurance industry’s leading expert system for assisting adjusters in the evaluation of bodily injury claims. Colossus provides adjusters access to your company’s claims data within a defined business process management framework for evaluating injuries, treatment, resolution, impairment and general damage settlements. Colossus helps your adjusters reduce variance in payouts on similar bodily injury claims.” Colossus^® has come under attack by the plaintiffs bar.

The California Court of Appeal was called upon to resolve a dispute between Computer Sciences Corporation (Computer Sciences) and The Travelers Property Casualty Company of America and St. Paul Fire and Marine Insurance Co. (collectively Travelers), after the trial court issued a summary judgment that Travelers had no duty to defend Computer Sciences in a class action suit brought as a result of Colossus^®, in The Travelers Property Casualty Company of America et al v. Computer Sciences Corporation, No. B229033 (Cal.App. Dist.2 02/27/2012).

Computer Sciences contended it was entitled to a defense under the CGL:

1. Travelers’ duty to defend does not depend on there being a claim in the underlying complaint that Computer Sciences caused the alleged bodily injuries; and
2. The allegations of the underlying complaint can be construed as alleging Computer Sciences was negligent.

FACTS

Computer Sciences licenses Colossus^® a software program used by insurance companies to evaluate bodily injury claims. From August 1, 1996, through August 1, 2000, Computer Sciences was the insured under three commercial general liability policies (the CGL policies) and three umbrella policies purchased from Travelers. Each policy included coverage for “amounts any protected person is legally required to pay as damages for covered bodily injury . . . [¶] . . . [¶] . . . caused by an event;” the policies define an “event” as an “accident.” “Protected persons” included the corporation and others. The Right and Duty to Defend provisions of the policies require Travelers to defend against a claim or suit “covered by this agreement.”

Computer Sciences and a number of insurance companies were named as defendants in Hensley v. Computer Sciences Corporation, a class action brought in the Arkansas State Court by a number of automobile insurance policy holders (the Hensley litigation).  The Hensley litigation alleged only that the class members sustained bodily injuries in automobile accidents involving uninsured or underinsured motorists starting July 1996, and that the named insurers – the class action plaintiffs’ own insurance carriers – undervalued their claims using the Colossus program.

The Hensley complaint alleged that Computer Sciences fraudulently conspired with the named insurers to conceal errors in the program that caused the bodily injury claims to be undervalued. The complaint sought damages in the amount of the unreimbursed bodily injury damages under theories of civil conspiracy, unjust enrichment, fraud and constructive fraud. Computer Sciences tendered its defense to the Hensley complaint to Travelers in July 2007. Travelers accepted the defense pursuant to a full reservation of rights; after further investigation, Travelers denied coverage and filed this action for declaratory relief.

The parties filed cross-motions for summary adjudication of the duty to defend issue. Computer Sciences took the position that Travelers had a duty to defend it in the Hensley litigation because the Hensley complaint sought to impose liability on Computer Sciences for the “bodily injuries” the Hensley plaintiffs suffered in “accidents.” Travelers countered that it had no duty to defend because the Hensley complaint sought damages for economic loss, not bodily injury; and coverage was limited to “accidents” and the Hensley complaint sought damages for intentional acts (conspiracy, fraud, and unjust enrichment), not “accidents.”

DISCUSSION

Coverage Does Not Extend to Damages for Accidents Caused by Third Parties and Not by Computer Sciences

Computer Sciences contends Travelers had a duty to defend it in the Hensley litigation because the Hensley complaint sought damages against Computer Sciences for “bodily injuries” the Hensley plaintiffs suffered in car “accidents.” It argues that whether Computer Sciences caused the car accidents that resulted in the plaintiffs’ bodily injuries is irrelevant to the duty to defend under the clear and unambiguous language of the coverage provisions.

In construing an insurance contract, it is the court’s goal to give effect to the parties’ mutual intentions. If the contract language is clear, it governs. If the terms are ambiguous, the court interprets them to protect the reasonable expectations of the insured. If the ambiguity cannot be resolved in this manner, the court construes the ambiguity against the insurer who drafted the policy and received premiums to provide the agreed protection. The insured has the burden of proving that a claim is within basic coverage.

The first step taken by California courts in determining whether the insurer owes a duty to defend is to compare the allegations of the complaint with the terms of the policy. The Court of Appeal first noted that the conduct for which the Hensley complaint seeks to impose liability on Computer Sciences is marketing a software program that undervalued the plaintiffs’ bodily injury claims. It does not allege that the plaintiffs’ bodily injuries were caused by any conduct of Computer Sciences. On the contrary, there is no dispute that the accidents resulting in the bodily injuries were caused by third parties. The insurance policies do not provide coverage for the claims in the Hensley complaint because those claims do not seek to impose liability on Computer Sciences for conduct that caused bodily injury. Here, the event that set the parties’ dispute in motion was someone suffering bodily injury. But in both cases, the action against the insured was not for causing that bodily injury, but for fraud (and in this case, conspiracy and unjust enrichment, too).

It is not the form of the action (tort or breach of contract) but the injury caused by the insured that governs.

The Court of Appeal observed that Computer Sciences’s efforts to find coverage in their CGL policies for the claims made by the Hensley plaintiffs conflates two different kinds of insurance: errors and omissions insurance or directors and officers liability insurance (D&O), and CGL insurance.CGL policies cover the insured’s liability for bodily injury and property damage to third parties. D&O policies generally cover loss resulting from wrongful acts of officers and directors and specifically exclude bodily injury and property damage.

The essence of the underlying plaintiffs’ claims against Computer Sciences is the company’s wrongful acts of conspiracy and fraud, which interfered with those plaintiffs’ ability to receive fair compensation from plaintiffs’ insurers. Indeed, the record shows that Computer Sciences’ errors and omissions policy paid $45 million to Computer Sciences’ in settlement of these claims.

The Hensley Complaint Does Not Allege Any Negligent Conduct by Computer Sciences

Recognizing that a policy holder is not entitled to coverage for liability caused by his or her willful acts. No evidence was presented by the Hensley plaintiffs nor by Computer Sciences that any of the actions of Computer Sciences was negligent. All of the allegations were of intentional torts.

The argument that the alleged intentional conduct may have been merely negligent does not create a negligence claim where none is pled.

ZALMA OPINION

This case, without mentioning the word, is centered on the doctrine of fortuity. An insurance policy cannot respond to a claim that is not fortuitous. In fact California Insurance Code § 533 provides: “533.  An insurer is not liable for a loss caused by the wilful act of the insured . . .” The events alleged by the Hensley litigation were all intentional.

If the software producer was to receive coverage for the class action the Hensley plaintiffs could have simply alleged an extra cause of action that Computer Sciences negligently created and marketed the software to cause bodily injury and emotional distress to each of the members of the class by forcing them to retain counsel and be aggravated by negotiation with their insurers who undervalued the accident claims so that the accident caused them injury and then the use of Colossus caused them a new and separate injury.

In addition, Colossus^® and other “expert” systems is an attempt by insurers to save money on the “expense” side of their ledger by replacing experienced personnel whose salaries and benefits are expensive with inexperienced people and an “expert” system that is much cheaper than real, knowledgeable people. The Hensley litigation and dozens, if not hundreds, of bad faith suits that arose as a result of the use of Colossus^® as a rule rather than as a tool has proved that the attempt of the insurer to replace experienced personnel has proved to be more expensive on the indemnity side of the ledger. Perhaps, as a result, insurers will hire experienced personnel and train their personnel to provide the service promised by the policy with empathy and good faith.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The First Circuit Court of Appeals was asked to resolve an insurance coverage issueconcerning the abuse of an eleven-year-old child (the child) in Valley Forge Insurance Co., American Casualty of Reading v. Carol Field, the Carson Center For Human Services, Inc, No. 11-1316, (1st Cir. 02/22/2012).

FACTS

The child suffered from long-term horrific abuse and on September 11, 2005 was

Zalma on Insurance in Top 50

beaten nearly to death by her adoptive mother and stepfather. The child’s legal guardian, David Murphy, brought suit in the Superior Court of the Commonwealth of Massachusetts against several defendants including the Carson Center for Human Services, Inc. (Carson Center), and one of its employees, licensed social worker Carol Field, whose patient the child was during this period. The complaint alleged that they failed to detect or report to state authorities signs of ongoing physical abuse of the child. That state court suit led to this insurance coverage litigation in federal court.

The federal plaintiffs are Valley Forge Insurance Company and American Casualty of Reading, PA, the insurers of the Carson Center and, as such, of Field as an employee of the Carson Center. The insurers sought a declaratory judgment that the allegations against the insureds in the underlying suit fall within exclusions to coverage. The district court granted the request for declaratory judgment. The insureds and Murphy appealed.

Murphy filed the underlying suit in Superior Court on October 18, 2007. The complaint alleged that the Carson Center, Field, and other providers had a doctor-patient relationship with the child and that in each case the providers knew or should have known that the physical injuries sustained by the child while she was in their care were the result of systematic abuse by her parents. Those injuries included head injuries from a baseball bat, severe burns on her legs from standing in scalding hot water, toenails that had been pulled off, beatings, chipped teeth, and numerous cuts, scrapes, and bruises that required sutures or had become infected.

Murphy’s complaint further alleged that the negligent failure to suspect or report such abuse on the part of the Carson Center, Field, and the other providers culminated in the near-fatal brain injury the child sustained as a result of abuse by her parents on September 11, 2005, and that breach of their duties of reasonable care were substantial contributing factors to the child’s serious injuries. The child’s physical injuries, including paraplegia, are permanently disabling, and she has been left with significant and permanent mental deficits, for all of which she will require lifetime care.

Field was a social worker and therapist at the Carson Center in Westfield, Massachusetts, when she met the child on October 30, 2002. The Carson Center is a non-profit facility that provides psychiatric, mental health, rehabilitation, and family stabilization services to the community. Field provided therapeutic services to the child over the course of the next thirty-five months. In the state suit, Field recalled approximately fifty-one in-person counseling sessions with the child; approximately twenty different meetings or telephone conferences with the child’s adoptive mother; at least four meetings with the child’s other health care providers; involvement in four of the child’s hospitalizations; eleven telephone conferences with the child’s medical providers; at least four telephone conversations with the child’s school counselors; and four conferences with the Massachusetts Department of Social Services. Field’s treatment of the child continued until the child suffered her catastrophic injuries on September 11, 2005.

ISSUE

The issue is one of policy language interpretation. It is whether the policy language of an Abuse or Molestation Exclusion in a Professional Liability Coverage part and an Abuse or Molestation Exclusion in a Commercial Umbrella Coverage part precludes coverage. The language of these Exclusions precludes coverage for abuse that occurs to anyone in the insureds’ “care, custody or control.” The question is whether the Exclusions apply where, as here, at the time of the abuse the victim was not in the physical custody of the insureds and had been receiving bi-weekly outpatient therapeutic services from them for fourteen months covered by the policies in question.

This action for declaratory judgment is concerned only with Murphy’s claims in the underlying Superior Court suit for the years 2002 and 2003. All told, during the period of October 30, 2002, through December 19, 2003, Field saw the child about twenty-five times, which averages to a visit nearly every other week.

The plaintiffs insured the Carson Center from December 19, 1998, through December 19, 2003. At issue is the policy provided by Valley Forge for the period December 19, 2001, through December 19, 2002, and the policy provided by American Casualty for the period December 19, 2002, through December 19, 2003. Each of these policies contained an Abuse or Molestation Exclusion. The parties do not dispute that, absent these Exclusions, the policies would provide coverage to the Carson Center and Field for the underlying suit.

THE EXCLUSION

The pertinent part of the Abuse or Molestation Exclusion to the Professional Liability Coverage reads:

        EXCLUSION – ABUSE OR MOLESTATION

This endorsement modifies insurance provided under the following:

        PROFESSIONAL LIABILITY COVERAGE FORM

The following exclusion is added to paragraph 2., Exclusions of Section I – Coverage:

This insurance does not apply to damages arising out of:

1. The actual or threatened sexual or physical abuse or molestation by anyone to any person while in the care, custody or control of any insured; . . . .

Exclusions of this type for sexual or physical abuse or molestation are not uncommon for these types of insurance policies for those who have care of others. Such exclusions appear to have been in use since 1987. Exclusions of this sort have generally been found to be unambiguous in the face of attacks on various parts of the language used, and the insureds in these cases have included medical or therapeutic care providers, health care centers, summer camps, schools and preschools, job training programs, churches, and the like.

Both sides argue that the Abuse or Molestation Exclusion here is unambiguous, offering competing interpretations of its language. That competing interpretations are given does not make an exclusion ambiguous. There is no dispute that the child was not in the physical dominion or control of either Field or the Carson Center at the time any of the abuse took place, and it is not a prerequisite to the application of the Abuse or Molestation Exclusion that an insured be the abuser, nor is it necessary that the abuse occur on the insured’s premises.

CONCLUSION

Under Massachusetts law, whose canons of construction dictate the outcome, the First Circuit concluded it must give the term “care” its plain and ordinary meaning.

The core argument of the defendants is that, regardless of common meaning, the word “care” in the phrase “care, custody or control” should be treated as an insurance industry term of art, across all types of coverage, meaning “physical dominion or control.” The defendants rely on certain constructions of the phrase from property and construction law, not on constructions of the Exclusions for sexual and physical abuse from liability insurance for care givers.

Defendants rely on the doctrine that “technical terms and words of art are given their technical meaning when used in a transaction within their technical field.”  The technical field at issue here is the provision of care to patients. After a review of multiple precedents the First Circuit concluded that the cases reinforce the conclusion that the plain and ordinary meaning rule applies and that the preconditions for applying the technical term of art rule were not met by the defendants finding that the term “care” is not a term of art nor is it unclear or ambiguous.

A body of law has developed around Abuse or Molestation Exclusions that is separate from the body of law regarding “owned property” exclusions upon which defendants rely. Terms in a contract may, when applied to certain factual scenarios, sometimes overlap. But those terms still have different, independent meanings. On the facts alleged by Murphy in the underlying suit, the child was clearly in the care of Field and the Carson Center and the use of the term “care, custody and control” in property insurance policies is irrelevant to the analysis of the care of a child.

The Exclusion precludes coverage on the limited occasions where the damages flow from sexual or physical abuse by another of someone in the care of the insured. As explained earlier, that is the very purpose for the Abuse or Molestation Exclusion since its creation. Nor is this a case in which application of the Exclusion defeats an objectively reasonable policyholder’s expectations of coverage. Since the Exclusion was not ambiguous, the Carter Center and Field had no reasonable expectation of coverage.

ZALMA OPINIONS

Barry Zalma, Esq., CFE

The dissenting opinion argued, unsuccessfully, about the reasonable expectations of the insured ignoring the fact that “reasonable expectations” must be interpreted as of the time of the acquisition of the policy not after a loss with hindsight. The First Circuit used an appropriate method of interpreting a policy by using the plain and ordinary meaning of the policy wording.

Ever since the first major child abuse cases made the news the Insurance Services Office wrote an exclusionary endorsement to eliminate coverage for abuse of a child whether intentional or negligent. The exposure to major judgments was just too big.

Every person insured, after a loss, believe that their “reasonable expectation” was that every claim and suit brought against the insured was intended to be covered for both defense and indemnity. The majority of the justices of the First Circuit did not fall for the “reasonable expectations” argument but interpreted the policy based solely on the clear meaning of the contract of insurance.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Yesterday more than 50 family and friends gathered at the residence hotel where my mother lives to celebrate her birthday. I gave a short talk about her life and history that deserves to be published.  So the following is the history of my 100-year-old mother’s life and times as she continues toward another 100 years.

My talk to the four generations present follows:

  Sarah Zalma

100-Years-Old and Counting

We are here today to celebrate the life of my mother, your grandmother or great-grandmother who has lived 100 years.

She was born in a small town in what is now Macedonia but was then part of the Ottoman Empire, called Monastir, the daughter of the second wife of a Hazan (the name the Sephardic community called a Cantor). Jews first moved there in 1492 when the King of Spain ordered the expulsion of all Jews from Spain. The Sultan Beyazit II of the Ottoman Empire issued a decree to welcome the Jews. The Ottoman Jews are identified as Sephardic Jews from the word Sepharad –  which in Hebrew means Spain. Her mother made extra money for the family by taking in laundry from the neighbors which she washed in the nearby Dragor River since washing machines were unknown.

She has lived through 100 years of history from the time she was born on February 29, 1912 until today so many things have changed and she has seen it all happen. When she was born, the automobile was a new invention, indoor plumbing was only available for the very wealthy and unknown to poor Jewish families living in the Ottoman Empire. There were no radios, television, computers, aircraft, rockets, video games, cellular telephones, movies with sound.

Some of what happened around the time she was born include:

• In 1912, the year she was born, Serbia conquered Monastir in the Balkan War ending 530 years of Ottoman rule over Monastir.
• In December 1915 — Monastir fell to Bulgaria during WWI.
• In November 1916 – Serbia retakes Monastir and until 1918 Monastir was shelled by Bulgarian and German troops nearly every day for 22 months.
• During World War I, the battle of Monastir took place on the Macedonian Front between Bulgaria and France in May 1917 when Grandma was only five years old. As a result, thousands of Jewish Monastirlis (as the locals referred to themselves) emigrated to North and South America, Jerusalem, and the Sephardic metropolis of Salonika, in Greece.

Monastir was virtually destroyed. About 6,000 Jews – nearly the whole community – deserted Monastir for Salonika, Athens and elsewhere. Grandma was sent to her stepsister’s house in Salonika, Greece to be safe, get a good education, and help her stepsister with household work.  The family in Salonika lived in a big house and was considered wealthy.  It was not a very happy time for Grandma because her brother-in-law was very strict and she missed her mother and brothers.

After the war ended in November 1918 Grandma’s mother, my grandmother Mazeltov Hazan, collected Grandma, her brothers Morris and Ralph and her baby sister Becky to leave Europe and emigrate to the US where Grandma’s two older stepbrothers, Israel, Aaron and Albert Hazan had started a new life.

Their emigration was not easy and they stayed in Paris, France for a year waiting for a ship to take them to the US. In Paris Grandma was impressed and still talks about seeing one of the first telephones. The rest of the extended family, including the Stepsister in Salonika stayed in Greece along with about 3000 of the 11000 Jews who lived in Monastir before WWI. In 1941 the Nazi army and its allies reached Monastir and every Jew who stayed in Salonika and Monastir was taken to concentration camps and killed. None returned.

If Grandma, her mother and brothers, had stayed with her stepsister in Salonika, she would not have survived World War II and none of us would have been born.

When the ships, including the one that took Grandma here in Steerage (below water level) carrying people from Europe landed in America, they stopped at Ellis Island in New York harbor. The immigrants were checked to see if they were healthy and had someone willing to help them. Grandma Sarah’s little sister, Becky, was sick and taken off the ship to a hospital on Ellis Island in New York. Her brave big brother, Morris, jumped off the ship, swam to shore, found the hospital and found Becky even though he knew no English.  It was a very scary time for Grandma Sarah and her brothers because they knew no English to ask anyone for help except the relatives who had come to New York from Monastir earlier.

People like Grandma’s family came to America because it was a place people could live free and where everyone had an equal opportunity to succeed regardless of their family, their religion, race or national origin. If they worked hard they had the ability to succeed. There was no social safety net from the government — only family and work.

Grandma Sarah’s adult stepbrothers had come first and worked in factories where they learned a business. Grandma Sarah, as a little girl, learned how to sew. She worked in sweat shops with many other young girls making dresses. Today, little girls’ 10-years-old, are not allowed to work. In Grandma Sarah’s time she was the only one making money and she supported her whole family.

Because Grandma Sarah had to work, she didn’t get to finish elementary school. She only went through about the third grad before she started working in a clothing factory. She always says how sad she is that she couldn’t finish school because she really liked school.

She sometimes calls herself “stupid.” She is wrong. She is only undereducated. She is a brilliant woman who is smarter than all of us since she is still here enjoying her children, grandchildren and great grandchildren 100 years after she was born. She is probably the smartest person in this room.

She came to America knowing no English but did speak some French, Turkish, Ladino (the Sephardic version of Spanish) and Greek. She learned English, how to sew and was good enough she was asked to be a supervisor. Since she was so fast at her work she gave up being a supervisor because she made more money being paid by the piece rather than on salary.

She was a hard worker, a risk taker, a fast learner and an aggressive go getter. She learned by doing and being strong and unafraid.

As a young woman she married my father, Sam, a Sephardic immigrant from Istanbul Turkey whose family came to the United States about the same time as Grandma Sarah and settled, like her, in Brooklyn. Grandpa Sam was a hard worker who did any job he could get. Although intelligent enough to be a college graduate, he like Grandma Sarah, had to work before finishing elementary school.

He did everything. He worked as a short order cook at Madison Square Garden in New York, drove a taxi cab, worked in the shipyards in San Pedro and Long Beach, California building Liberty ships during World War II (since he was rejected for the military), drove a Helms Bakery truck, drove a delivery truck for a dry cleaner and eventually started his own dry-cleaning business which he operated until he retired after his second heart attack.

The business was a success because he worked 16 hours a day six days a week and only eight hours on Sunday. He was eventually helped by my big brother who operated the business after Grandpa retired. Grandpa Sam supported his family and kept his mother-in-law in our house until she died.

Grandma and Granpa Sam loved each other and tolerated each other. He provided for Grandma and his children. Grandma brought up three children all of whom were successes in their own right. She was there for her children 24 hours a day seven days a week because she and Grandpa Sam felt it was important that their children always had someone to care for them. They taught their children what was important by example not by lecture.

Grandma Sarah and Grandpa Sam are the kind of people that made America great.  Impressive, self-sufficient, asking nothing of anyone but the ability to work as hard as they could to live free of fear.

Grandma Sarah’s children grew up with little in the way of things and much in the way of love. We, her children learned by their example, that love and caring for each other was more important than things. Grandpa Sam, when Irving, Starr and I were young, worked three jobs and would leave for work before we woke and not return until after we were in bed. On Sundays he had the right to sleep late but we would all jump into bed with him and Grandma and get into vicious and delicious tickling bouts.  You can still tickle Grandma Sarah without even touching her.

People like Grandma Sarah and Grandpa Sam made this a great country – immigrants who took advantage of the opportunities the United States of America provided to them – and made a success out of it without an education by making up for the lack of education with hard work and determination.

Grandma Sarah works every day for her great-grandchildren playing Bingo here at Palm Court. Her winnings go into banks for each great-grandchild who will each receive their share after I am done talking.

Happy Birthday Mother – We all love and respect you and expect to celebrate your birthday on February 29, 2112.

]]> http://zalma.com/blog/?feed=rss2&p=2659 0 http://zalma.com/blog/?p=2655 http://zalma.com/blog/?p=2655#comments Fri, 24 Feb 2012 15:32:29 +0000 Barry Zalma http://zalma.com/blog/?p=2655 Continue reading →]]> A Crime is Only a Crime If Prosecuted

Lawyer Violating Criminal Statute Not Prosecuted

Zalma on Insurance in Top 50

I, like most modern lawyers with modern computers and printers, use a template for a letterhead rather than having one professionally engraved and printed. The problem with technology, however, is that anyone with a computer and printer, can claim to be an attorney. In Attorney Grievance Commission v. Jude Ambe, No. 6 September Term, 2011 (Md. 02/22/2012) The Maryland Court of Appeal was called upon to decide what to do with an attorney who was licensed only in New York but was practicing law in Maryland.

FACTS

On March 17, 2011, the Attorney Grievance Commission of Maryland (the Commission) filed a Petition for Disciplinary or Remedial Action in which it asserted that Jude Ambe violated Maryland Rules of Professional Conduct.

Jude Ambe received a LLM degree from the American University School of Law in 2008. Ambe was not eligible to take the Maryland Bar Exam in 2009 because he does not have a JD degree. Instead, Ambe took the New York Bar Exam, passed, and was admitted to practice in the State of New York in February 2009. Ambe is not, and has never been, a member of the Bar of the Court of Appeals of Maryland.

Since his admission to the New York Bar, Ambe has maintained a law office at 8121 Georgia Avenue, Silver Spring, Montgomery County, Maryland. According to Ambe, the office is maintained solely for the practice of immigration law. Ambe does not maintain a law office in New York or any other jurisdiction.

In June 2010, State Farm Insurance contacted Bar Counsel about the Ambe and provided copies of a number of documents received from and sent to Ambe. These documents related to claims received by State Farm from three claimants identified as: Susan Ngwese, Celestine Ngwa, and Brigitte Nsanguet (also referred to as Brigitte Edimo). Later, Bar Counsel received documents from Allstate Insurance pertaining to another claimant, Daisy Epie (also referred to as Dessy-Liza Epie). These documents included a letter of representation on the original Ambe & Associates letterhead on behalf of Daisy Epie. State Farm issued a check for $3,222.22 payable to “Brigitte N. Edimo & Jude Ambe, her attorney” dated January 25, 2010.  Ambe’s office address appeared on the check and Ambe acknowledged that he received the check. Ambe deposited the check to either his personal or operating account, kept $1,000 and returned the remainder to Nsanguet/Edimo.

John Epie testified at trial that he worked for Ambe on a case by case basis from March 2009 through September 2010. His services to Ambe’s firm included providing research on country conditions for immigration cases. He also communicated with Allstate and State Farm Insurance on behalf of the Ambe’s clients with auto accident claims. According to Epie, he had experience in auto accident cases from working for other lawyers.

Both the Ambe and Epie testified that the Ambe did not have preprinted letterhead. Instead, Ambe relied on a computer-based template to generate the letterhead used for his firm’s correspondence.

CONCLUSIONS OF LAW

It is undisputed that the Ambe is not, and has never been, a member of the Maryland Bar, licensed to practice state tort law in the State of Maryland. There is no dispute that Ambe was responsible for the four personal injury claims that he initiated either by himself or through his agent, John Epie.

There is clear and convincing evidence that the Ambe violated Rule 5.5(a) by representing clients in Maryland state tort law cases while not licensed to practice law in Maryland.

It is undisputed that Ambe’s actions constituted the practice of law. There is clear and convincing evidence that the Ambe drafted, or had drafted under his name, demand letters seeking to settle cases arising from four separate state tort claims that could be filed in court.

Ambe’s contention that he did not know such action constituted the practice of law does not affect the analysis as to whether the Ambe violated the rule. Under Maryland law, claimed ignorance of ethical duties is not a defense in disciplinary proceedings. There is also clear and convincing evidence that Ambe failed to clearly indicate on his business cards that he was not licensed to practice law in Maryland.

The Court found by clear and convincing evidence that Ambe engaged in the unauthorized practice of law and held himself out to the public that he was authorized to practice law in Maryland, a misdemeanor. There is also clear and convincing evidence that Ambe made false and misleading communications by failing to disclose the limitations on his practice.  As discussed above, Ambe practiced law in Maryland without being admitted to the Maryland Bar  by representing and advocating on behalf of Daisy Epie and Brigitte Nsangue/Edimo in connection with Maryland state tort law claims.

The Court also found that there is clear and convincing evidence that Ambe engaged in conduct that is prejudicial to the administration of justice. In this case, there is clear and convincing evidence that Ambe’s behavior was dishonest and deceitful because he misled representatives of State Farm and Allstate by failing to indicate the limitations on his law practice.

Even after Bar Counsel told Ambe he had to clearly indicate the limitations on his practice and he could not practice state tort law in Maryland, the Ambe interacted with Allstate regarding Daisy Epie’s claim and sent, or had his agent send, correspondence on his original letterhead to State Farm. Also, the Ambe’s conduct was criminal because he engaged in the unauthorized practice of law, a misdemeanor.

In this case, this Court has found clear and convincing evidence that the Ambe has violated several Rules of Professional Conduct.

CONCLUSION

Given that Ambe discussed at least three of the personal injury claims with his “clients” and negotiated a settlement on behalf of a client in one other, there is little merit to his assertion that he did not personally handle the personal injury cases. The bottom line is that Ambe was never allowed to practice any law or settle any claim in the State of Maryland other than claims in the United States District Court for the District of Maryland. Thus, whether the personal injury claim was brought to Ambe by an existing immigration client as well as the Ambe’s reasons for taking on (or not taking on) a personal injury case are not directly relevant in respect to Ambe’s exceptions to the hearing judges findings and conclusions, although it may be entitled to some consideration in respect to this Court’s sanction.

In Maryland the purpose of attorney discipline is the protection of the public, not the punishment of the erring attorney. Ambe’s transgressions in the instant case are not as severe in nature as those in cases cited by the state. Ambe was a newly practicing attorney who never specifically solicited any clients on Maryland matters. It is uncontradicted that his various contacts with insurers in a settlement context originated with his immigration clients who sought his assistance in communicating with various insurers. He never entered his appearance in any Maryland court case and never assisted any other attorney in doing so. Ambe did violate Rule 5.5(a) by representing clients in Maryland state tort law matters while not licensed to practice law in Maryland. But, as we have indicated, it does not appear he actively solicited any clients in respect to Maryland issues.

Lastly, because Md. Rule 16-760(f) provides for the protection of the public by authorizing Bar Counsel to take further action against Ambe in the unlikely event that Ambe ever again engages in the unauthorized practice of law – - the main charge for which these disciplinary proceedings were brought we believe that the public is adequately protected by reprimanding Ambe.

ZALMA OPINION

Committing a crime of moral turpitude, in most cases, will cause a lawyer to lose his license. Mr. Ambe had no license in Maryland for the state court to take from him. They found he breached a criminal statute by practicing law without a license. A reprimand from the state telling him, over whom they have no power, that he was naughty did not deserve the time necessary to go through trial and write a lengthy appellate decision. The dissenters, who sought a more stringent punishment, wanted him suspended for 30 days. Since he had no right to practice a 30 day suspension would be as effective as a Band-Aid on a  decapitation.

The court, after finding a criminal violation, should have referred Ambe to the state attorney general for prosecution for the unlawful practice of law.

Insurers, dealing with lawyers they do not know should make it a practice to check the status of the lawyer before dealing with the person as a licensed attorney. Every state has a web site listing each licensed attorney. That is what State Farm and Allstate did. Their mistake was reporting Ambe to the Bar rather than to the prosecutor.

Criminal actions by people pretending to be a licensed lawyer need to be punished. That the crime is only a misdemeanor is silly and does not protect the public. This decision is a travesty. Hopefully Maryland will keep a watch on Mr. Ambe and if he ever claims to be a Maryland lawyer again they will try him and spend millions to suspend his non-existent license for 30 days.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The U.S. District Court for the Eastern District of Michigan was asked to grant Defendant Netherlands Insurance Company’s Motion for Summary Judgment. Plaintiffs filed suit for declaratory relief and seek coverage under a cemetery’s insurance policy for an allegedly misplaced body in Steven Reed, et al v. Netherlands Insurance Company, No. Case No: 10-13247 (E.D.Mich. 02/16/2012).

The Netherlands policy was effective December 22, 2006 until November 25, 2007. Plaintiffs did not discover the alleged mistake until March 11, 2009. The cemetery claimed the body was never lost. Rather, paperwork was misplaced, and the burial took place on August 10, 2007 as scheduled, in the lot the Plaintiffs purchased.

Plaintiffs’ underlying state court complaint (“Verified Complaint”) alleges breach of contract, negligence, intentional infliction of emotional distress, violation of the Michigan Consumer Protection Act, and fraud. As a result, Plaintiffs alleged they suffered mental anguish, loss of use of attendant property, and interference with the right of burial of human remains.

Netherlands denied coverage. It averred that Plaintiffs’ claims – if they exist – occurred outside of the policy period and even if they are timely, policy exclusions bar coverage.

FACTS

Steven Reed, Kresha Rhan, Ezra Bolden, Cholon Bolden, and Phaedra Bolden (“Plaintiffs’”) are the children of deceased, Katherine Bolden. Plaintiffs allege the United Memorial Gardens Cemetery (“Cemetery”), a cemetery corporation, misplaced their mother’s remains. Plaintiffs filed suit in Wayne Circuit Court on February 12, 2010 against the Cemetery. Plaintiffs’ underlying state lawsuit is against the Cemetery. Plaintiffs entered into a burial contract with the Cemetery on August 7, 2007, to bury their mother. The Plaintiffs allege that they were not allowed to see their mother interred, but do not explain why. The Plaintiffs did not attend the funeral and had no contact with the Cemetery until a year and a half later.

Around March 11, 2009, Plaintiffs contacted the Cemetery to make arrangements to bury their sister next to her mother. Plaintiffs allege they were told their mother was not buried there, but if she was, she was in a different plot. Plaintiffs also say an agent of the Cemetery informed them that a former employee had taken client money and disposed of bodies in unknown locations. The Cemetery says it located Katherine Bolden’s body after the Plaintiffs filed suit in the plot purchased by the family.

In a letter dated May 14, 2009, the Cemetery said its records indicate Katherine Bolden was buried in the space Plaintiffs reserved, on the day she was to be buried. Although Bolden’s file could not be located, the Cemetery says the burial was recorded in two other places. The Cemetery lot book, shows that Bolden’s space had already been sold to someone else at the time Plaintiffs purportedly purchased it; that is why the family was told the decedent was buried in someone else’s space.

GENERAL DESCRIPTION OF POLICY

A. Coverage

In determining Coverage it is necessary to review the insuring agreement, conditions and definitions sections of the policy (“Coverage”). Under Coverage, the insurer agrees to pay damages resulting from “bodily injury,” “property damage” or “personal and advertising injury” caused by an “occurrence” during the policy period.

B. Exclusion

Despite the language in the Coverage section, the policy contains a Funeral Services Exclusion (“Exclusion”). This states that the insurance does not apply to “bodily injury,” “property damage” or “personal and advertising injury” arising out of errors or omissions in the handling, embalming, disposal, burial, cremation, or disinterment of dead bodies.

C. Endorsement

Finally, the insurance policy contains a Funeral Homes or Cemeteries Endorsement (“Endorsement”); this Endorsement modifies the coverage to extend coverage for “bodily injury,” including mental anguish claims, and “property damage” arising from the rendering or failure to render professional services by a funeral home or a cemetery. The Endorsement also modifies coverage to allow recovery for “personal injury” arising out of the interference with the right of burial of human remains.

IV. ANALYSIS

Determining coverage here is complicated by several facts. The policy was in effect December 22, 2006 until November 25, 2007. While Plaintiffs’ decedent was buried during the period of coverage – on August 10, 2007 – Plaintiffs did not find out she was not in the plot they purchased until March 11, 2009 – outside of the policy period. Their so-called mental anguish arises from being given the information that their mother was not in the purchased plot.

Applicable Law

Michigan law governs; a federal court sitting in diversity applies the substantive law of the state in which it sits.  To determine whether an insured is entitled to insurance benefits, a court must first determine whether the policy provides coverage. If it does, the court must then determine whether that coverage is negated by an exclusion.

Plaintiffs’ theory of recovery is that under the Endorsement, there is coverage for “bodily injury” including mental anguish, arising from the Cemetery’s failure to render professional services. Netherlands counters that the claims are barred because Plaintiffs did not discover an alleged error until March 11, 2009 after the expiration of the Netherlands policy.

Emotional distress claims generally do not ripen until the plaintiff suffers the emotional distress. Under the circumstances of this case, a plaintiff’s claim for mental anguish would not accrue until the plaintiff is actually aware that human remains were mishandled.

The Netherlands policy provides coverage only for losses that occur within the policy period. Under the policy, “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Under an occurrence policy, there can be no coverage for an event which doesn’t occur during the policy period.

The Plaintiffs’ claim of mental anguish did not accrue until August 11, 2009, the date Plaintiffs discovered that Katherine Bolden’s body had allegedly been misplaced. This date is outside the effective dates of the policy, and, Netherlands is not obligated to provide coverage for losses that occur outside the policy period.

Plaintiffs contend that as a result of the breach, Netherlands is legally obligated to pay property damages for the loss of use of the burial lot, burial vault, internment rights, perpetual care of gravesite, and services which they paid for and did not receive. Netherlands counters that this property claim fails because: (1) the Exclusion bars coverage; (2) a cause of action did not accrue until the family learned of the alleged misplacement; (3) the body was never misplaced; (4) policy provisions j(6) and m(2) exclude coverage; and (5) recovery for breach of the burial contract is limited to one hundred dollars.

Even if this alleged loss accrued during the policy period, Netherlands alleges that there are exclusions in the policy which bar coverage.  The exclusion states:

Exclusions — this insurance does not apply to:

m. Damage to Impaired Property or Property Not Physically Injured

(2) A delay or failure by you (Cemetery) or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

The court found that Netherlands is correct that Provision m(2) excludes coverage.

Under m(2), there is no coverage under the policy for a delay or failure by the Cemetery to perform a contract. Therefore, Plaintiffs’ property damage claims arising out of the alleged breach of the burial contract are barred because the policy does not provide coverage for instances in which the Cemetery breaches a contract or agreement.

CONCLUSION

The Court declares the policy does not cover any of Plaintiffs’ claims:

1. Plaintiffs’ property damage claims are barred by policy exclusions,
2. Plaintiffs’ claims for bodily injury are barred because they fall outside of the policy period,
3. Plaintiffs’ claim of interference with the burial of human remains is similarly barred; Plaintiffs could not have suffered damages until after the policy expired,
4. claims for emotional distress and fraud are precluded because the policy does not provide coverage for intentional acts,
5. Plaintiffs do not allege a theory of recovery that falls within the policy,
6. arguments regarding an extension of the policy period are unavailing, and
7. Plaintiffs’ contract and negligence claims for burying the body in the wrong place are precluded by the Exclusion.

Finally, when read as a whole, the contract is unambiguous and must be enforced as written.

ZALMA OPINION

As interesting as the facts of this case are – the claimed loss of the body of the plaintiffs’ mother – it is a fairly direct insurance case where the parties seeking insurance coverage must prove that their damage occurred within the policy period and that the policy provided coverage for what allegedly caused damage. Plaintiffs failed and the insurer was granted summary judgment.

A Cemetery is obliged to fulfill the contract with the family of the deceased with knowledge that a failure can cause bodily injury and emotional distress. The potential for such a breach is the reason why Funeral Homes or Cemeteries Endorsement insurance is purchased.

It seems the wrong insurer was sued or that there was no insurer available at the time the Plaintiffs incurred emotional distress. Their attempts to drag Netherlands into the case to provide money for their injuries failed because the district court was willing to read the policy as written.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The following story is from my E-book “Heads I Win, Tails You Lose” available at

Zalma on Insurance in Top 50

http://www.zalma.com/zalmabooks.htm and for continuing education credit from A. D. Banker Co., http://www.adbanker.com.  This story is fiction, the people identified bear no resemblance to anyone, living or dead, whose names were changed to protect the guilty.

The Decision to Commit Fraud

When a person decides to perpetrate an insurance fraud, he pushes the pause button on his morality. His plan to commit the fraud will then become so flamboyant and creative that even the most innocent of claims adjusters will detect the crime. Such was the case of a Belgian immigrant. He came to the United States shortly after World War II. He eked out a living with various jobs as a low paid engineering draftsman.

Before he decided to change his career and try arson for profit, he had lead a dull, but exemplary, life. He, at the age of sixty, married his second wife. Later they had a child. When the child was three, he contracted phlebitis and underwent several surgeries. He was unable to keep up with his work and, in any event, the aerospace industry had just lost several major contracts. He lost his job.

Unemployment Compensation did not pay enough for him to make the $1,400 a month payments on his small three bedroom house in Cerritos, California. His lender foreclosed.

After the foreclosure sale had occurred, he was still living in the house. His homeowner’s policy was still in effect. He no longer had an interest in the house and was subject to eviction. The insured recruited his sixteen-year-old son, from his first marriage, to set fire to the house. He made certain that when the fire occurred he, his wife and young daughter were away visiting relatives in Victorville. The house, with the assistance of much gasoline, burned to the foundation.

Much to his surprise (he was not an insurance scholar) the insurance company immediately denied his claim for the loss of his structure. He did not know that he must, at the time of the fire, have an interest in the structure to collect indemnity. The mortgagee, now the owner, received full payment. He had $100,000 in contents coverage and needed to collect it all.

Of course, because of his extended illness and lack of income, the house had relatively threadbare and simple furniture and furnishings. He needed to bring the values up somehow to effect a policy limits payment.

He prepared an inventory of all of his household furniture and furnishings and added to that an original oil painting by Rembrandt, an original oil painting by Pablo Picasso and an original oil painting by Vincent Van Gogh.

The adjuster was surprised that anyone who owned such valuable art work had difficulty making $400 a month payment to his mortgage company. The adjuster could not understand how the insured could allow his house to go by foreclosure. The adjuster retained counsel to examine the insured under oath.

Under oath, the insured’s testimony established that the insured had attempted to perpetrate a fraud on his insurer.

The insured testified that he was of royal birth, his father being a baron in Belgium. The Baron lived in a castle outside of Antwerp having earned his fortune in the diamond trade. The baron, pleased to learn that he had become a grandfather again, brought his son, daughter-in-law and new granddaughter to visit him at the castle. They spent a month at the castle enjoying the generosity of the baron. Before the insured left, the baron pointed to three oil paintings on the castle wall and told his son to take them home. Grandfather, the Baron, made the paintings a gift in honor of the birth of the new granddaughter.

The insured testified that he took the oils out of their frames, rolled them up and placed the three in a shipping tube which he hand-carried back to the United States. Since they were gifts, he did not report them to U.S. Customs. He had no written record of his ownership or possession of the paintings.

He described the Rembrandt as the dark painting of people sitting about a table with a bright point of light. When asked to describe the painting by Van Gogh, the insured testified:

“Another Dutchman. The painting was in the same style.”

Of course, counsel knew that although Rembrandt painted in very dark colors. Van Gogh, however, painted in wild, bright, and exuberant color schemes. A dark and brooding painting like that of Rembrandt never came off Van Gogh’s brush.

Further, counsel knew (after consulting with an art expert) that Rembrandt painted most of his works on board – planks of wood — it was, therefore, impossible to roll it up and put it in a tube. If the insured had one of Rembrandt’s rare canvasses and had rolled it up when he arrived home in Cerritos he would have found a clean canvas and a pile of paint chips at the bottom of the tube.

The insured tried to help the insurer’s investigation. He provided a photograph of a family dinner where the Rembrandt was visible in the background. The insured identified the photograph as depicting the original Rembrandt oil painting in its background. Counsel for the insurer had the photograph enhanced and enlarged. The enlargement showed the single, bright point of light described by the insured was cast by a painting of an electric light bulb. Of course, Tom Edison had not been born when Rembrandt was painting, and would not be born for at least three hundred more years.

To the surprise of the insured only the insurer rejected the claim presented by the insured for fraud, false swearing, and material misrepresentation of fact.
Suit was filed by the Insured for breach of contract and breach of the covenant of good faith and fair dealing. Although the fraud was obvious and blatant the costs of defense of the bad faith action mounted. The suit dragged on for three years. Trial counsel for the insurer were unable to convince a court to grant summary judgment. Finally, at a mandatory settlement conference the lawsuit settled for a payment by the insurer of $30,000 against the wishes of defense counsel who, regardless, admitted he would charge more than $30,000 to take the case through trial.

There is no question that the settlement was an appropriate economic decision if the insurer was only considering the single lawsuit. They were dealing with a plaintiff’s lawyer they saw on a regular basis. To pay him “tribute” as an economic decision was illogical. When a plaintiff’s bad faith lawyer is paid $30,000 by an insurer for a lawsuit that any three-year-old would know was a blatant fraud, he has been given an invitation to file more suits against that insurer, regardless of the merits of the lawsuit. Paying a blatant fraud is tantamount to providing plaintiff’s counsel with the key to the vault that holds the assets of the company. The insurer that does so fools itself only that it is making a reasonable economic decision. It will pay, in the future, thousands of dollars because the plaintiff’s bar knows they will pay off rather than pay their lawyers to defend the most spurious of suits.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Carbon Dioxide Poisoning

Zalma on Insurance in Top 50

Two houseguests suffered serious injuries after their host left her car running overnight in an attached garage and the house filled with carbon monoxide. The Connecticut Supreme Court was asked, in New London County Mutual Insurance v. Maria v. Nantes et al., No. (SC 18758), (Conn. 02/21/2012), to determine if the guests’ injuries are covered by a homeowner’s insurance policy issued by the plaintiff, New London County Mutual Insurance Company, to the named defendant, Maria V. Nantes, that excludes coverage for injuries “[a]rising out of . . . [t]he . . . use” of a motor vehicle.

The plaintiff brought this declaratory judgment action against Nantes, the homeowner, her guests, Armenui Dzhgalian and Aida Melikyan, and Nantes’ automobile insurer, Government Employees Insurance Company (GEICO), seeking a declaration that Nantes’ homeowner’s policy does not cover the injuries suffered by Dzhgalian and Melikyan. The plaintiff filed a motion for summary judgment, claiming that the policy does not cover these injuries because they fall within the policy exclusion for injuries “[a]rising out of . . . [t]he . . . use” of a motor vehicle. The trial court granted the plaintiff’s motion and rendered judgment for the plaintiff, and the defendants appealed.

UNDISPUTED FACTS

Dzhgalian and Melikyan are medical school graduates and residents of California. In February, 2007, they traveled to Connecticut to participate in a month long, unpaid internship at Griffin Hospital (hospital) in the town of Derby. During their internships, Dzhgalian and Melikyan lived with Nantes, a hospital employee, at her home in the town of Ansonia. As part of the living arrangement, Nantes drove Dzhgalian and Melikyan to and from the hospital each day. Dzhgalian and Melikyan each agreed to pay Nantes $460 to cover their share of utilities and car expenses.

At the end of the work day on February 12, 2007, Nantes drove Dzhgalian and Melikyan to her house and parked her car in the attached garage. Nantes exited the car without turning off the engine, closed the garage door, and went into the living quarters of the house, which did not contain a carbon monoxide detector. The car’s engine continued to run overnight, and the house filled with carbon monoxide. Dzhgalian and Melikyan suffered serious neurological injuries from carbon monoxide poisoning. They suffered additional injuries when Nantes dragged them, unconscious, out of the house.

The plaintiff promptly disclaimed coverage, relying mainly on the fact that Nantes’ homeowner’s policy contained the following exclusion:

[c]overage [for] [p]ersonal [l]iability and . . . [m]edical [p]ayments to [o]thers do[es] not apply to ‘bodily injury’ or ‘property damage’ . . . [a]rising out of . . . [t]he ownership, maintenance, use, loading or unloading of motor vehicles or all other motorized land conveyances, including trailers, owned or operated by or rented or loaned to an ‘insured’…

Soon thereafter, Dzhgalian and Melikyan returned to California. Nantes subsequently relocated to California as well. Dzhgalian and Melikyan settled with Nantes and obtained an assignment of her rights to sue the plaintiff for indemnity and bad faith tort damages.

The plaintiff filed this declaratory judgment action against the defendants. Relying primarily on the motor vehicle exclusion, the plaintiff sought a declaration that Nantes’ homeowner’s policy does not cover Dzhgalian’s and Melikyan’s injuries. The trial court concluded that Dzhgalian and Melikyan’s lodging and transportation arrangement with Nantes constituted a purposeful business transaction within the meaning of Connecticut statutes and that the plaintiff’s cause of action against Dzhgalian and Melikyan arose out of this transaction.  The Supreme Court concluded that the trial court was correct that Connecticut had jurisdiction.

The Purpose of a Declaratory Relief Action

In Connecticut, the purpose of a declaratory judgment action is to secure an adjudication of rights when there is a substantial question in dispute or a substantial uncertainty of legal relations between the parties.  The Supreme Court noted that the Connecticut declaratory judgment statute is unusually liberal. An action for declaratory judgment is, in Connecticut, a statutory action as broad as it could be made. One type of controversy to which the Connecticut declaratory judgment statute often has been applied is a dispute over rights and liabilities under an insurance policy.

In the present case, the plaintiff sought an adjudication of its rights with respect to an unsettled question of law pertaining to its liability under the homeowner’s insurance policy that it had issued to Nantes.  As the defendants acknowledged the settlement agreement “demonstrated the intent of . . . Melikyan and Dzhgalian to pursue legal action against [the plaintiff], upon the anticipated attainment of an award in arbitration.” A clearer case of an actual bona fide issue in dispute would be difficult to imagine.

The defendants last contention was that the complaint was an abusive attempt to deprive the true plaintiffs of their chosen forum. The defendants assert that the real purpose behind the plaintiff’s declaratory judgment action was to avoid defending a breach of contract action in the defendants’ preferred forum. This purpose, the defendants maintain, has been admonished by courts across the country.

A Forum Cannot Be Chosen if a Party Prefers to Litigate Elsewhere or Prefer to be the Plaintiffs

The defendants failed to cite a single Connecticut case in support of this argument. Even if there were such a case, the Supreme Court concluded it would not be persuaded that the action is an instance of impermissible forum shopping. Rather, the attempt to seek relief in California was, in fact, an instance of forum shopping since the action was brought by a Connecticut insurance company to determine whether a Connecticut homeowner’s insurance policy covers injuries that occurred in a Connecticut home. Under the law in Connecticut, as it should across the country, a forum does not become inappropriate simply because the defendants would prefer to litigate elsewhere or because they would prefer to be the plaintiffs.

On appeal, the defendants advance three arguments:

1. The injuries that Dzhgalian and Melikyan suffered as a result of the carbon monoxide poisoning do not fall under the policy’s motor vehicle exclusion because the injuries did not arise out of the use of a motor vehicle.
2. Even if those injuries did arise out of the use of a motor vehicle, they fall within the scope of coverage under the doctrine of concurrent causes.
3. The additional injuries that Dzhgalian and Melikyan sustained as a result of being dragged out of the house did not arise out of the use of a motor vehicle and, therefore, do not fall within the motor vehicle exclusion.

First, well established principles that govern the Supreme Court’s review of the defendants’ arguments. In the present case the Supreme Court was called on to ascertain the meaning of the phrase, “[a]rising out of” the “use” of “motor vehicles,” a phrase that is clear and unambiguous because our case law explicitly defines it. In Connecticut it is sufficient to show only that the accident or injury was connected with, had its origins in, grew out of, flowed from, or was incident to the use of the automobile, in order to meet the requirement that there be a causal relationship between the accident or injury and the use of the automobile. One may “use” an automobile without personally operating it, as the term use is broader than operation. Finding the provision to be unambiguous the Supreme Court construed it according to its natural and ordinary meaning and determine whether the provision so construed encompasses the injuries that Dzhgalian and Melikyan sustained as a result of their prolonged exposure to carbon monoxide while guests at Nantes’ home.

The defendants do not seriously dispute that Dzhgalian’s and Melikyan’s injuries arose out of Nantes’ act of leaving her car running in the garage because those injuries obviously were connected with that act. The defendants contended that, even if the injuries that Dzhgalian and Melikyan sustained as a result of their exposure to carbon monoxide did arise out of the use of a motor vehicle within the meaning of the motor vehicle exclusion of Nantes’ homeowner’s insurance policy, the doctrine of concurrent causes brings their injuries within the scope of coverage.

The present case involves injuries that stem from two causes, one falling within the exclusion, that is, Nantes’ act of leaving her car running in the garage, and the other arguably falling outside the exclusion, that is, Nantes’ act of closing the garage door. Here it is irrelevant that an arguably covered event – Nantes’ closing of the garage door – was a contributing cause of Dzhgalian’s and Melikyan’s injuries. The fact that Nantes’ use of her motor vehicle was connected to or created a condition that caused Dzhgalian’s and Melikyan’s injuries is enough to bring them within the motor vehicle exclusion.

Finally, facing a loss of the argument, the defendants contended that the bodily injuries that Dzhgalian and Melikyan sustained when Nantes dragged them out of the house (dragging injuries) do not fall within the policy’s motor vehicle exclusion because they neither arose out of nor were causally connected to the use of a motor vehicle. The Supreme Court dealt with the imaginative argument quickly and found, contrary to the defendants’ claim, the dragging injuries arose out of the use of a motor vehicle because Nantes’ negligent act of leaving her car running in the garage was the proximate cause of those injuries.

ZALMA OPINION

When an insurer denies a claim it will invariably find itself a defendant in a case seeking bad faith tort damages. In this case, because the defendant did not have coverage sufficient to pay for the injuries suffered by the two young doctors, the lawyers for the doctors attempted to set up the homeowners insurer for tort damages, including punitive damages, in California although none of the injuries were suffered in California — a forum know to provide large punitive damages awards against insurers.

Connecticut, where the policy was issued and where the injuries occurred refused to allow the injured to select a forum of their choice and allowed the declaratory relief action filed by the Connecticut insurer to have its coverage question resolved by a Connecticut court. They read a clear and unambiguous policy exclusion to apply and refused to apply the creative use of the concurrent cause doctrine to reach a result that applied the clear language of the policy.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Nealey Michelle Malham appealed a take-nothing judgment in her suit for benefits

Zalma on Insurance in Top 50

under an uninsured motorist coverage provision contained in her Texas Personal Auto Policy issued by Government Employees Insurance Company (“GEICO”) in Nealey Michelle Malham v. Government Employees Insurance Company, No. 03-11-00006-CV (Tex.App. Dist.3 02/08/2012).

BACKGROUND

Malham was injured in a motor vehicle accident in which the car in which she was a passenger was struck by a pickup truck owned by the City of Killeen and driven by a city employee while in the course and scope of his employment. Malham sued the City and its employee alleging that she suffered injuries as the result of the employee’s negligent acts and omissions and that the City was vicariously liable for the negligence of its employee.

Malham settled her claims against the City and the employee in exchange for payment to her of $87,500. Thereafter, Malham filed a claim under the uninsured motorist coverage provision of her GEICO policy seeking to recover medical expenses related to back surgery she alleges was recommended to treat injuries sustained in the accident. In the underlying cause of action, Malham sought a declaration that the City vehicle that struck the car she was riding in was an “uninsured motor vehicle,” as that term is defined in her contract with GEICO, and that she was entitled to recover $300,000 from GEICO under the terms and conditions of the uninsured-motorist coverage contained in the policy.

The parties agreed to a bifurcated trial whereby they would first try the coverage issues, which presented pure questions of law, to the court and then set any remaining liability and damages issues for a subsequent jury trial. The court entered findings of fact and conclusions of law supporting its conclusion that GEICO was not liable to Malham for the payment of any uninsured motorist benefits under the terms and conditions of her GEICO policy.

DISCUSSION

At the time of the accident, Malham’s GEICO policy contained the following Uninsured/Underinsured Motorist Coverage provision:

We will pay damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by a covered person, or property damage, caused by an accident.

The parties do not dispute that Malham is a “covered person” or that she was legally entitled to recover damages from the City as a result of the accident. The sole point of disagreement between the parties with respect to the above-quoted provision is whether the City vehicle that caused the accident was an “uninsured motor vehicle” under the GEICO policy.

The GEICO policy contains, in pertinent part, the following definition:

I. “Uninsured motor vehicle” means a land motor vehicle or trailer of any type:

1. To which no liability bond or policy applies at the time of the accident.

II. However, “uninsured motor vehicle” does not include any vehicle or equipment: . . . .

2. Owned or operated by a self insurer under any applicable motor vehicle law.

3. Owned by any governmental body unless:

a. the operator of the vehicle is uninsured; and

b. there is no statute imposing liability for damage because of bodily injury or property damage on the governmental body for an amount not less than the limit of liability for this coverage.

Malham contends that, under the foregoing provisions, the City-owned vehicle that struck the car in which she was a passenger was an “uninsured motor vehicle” under the GEICO policy definition and that the trial court erred in concluding otherwise.

The City is a party to a Liability/Property Interlocal Agreement (the “Agreement”), which creates the Texas Municipal League Joint Self-Insurance Fund (the “Fund”) for the purpose of “providing coverages against risks which are inherent in operating a political subdivision.”  The question before this Court, then, is whether the liability coverage provided for by the Agreement constitutes a “liability policy” as that term is used in the GEICO policy. We conclude that it does.

Insurance policies are interpreted according to the general rules of contract construction.  Although Malham does not dispute that the Agreement essentially functions as insurance, she maintains that it does not constitute a “liability policy” under the terms of the GEICO policy.

As an initial matter, the court noted that the GEICO policy definition of uninsured motor vehicle does not use the words “insurance policy.” Rather, it refers to the absence of a “liability bond or policy.” And there is nothing in the GEICO policy that restricts the term “liability policy” in the narrow and technical manner urged by Malham. The plain, ordinary, and generally accepted meaning of the term “liability policy” embodies a broader notion that includes not only an insurance company-issued insurance policy, but also the type of third-party liability coverage provided by the Agreement.

Because the appellate court concluded that the Agreement provides the City and its employees liability coverage and constitutes a “liability policy,” it also concluded that the operator of the City-owned vehicle was not “uninsured.”

Malham next contends that the City-owned vehicle was uninsured because the City did not meet the requirements of a “self-insurer” under the Texas Transportation Code. The GEICO policy includes a provision that excludes from the definition of an “uninsured motor vehicle” any vehicle “owned or operated by a self insurer under any applicable motor vehicle law.”

CONCLUSION

The appellate court concluded that the trial court did not err in concluding that the City-owned vehicle that caused the accident for which Malham seeks to recover damages was not an “uninsured motor vehicle” as that term is used in the GEICO policy. The trial court’s judgment that Malham take nothing by way of her claim for benefits under the uninsured motorist provision of that policy is affirmed.

ZALMA OPINION

Greed is not unusual. In this case the plaintiff sued the local city whose employee caused her injury while operating a city owned vehicle in the course and scope of his employment. She settled her suit with the City for a considerable sum: $87,500.

Buyers remorse then struck. Since the case against the city was settled there was no way for her to get more money from the city. Assuming that no one likes insurance companies she sued her own insurer claiming that the City, and its driver, who settled with her was uninsured she tried to obtain $300,000 (more than three times the settlement with the city) from GEICO, her insurer.

The court, logically, and on the terms of the insurance contract did not buy the argument and gave a judgment properly to GEICO who should be commended for not entering into a settlement to avoid the costs of litigation. It is this type of action that gives support for the British”loser pays” system. This suit would never have been brought if Ms Malham felt she would have to pay GEICO’s attorneys fees for defending her case to verdict.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Health Insurance and Religion

Opinion by Barry Zalma

Zalma on Insurance in Top 50

Government health insurance programs like the 2200 page law euphemistically called “Obamacare” or the program for the elderly called Medicare have no resemblance to true insurance. Both require people to buy the so-called “insurance” and pay for it with tax dollars rather than all of the cost being paid by those insured.

In the real world “Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22] Insurance, to exist, requires a contract freely entered into by two parties, neither under compulsion to enter or not enter into the contract. The insurer, for the payment of a premium from the person to be insured, agrees to indemnify the insured against certain clearly identified risks of loss chosen by both. The insurer expects to profit from the premium collected and the insured expects to be indemnified for the risks of loss identified in the policy agreed to at the time the contract was agreed.

As I listen to politicians and clergy argue over rulings by the Secretary of Health and Human Services requiring religious organizations to provide “insurance” for procedures that are anathema to the religious beliefs of followers of the Roman Catholic Church, many Protestant denominations and Muslim organizations I  wonder if anyone in the U.S. Government knows what insurance is and that insurance is not a right guaranteed by the U.S. Constitution whose terms and conditions could be mandated by the Secretary of Health and Human Services.

In a free society everyone has the right to enter or refuse to enter into a contract free of compulsion.  If the force of the United States government requires a person to buy a contract of insurance that provides coverages not required — like a 90-year-old woman or a nun who took a vow of celibacy coverage for pregnancy — or a 20-year-old man to buy coverage for Viagra it is compelling a contract under the compulsion of fine or jail.

In 1904 the U.S. Supreme Court found in NORTHERN SECURITIES COMPANY v. UNITED STATES, 24 S. Ct. 436, 193 U.S. 197 (U.S. 03/14/1904) the court concluded that “‘Liberty,’ as used in the Fifth Amendment to the Constitution means not merely bodily liberty — freedom from physical duress, but in effect comprehends substantially all those personal and civil rights of the citizen which it is meant to place beyond the power of the general government to destroy or impair.”  The Supreme Court found that it follows that, as used in the Fifth Constitutional Amendment, “liberty” includes equality of rights under the law and secures citizens similarly situated against discriminations between them which are arbitrary and without foundation in reason. United States v. Cruikshank, 92 U.S. 542, 554; Yick v. Hopkins, 118 U.S. 356, 369; Gulf, Colorado & Santa Fe Ry. Co. v. Ellis, 165 U.S. 150, 160. By denying people equality of rights and discriminating between them in the matter of their property rights, arbitrarily and without reason by stopping them from selling their property I believe that ordering someone to buy insurance is the same as a government stopping someone from selling his property.

The U. S. Supreme Court also found in Gibbons v. United States, 8 Wall. 269, in which an army contractor who had agreed to furnish certain oats at a fixed price had, after the delivery of part of the amount, been released from the obligation to deliver the balance. He was, however, carried before the military authority, and influenced by threats, agreed to deliver, and did deliver, the full quantity of oats specified in the contract. He brought suit for the difference between the contract price and the market price of the oats at the time of delivery. It was said that “if such pressure was brought to bear upon him as would make the renewal of the contract void, as being obtained by duress, then there was no contract, and the proceeding was a tort for which the officer may have been personally liable.”

A contract made by a party under compulsion is void because consent is of the essence of a  contract, and where there is compulsion, there is no voluntary consent. “A contract made by a party, under compulsion, is void; because consent is of the essence of a contract, and where there is compulsion, there is no consent, for this must be voluntary. Such a contract is void for another reason. It is founded in wrong or fraud. It is not, however, all compulsion which has this effect; it must amount to duress. But this duress may be either actual violence, or threat. [Doctor's Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996);DUNCAN v. HENSLEY, 248 Ark. 1083, 455 S.W.2d 113 (Ark. 06/15/1970); The Elfrieda, 19 S. Ct. 146, 172 U.S. 186, 43 L. Ed. 413, 1898.SCT.40283; McCracken v. McCracken, 2009 Ark.App. 758 (Ark.App. 11/11/2009)]

I am fearful of a government that can compel me to enter into a contract I do not wish to enter. If they can compel me to buy a health insurance coverage I neither want nor need for a price I do not want to pay it can compel me to enter into a contract of marriage with a woman I do not know or to buy an automobile I do not want or need, or to buy a house where I do not want to live, or to have adopt children after I am too old to care for them, or to limit my family to one child.

As I listen to the talking heads and politicians speak I was reminded of a poem by Friedrich Gustav Emil Martin Niemöller (14 January 1892 – 6 March 1984) who was a Protestant pastor and social activist. He wrote about his time in Germany during World War II:

When the Nazis came for the communists, I did not speak out;
 As I was not a communist.

When they locked up the social democrats, I did not speak out;
I was not a social democrat.

When they came for the trade unionists, I did not speak out;
As I was not a trade unionist.

When the came for the Catholics, I did not speak out;
As I was not a Catholic.

When they came for the Jews, I did not speak out;
As I was not a Jew.

When they came for me,
there was no one left to speak out.

As a Jew who has different religious imperatives than a member of the Roman Catholic Church, I will not fall into the trap that Pastor Friedrich Gustav Emil Martin Niemöller fell into. I am, by this post, speaking out that the United States Government should not, under the First, Fifth and Fourteenth Amendment to the U.S. Constitution be allowed to compel anyone to buy any type of contract — whether called “insurance” or something else — because to do so is an improper compulsion making the contract voidable.

As I have said many times insurance is a contract between a person who, for a premium, agrees to indemnify another (the insured) against certain enumerated risks of contingent or unknown losses. When a government compels the content of the contract it is no longer a contract between two but a contract where one is compelled against his pecuniary interest to buy insurance protection he neither wants nor needs. It is, by a weight of authority, voidable.

To compel a Catholic priest or nun to be insured for contraception, pregnancy or abortion when they have taken an oath of celibacy is wasteful, a contract unneeded by religious fiat, and an attempt to prevent them exercising their right to practice their religion as they see fit in violation of the First Amendment to the U.S. Constitution.

When representatives of the government say the order of HHS is to protect the health of women like cloistered nuns is a fraud on its face. HHS should stop telling people what insurance coverages they must buy and spend more time prosecuting those health care providers who are stealing from the public treasury billions of dollars by billing for services not rendered.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

In this, the fourth issue of the 16th year of of publication with ZIFL reports on the crime of insurance fraud perpetrated by people from every race, religion, and national origin. ZIFL reminds its readers that insurance fraud continues, without any cognizable abatement and insurers must remain vigalent in the effort to limit the success of fraud perpetrators.

The current issue reports on the effort of two Mississippi lawyers to appeal verdicts that they defrauded a defendant when presenting an asbestos suit; reviews appellate decisions where arson-for-profit insurance fraud failed and convictions were affirmed; the attempts of U.K. lawyers to recruit clients by offering them free I-Pads; Chapter III of the serialized novel “Murder and Insurance Fraud Don’t Mix”; the claims of the Department of Justice about increased efforts to defeat Medicare fraud and recovery of $4.1 billion; and, as usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 357 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-book “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and is available from http://www.zalma.com/zalmabooks.htm.

If you or your client faces a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert and consultant, please contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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.

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.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Barry Zalma, Esq.

© 2012 – Barry Zalma

    Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

    He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

    Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance in Top 50

The Illinois Court of Appeal was called upon to determine whether the trial court properly granted summary judgment in favor of State Farm Mutual Automobile Insurance Company (State Farm) in Phillip R. Katz v. State Farm Mutual Automobile, 2012 IL App 110931 (Ill.App. Dist.1 02/07/2012). Phillip R. Katz filed an amended complaint against State Farm claiming that he was owed additional underinsured motorist benefits under three insurance policies issued to him by State Farm. At issue is:

(1)     whether State Farm is Katz’s excess underinsurer;

(2)     whether the circuit court properly calculated the applicable setoffs to Katz’s underinsured motorist benefits; and

(3)    whether State Farm’s conduct in denying Katz’s claims of additional underinsured motorist benefits was unreasonable and vexatious such that Katz is entitled to damages under provisions of the Illinois Insurance Code.

BACKGROUND

On February 26, 2008, Katz was involved in an automobile accident. At the time of the accident, Katz was the named insured on three automobile policies issued by State Farm. The relevant provisions of these policies are identical and each included underinsured motorist benefit coverage limits of $250,000 per person. At the time of the incident, Katz was driving a vehicle owned by his employer and insured by Sentry Select Insurance Company (Sentry). The underinsured motorist coverage under the Sentry policy included coverage limits of $50,000 per person. The other vehicle involved in the accident, driven by Gregory Belt, was also insured by State Farm and contained a primary liability policy limit of $100,000 per person.

Katz filed the underlying personal injury lawsuit against Belt in the circuit court of Du Page County. In settlement of the underlying action, State Farm tendered its primary liability policy limits of $100,000 under Belt’s policy to Katz. The settlement order allocated 60%, or $60,000, of the $100,000 settlement amount to Katz and 40%, or $40,000, to Katz’s spouse in compensation for her loss of consortium claim.

Katz also received a workers’ compensation benefit, of which $47,654.08 was paid to Katz and was available for setoff. Sentry paid Katz $2,345.92 under its policy. Although Sentry is not part of this appeal, it appears from the record that Sentry applied a setoff for the workers’ compensation benefits Katz received. Sentry’s policy limit for underinsured motorist benefits was $50,000. After applying the workers’ compensation setoff of $47,654.08 to the policy limits, $2,345.92 of underinsurance motorist benefits remained to be tendered to Katz.

State Farm, under the policies it issued to Katz, paid him $161,876 in underinsured motorist benefits. This amount is $88,124 less than State Farm’s underinsured motorist coverage limits of $250,000 under the polices issued to Katz.

On May 3, 2010, Katz filed his amended complaint for declaratory judgment and attached as exhibits the three policies issued to him by State Farm. In his amended complaint, Katz characterized Sentry as the primary underinsurance policy and State Farm as the excess underinsurance policy. Katz stated that Sentry had already tendered him the benefits it owed him, after it applied a set-off for Katz’s workers’ compensation benefits. Katz sought to have State Farm pay him “the remaining benefit available of $88,124 arising out of the occurrence of February 26, 2008.” Katz pointed to the following policy language in the State Farm policy to support his position:

“If There Is Other Underinsured Motor Vehicle Coverage- Coverage W:

        * * *

2. Subject to item 1 above, any coverage applicable under this policy shall apply:

        a. on a primary basis if the insured sustains bodily injury while occupying your car, or while not occupying a motor vehicle or trailer.

        b. on an excess basis if the insured sustains bodily injury while occupying a vehicle other than your car.” 

On July 7, 2010, State Farm filed its motion for summary judgment. In its motion, State Farm argued that Katz did not have an underinsured motorist claim under the Sentry policy because the primary liability limit on Belt’s car in the underlying lawsuit was more than the underinsured motorist limits of the Sentry policy. Specifically, the primary liability limit for the insurance on Belt’s car was $100,000, whereas the Sentry policy contained a $50,000 underinsured motorist limit. State Farm argued that under the Sentry policy, Katz did not have a claim for underinsured motorist coverage. In its motion for summary judgment, State Farm also contended that it had already paid more than it owed under its own policy with Katz.

State Farm contended that under the terms of its policy $100,000 must be subtracted from the $250,000 policy limit. The $100,000 setoff represents the settlement of the underlying action.

State Farm also argued that an additional setoff of $47,654.08 applied because its policy states that workers’ compensation benefits shall reduce the amount of underinsured motorist benefits available. According to State Farm, Katz was entitled to receive $102, 345.92 under the underinsured motorist policy. This conclusion represents the total underinsurance motorist benefit after subtracting both the $100,000 Katz received from the Belt settlement and the $47,654.08 in workers’ compensation benefits Katz received from the $250,000 policy limit.

State Farm stressed that since it had already paid Katz $161,876, it “owes him nothing.”

On November 18, 2010, Katz filed his cross-motion for summary judgment and response to State Farm’s motion for summary judgment. In his motion, Katz maintained that Sentry was the primary underinsurer and State Farm was the excess underinsurer. Katz argues that both polices may be stacked so that he is able to claim $50,000 worth of underinsurance benefits from Sentry and $250,000 worth of underinsurance benefits from State Farm.

The trial court granted State Farm’s Motion and this appeal followed.

ANALYSIS

Katz argues that aggregating or “stacking” the two benefits together provides him with an underinsurance benefit of $300,000. Katz maintains that any setoffs applied to the underinsurance benefits should first be applied to Sentry, as the primary underinsurer, and then any extra setoff applied to State Farm’s policy, as the excess underinsurer.

The legislative purpose behind underinsured motorist coverage is to place the insured in the same position he would have occupied if the tortfeasor had carried adequate insurance.  According to the definition of underinsured motorist in Sentry’s policy, Belt, the tortfeaser, cannot be considered an underinsured motorist because his primary liability policy limit of $100,000 is greater than the $50,000 limit of coverage provided by Sentry under the underinsured motor vehicle provision of its policy.

The Court of Appeal disagreed with Katz’s characterization of State Farm as the “excess underinsurer” because the Sentry policy, which Katz believes is the primary underinsurer, does not apply in this case. State Farm cannot be considered to be providing excess coverage where it is the only coverage. Therefore, the Court of Appeal held that State Farm’s policy provides the only underinsurance coverage in this case. As the only provider of underinsurance coverage, State Farm is entitled to apply any applicable setoffs regardless of Sentry’s actions.

The language of State Farm’s policy allows for a setoff for workers’ compensation benefits. Based on our conclusion that State Farm does not owe any additional benefits, Katz’s final argument, that State Farm’s conduct in denying his claim for an additional $88,124 in underinsured motorist benefits was unreasonable and vexatious such that he is entitled to damages under the statutes failes because a defendant cannot be liable for violation of the bad faith statute where no benefits are owed.

ZALMA OPINION

The Court of Appeal failed to deal with the 600 pound gorilla in this case — that State Farm overpaid the Katz claim. Finding in its favor they allowed Katz to keep the overpayment because State Farm failed to ask the court to return its overpayment.

When an insured files a complaint for declaratory relief seeking more than that to which he is entitled only to learn he was paid too much he should not be allowed to keep the overpayment. The amount may not be worth filing a suit for its return now that the case has gone through the appellate process.

Insurers, in the same situation as State Farm in the Katz case, should always stand for its rights and if it believes it has overpaid a claim should cross complain for return of the overpayment.

Barry Zalma, Esq.

© 2012 – Barry Zalma

    Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

    He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

    Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

EQECAT estimates damages from an earthquake in the Philippines. Rate increases in Australia were not enough to offset claims trends. Willis says it could be a difficult year ahead for mining business. Three states in the U.S. to require NAIC climate change survey. A.M. Best comments on the tenuous U.S. economic recovery. Adoption of Predictive Modeling is on the rise. Barry Zalma discusses “Murder for Life Insurance.” This and more from the online video news network for the global insurance community….World Risk and Insurance News. And now available in the WRIN.tv On Demand Library:

International News A magnitude 6.7 earthquake rocked the Philippines. EQECAT estimates economic and insured losses. J.P. Morgan and Deloitte publish a survey on the Australian insurance market. Highlights from a Mining Market Review published by Willis. California, Washington and New York will require insurers to answer the NAIC Climate Risk Survey. Some believe the move is politically motivated Technology/Modeling Report – Predictive Modeling A survey from Towers Watson looks at adoption of Predictive Modeling among U.S. personal lines carriers as well as commercial and specialty lines insurers.

“Who Got Caught?” with Barry Zalma (“Murder for Life Insurance”) In the latest edition of this popular WRIN.tv series, internationally known insurance lawyer, Barry Zalma reviews a shocking case of “Murder for Life Insurance.”

BestDay on WRIN.tv (U.S. Economic Recovery) Nancy Snyder comment on the potential for a sustained recovery in the U.S. economy, including the uncertainty and challenges that lie ahead.

Did you miss our previous newscast? World Risk and Insurance News reported on International News: the Greek Debt Deal; a Swiss Re report on earthquake losses; ABI concerns over UK flood insurance; and Fitch warnings regarding Solvency II and EU captives. BIBA outlined its 2012 Manifesto; A.M. Best discussed Solvency II preparedness; and we revealed the results of our latest WRIN.tv Poll on hiring in 2012?

View the news program and full length stories in the WRIN.tv On Demand Library. About World Risk and Insurance News World Risk and Insurance News (WRIN.tv) is the online video news network for the global risk, insurance and financial services industries. WRIN.tv works closely with news outlets, research firms, industry analysts, trade associations and subject matter experts around the globe to deliver relevant and valuable information, news and special programs.

Submit News and Video Stories To contribute story ideas, press releases and video reports for potential airing on World Risk and Insurance News please forward them to: media@wrin.tv.

Zalma on Insurance in Top 50

John Plotts appealed the judgment of the Court of Common Pleas of Van Wert County, Ohio that convicted him of arson, aggravated arson, and insurance fraud. On appeal, Plotts contended that the trial court erred by admitting physical evidence for which the State did not sufficiently demonstrate the chain of custody and that he received ineffective assistance of counsel. In  State of Ohio v. John Plotts, Opinion, 2011 -Ohio- 900. (Ohio App. Dist.3 02/28/2011) the Court of Appeal reviewed his claims and resolved the issue.

TRIAL TESTIMONY

In June 2010, Plotts was tried on charges of arson and fraud as a result of two separate fires at Plotts’ residence on April 8, 2009, and April 10, 2009, for which he attempted to collect insurance proceeds from Erie Insurance Company (“Erie”).the case proceeded to jury trial, during which the following pertinent testimony was heard:

• Plotts testified that on April 8, 2009, he resided at his residence, located at 630 Monroe, Van Wert, Ohio;
• that he left his residence for class in Lima, Ohio, driving a green car; that he returned home to retrieve a book;
• that upon arrival, he discovered his residence on fire, and called 9-1-1 on his cell phone;
• that after the fire was under control, he met with Frank Ritemeyer, an Assistant State Fire Marshal;
• that he signed a consent form allowing Ritemeyer to enter the residence, inspect it, and collect evidence;
• that upon exiting the residence, the front door was locked; and,
• that as a result of the fire, he made a claim with his home insurance provider, Erie, representing to them that he had no active role in starting the fire.

Cody Fife, a resident of Van Wert, Ohio, testified that, on April 8, 2009, he was locked out of his home; that as he waited on his porch for his wife, Karri Fife, he noticed a green car circling the block; that upon his wife’s return home, they took his wife’s car and followed the green car; that, eventually, the green car pulled into a driveway located on Monroe Street; and, that, shortly thereafter, he heard fire engines approaching the area.

Ritemeyer testified that the heaviest fire damage was located in the living room; that he slightly moved a burned sweatshirt lying near the entertainment center, which was located in the living room, so he could photograph the sweatshirt; that he moved the entertainment center away from the wall and back again; and, that he did not collect any physical evidence from Plotts’ residence on that day. Ritemeyer further testified that he returned to the residence, on April 10, 2009; that, on that day, he did another inspection of the residence; and, that the heaviest fire damage was located in the master bedroom.

Ralph Kisor, an investigator with Erie, testified that Plotts called Erie to submit claims for both fires; that the first fire caused $77,863.41 in damage, and the second fire caused $51,951.42 in damage.

THE SENTENCE

The jury returned a verdict convicting Plotts on all eight counts. The trial court proceeded to find that Counts One, Two, and Three were allied offenses and merged them into Count One for sentencing purposes. The trial court also found Counts Five, Six, and Seven were allied offenses and merged them into Count Five for sentencing purposes. The trial court then sentenced Plotts to a three-year prison term for Count One; an eighteen-month prison term for Count Four; a three-year prison term for Count Five; and, a six-month prison term for Count Eight.

ANALYSIS

Chain of Custody

The Court of Appeal noted that after retrieving the physical evidence from Plotts’ residence, Spencer placed the evidence in his personal storage facility, which he locked. From that point on, Spencer maintained custody of all the physical evidence retrieved from Plotts’ residence, until he delivered it to the Van Wert County Court House for trial.

The Court of Appeal concluded that the State, with reasonable certainty, established that no substitution, alteration or tampering occurred with regard to the physical evidence presented at trial. Although the chain of custody is not pristine in the case, and it rarely is, Plotts has failed to identify evidence within the record, which demonstrates substitution, alteration or tampering of the physical evidence.

Ineffective Counsel

Plotts contended that he was denied effective assistance of counsel because trial counsel failed to call expert witnesses, inappropriately alluded to a conspiracy between the insurance companies and independent contractors, failed to effectively cross-examine eyewitnesses, and, failed to challenge the absence of proof of loss forms in evidence.

An ineffective assistance of counsel claim requires proof that trial counsel’s performance fell below objective standards of reasonable representation and that the defendant was prejudiced as a result.  In the trial Ralph Kisor, an investigator with Erie, testified that Plotts called Erie to file claims for both fires. Accordingly, the claims were filed orally, which is sufficient to support a conviction of insurance fraud, pursuant to Ohio statutes.  In addition, Kisor testified that the damage caused by the fires totaled $77,863.41 and $51,951.42, respectively. Thus, the record contained enough evidence for the jury to convict Plotts on both counts of insurance fraud.

ZALMA OPINION

Arson-for-profit requires a certain amount of skill to be performed effectively and profitably. Mr. Plotts is an example of everything that can be done to assure a conviction for insurance fraud and arson. Plotts set one fire that caused $77,863.41 in damage and was not satisfied so he set a second fire that did an additional $51,951.42 in damage. Accidental fires seldom occur twice within a few days of each other.

Plotts allowed the investigators into the house to do what they would without control assuming he was so proficient as an arsonist that the investigators would not discover his crime.

Finally, he claimed he hired a stupid lawyer who did not defend him properly although, considering the evidence available, his attorney had little to work with.

Insurers faced with a potential arson-for-profit, like Erie faced when presented with the Plotts claim, must do a thorough investigation before making a decision. Erie did so and the evidence presented by the state and private investigators made it possible for the prosecutor to gain a conviction on eight counts of arson and fraud.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The Issues

An insurer sought a declaratory judgment that it was required to indemnify its insured for no more than 40 percent of a state court judgment because it had covered its insured for no more than 40 percent of the time in which the state court plaintiff was exposed to lead poisoning. The district court agreed that the insurer was responsible for only a portion of the judgment, notwithstanding the fact that its insured was held jointly and severally liable for the entire judgment in the underlying state proceeding. The state plaintiff (and defendant in the federal declaratory action) appealed. The Fourth Circuit Court of Appeal was called upon to determine, in Pennsylvania National Mutual v. Lakia C. Roberts, No. 10-1987,10-1988 (4th Cir. 02/03/2012) whether an insurance company cannot be held liable for periods of risk it never contracted to cover.

FACTS

From her birth on January 17, 1991 until 1998, Lakia Roberts resided at a house on 1740 East Preston Street in Baltimore, Maryland. In September 1992, when she was 20 months old, Roberts was diagnosed with lead poisoning. A test indicated that she had an elevated blood lead level of 28 micrograms of lead per deciliter of blood (“mcg/dL”). She continued to exhibit elevated blood lead levels until August 1995.

On February 4, 2005, Roberts filed a complaint in Maryland state court against Attsgood Realty Company alleging that the injuries she sustained from the lead poisoning were the result of its negligent management of the East Preston Street property. Attsgood had owned, leased, and managed the property from Roberts’s birth until November 1, 1993, when it had sold the property to Gordon Gondrezick.

Attsgood then requested defense and indemnification from Pennsylvania National Mutual Casualty Insurance Company (“Penn National”) under the terms of its insurance contract. In 1992, Penn National had issued a liability insurance policy to Attsgood covering the period from January 13, 1992 to January 13, 1993. The policy was later renewed to extend coverage to January 13, 1994. According to the terms of the contract, Penn National promised Attsgood that it would provide liability insurance for “Premises You Own, Rent or Occupy,” including 1740 East Preston Street.

From Roberts’s birth in January 1991 until this coverage began in January 1992, Attsgood lacked liability insurance for the East Preston Street property. Under the contract, Penn National promised to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies” as well as “defend any ‘suit’ seeking those damages.” This guarantee was in turn qualified by a provision stating that “this insurance applies to ‘bodily injury’ and ‘property damage’ only if . . . the ‘bodily injury’ or ‘property damage’ occurs during the policy period.”

The contract also made clear that Attsgood’s “rights and duties under this policy may not be transferred without [Penn National's] written consent except in the case of death of an individual [n]amed [i]nsured.”  In accordance with the policy, Penn National agreed to defend Attsgood subject to a reservation of its rights. Attsgood then filed a third party complaint against Gondrezick seeking contribution and indemnification in the event that Roberts prevailed. After Gondrezick failed to appear or otherwise defend himself, the Maryland court entered an order of default against him in favor of Attsgood.

Following discovery, the state case went to trial on May 4, 2009 on counts of negligence and unfair trade practices. To prove the property owners’ liability, Roberts’s mother and her expert witness provided testimony indicating that Roberts had been exposed to lead poisoning at the East Preston Street property since her infancy and that this exposure had resulted in permanent brain damage. Attsgood in turn challenged the contention that the presence of lead at its property was the actual source of Roberts’s injuries.

The trial ended on May 8, 2009. The jury returned a verdict in favor of Roberts for $2,000,000, which was reduced to $850,000 following an application of Maryland’s non-economic damages cap. It is undisputed that Attsgood and Gondrezick are jointly and severally liable for this amount.

The Litigation

On October 9, 2009, Penn National filed a declaratory judgment action against Attsgood and Roberts in federal court on the basis of diversity jurisdiction. The insurer sought a determination that it was obligated to indemnify Attsgood for no more than 40 percent of the total judgment, or $340,000. Penn National filed a motion for default judgment against Attsgood after it failed to respond. Penn National also filed a motion for summary judgment against Roberts arguing that it should be liable for only 22 months of the entire period of Roberts’s exposure to the risk of lead poisoning. It calculated that while it had insured Attsgood for the 24 months from January 1992 to January 1994, Attsgood had sold the property to Gondrezick in November 1993, thereby resulting in a total of 22 months of coverage.

Roberts saw the matter differently. She argued that Penn National was responsible for paying the entire $850,000 judgment in light of the joint and several liability of its insured. She also contended that even if the district court decided to allocate liability, “virtually all” of her “lead exposure occurred during Penn National’s two policy periods,” beginning with the discovery of her elevated blood lead level in September 1992.

The Continuous Trigger

The district court largely agreed with Penn National.  The trial court relied on “continuous trigger” cases such as that Maryland courts determine an insurer’s liability through a “pro-rata allocation by ‘time on the risk.’” The district court concluded that Roberts had been exposed to lead poisoning from January 17, 1991 to August 1995, for a total of 55 full months. The district court calculated Penn National’s period of coverage. It concluded that Penn National provided insurance to Attsgood from January 13, 1992 to January 13, 1994, for a total of 24 months. The court rejected Penn National’s argument that its period of coverage should be reduced to 22 months because Attsgood had sold the property to Gondrezick on November 1, 1993, concluding that while “under the terms of the insurance contract Penn National may be correct, the record is entirely barren of facts showing that Penn National’s coverage in fact was terminated.”

In its allocation of liability, the district court used the 24 months of coverage as the numerator and the 55 months of exposure to lead poisoning as the denominator to conclude that Penn National was responsible for 24/55, or approximately 43.6 percent, of the judgment. It then found that “Penn National is liable to Roberts for $370,600 (43.6% x $850,000), but no more.”

ANALYSIS

The plain language of the insurance contract limited coverage. Penn National did not contract to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’” without qualification. Rather, it contracted to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’ . . . to which this insurance applies.” The policy also clearly limited the insurer’s obligation to damage that “occurs during the policy period.”

Not only was Penn National’s coverage limited to the policy period, it was also restricted to premises that Attsgood Owned, Rented or Occupied. This language precluded the Fourth Circuit Court of Appeal from holding Penn National liable for injuries that occurred when Gondrezick, and not Attsgood, owned the house at 1740 East Preston Street. Roberts asked the Fourth Circuit to turn a blind eye to the policy wording and hold an insurance company liable for risks for which it never contracted and for which it never received premiums. It refused to do so.

In addition to ignoring contractual language, Roberts’s position conflicts with Maryland law. In lead paint or continuous trigger cases such as this one, Maryland courts engage in a “pro rata by time-on-the-risk allocation” of liability.

No one disputes that Attsgood and Gondrezick are jointly and severally liable and that each is responsible for the entire judgment under longstanding principles of tort law.

The question before the Fourth Circuit was not whether Attsgood is liable for the entire $850,000 judgment. The question was whether Penn National is responsible for the entire $850,000 judgment. Finding that the question can be answered only by reference to the insurance contract, which necessarily involves the application of contract law, the Fourth Circuit refused to apply tort law and insisted on applying contract law to a contract dispute.

While contractual text and Maryland precedent provide ample reason to reject Roberts’s position, it is also worth noting that her approach to allocating liability would upend insurance underwriting. As multiple courts have pointed out, Roberts’s approach would impose the same amount of liability on an insurance company that provided coverage for one month as the insurer that provided coverage for 10 years.

An insurance contract is, at most, an agreement to accept a premium in exchange for a contractually defined risk. If an insurance company cannot limit its risk to a defined period, it will be unable to determine the precise risks assumed under a contract, which in turn will prevent it from accurately pricing coverage. Not only will this hinder rational underwriting, but the higher premiums necessary to compensate for this rising uncertainty will be passed on to policyholders everywhere.

We recognize that Roberts may not be able to recover her entire judgment from either Attsgood or Gondrezick. It is a dispiriting but inescapable fact that sometimes really bad things happen, and those responsible are either insolvent or inadequately insured. But that regrettable reality does not allow a court to ignore state law, to hold an insurance company to a contractual provision to which it never agreed, or to scramble together whole areas of law that are conceptually distinct.

As the district court suggested, Penn National’s coverage ended “under the terms of the insurance contract” when the property was sold to Gondrezick. There was nothing ambiguous about this aspect of coverage. After Attsgood sold the East Preston Street property to Gondrezick, it obviously neither owned, rented, nor occupied those premises.

The law may not be difficult here, but the human costs incurred are undeniably hard. It is sad that Roberts may recover only partially on her judgment. The jury obviously believed this child suffered significant brain damage from lead poisoning and that Attsgood and Gondrezick were liable. The condition of the property and the failure to procure appropriate insurance were the property owners’ responsibility. Roberts’s misfortune cannot be laid at Penn National’s feet, for that company has not disputed that it must pay that portion of the judgment to which its policy applied.

For the reasons stated herein, Penn National is liable for 22/55, or 40 percent, of the $850,000 judgment. The district court’s judgment is therefore affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.

ZALMA OPINION

As the Fourth Circuit made clear, an insurance contract is, at most, an agreement to accept a premium in exchange for a contractually defined risk. Young Ms. Roberts was seriously injured by the actions of the person insured over a long period of time as she ingested lead into her system from a poorly maintained property. She won her lawsuit against the tortfeasors. One was uninsured and the other was insured only for a short period of time during the time Ms. Roberts was injured.

The Fourth Circuit was correct when it concluded that it is a dispiriting but inescapable fact that sometimes really bad things happen, and those responsible are either insolvent or inadequately insured. But that regrettable reality does not allow a court to ignore state law, to hold an insurance company to a contractual provision to which it never agreed, or to scramble together whole areas of law that are conceptually distinct.

In cases where an injury occurs over a long period of time where periods of insurance, no insurance or multiple insurance policies apply to the risk, Maryland and the Fourth Circuit apply a reasonable application of clear and unambiguous policy language. To do otherwise would be a dangerous rewriting of an insurance contract that might help one little girl but would harm the entirety of the insurance buying public.

Courts must do justice. They should not, nor can they, breach or bend the law of contracts to do what they perceive to be justice. Ms. Roberts and her lawyers will recover 40% of the judgment from the insurer. She and her lawyers must search out all of the assets of the tortfeasors and take them through the process of the court not from an insurer that did not take any premium to recover the rest of the judgment.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

North Star Taxi, Inc. (North Star) challenged the district court’s confirmation of an arbitration award, arguing that the arbitrator misapplied the law and that judicial review of the award is warranted. In North Star Taxi v. Progressive American Insurance Company, No. A11-757 (Minn.App. 01/30/2012) the Minnesota Court of Appeal was asked to determine if the arbitration agreement was against public policy and thus unenforceable so that the Court of Appeal could review the findings of the arbitrator.

FACTS

North Star is in the business of leasing, renting, and bailing taxicabs for use by independent contractors. Progressive American Insurance Company (Progressive) provides automobile insurance. North Star and Progressive are parties to a voluntary arbitration agreement obligating them to resolve their property-damage and business-interruption-loss claims through inter-company arbitration before Arbitration Forums, Inc. (AFI). The agreement requires application of Minnesota law and provides that arbitration awards are “final and binding without the right of rehearing or appeal.”

In February 2008, a motor-vehicle accident occurred between one of Progressive’s insureds and one of North Star’s bailee-independent contractors. Pursuant to the arbitration agreement, North Star presented its property-damage and business-interruption-loss claims to an AFI arbitrator. The arbitrator determined that each of the two drivers was 50% responsible for the accident. Accordingly, the arbitrator reduced North Star’s undisputed damages by 50% based on the bailee-independent contractor’s negligence.

North Star moved the district court to vacate the award, arguing that the arbitrator’s reduction of North Star’s damages was not authorized under Minnesota’s bailment law. The district court concluded that North Star waived the right to seek vacation of the arbitration award by entering into the arbitration agreement and declined to address the merits of the vacation motion. The district court confirmed the arbitration award, and this appeal followed.

ISSUE

Parties to an arbitration proceeding generally are entitled to limited judicial review under the Minnesota Uniform Arbitration Act (UAA). An arbitrator is the final judge of both law and fact, so the standard of review is extremely narrow.  A district court may vacate an award only if it was issued in excess of the arbitrator’s authority. A court can only modify or correct an award if it does not comport with the arbitrator’s apparent intent.

The issue here is whether North Star waived its right to limited judicial review of the arbitration award by entering into the following provision in the arbitration agreement:

The decision of the arbitrator(s) . . . is final and binding without the right of rehearing or appeal … (Emphasis added)

North Star argued that this contract language did not waive its review rights and, if it did, such waiver is ineffective as a matter of law.

DISCUSSION

Waiver is the voluntary and intentional relinquishment of a known right. Whether the parties intended a waiver of judicial review is determined from the plain language of the arbitration agreement. North Star argued that it did not voluntarily and intentionally relinquish its right to obtain judicial review because the arbitration agreement does not expressly reference the UAA.

Although the arbitration agreement does not expressly reference judicial review under the UAA, the language is broad with respect to the finality of the arbitrator’s decision and the unavailability of any appeal. Based on the plain language of the parties’ voluntary arbitration agreement the Court of Appeal found it had no choice but to conclude that North Star waived its right to judicial review of the arbitration award.

Having determined that the arbitration agreement effects a waiver of the right to limited judicial review under the UAA, the court needed to also determine if the waiver provision is valid before deciding the dispute between North Star and Progressive.

Unless public policy otherwise indicates, parties to an arbitration agreement may waive statutory rights in defining the scope of the arbitration. The Court of Appeal noted that the parties’ arbitration agreement plainly establishes a valid waiver of judicial review of the arbitration award and because the agreement to waive review does not violate public policy, the Court of Appeal concluded that the district court did not err by dismissing North Star’s motion to vacate the award.

The award of the arbitrator was affirmed and North Star was limited to 50% of its loss.

ZALMA OPINION

Arbitration avoids expensive litigation. Avoiding expensive litigation is usually a good thing.

When a party to an insurance policy, especially a high risk policy insuring taxi operations, agrees to limit all disputes to arbitration without a right to appeal, the taxi operator will be able to buy coverage for less money than a policy without a limited arbitration agreement. North Star apparently opted to save money in premium in exchange for the right to seek judicial review of the award of the arbitrator.

In this case North Star entered into a contract voluntarily that clearly and unambiguously agreed to limit North Star’s right to dispute claims with its insurer to arbitration and agreed to not dispute the award of the arbitrator. When North Star did not agree with the arbitrator’s finding it attempted, unsuccessfully, to avoid the arbitration agreement because its agreement was clear on the face of the contract. Reducing litigation is not in violation of public policy because the public policy of Minnesota and every other state is to allow people to agree to alternative methods of dispute resolution.

The lessons North Star learned are that although it saved premium money when it entered into the agreement with Progressive to arbitrate without a right to appeal it actually gave up the right to seek judicial review and appeal — that is — that contracts with insurers actually mean what they say. It also learned that arbitration agreements should never be signed unless the parties have independent advice of counsel so that they can make a wise decision to give up the right to judicial and appellate review.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The E-Book

© 2011

Barry Zalma

Every lawyer retained to prosecute or defend a civil suit should begin the representation with efforts to find insurance coverage for the benefit of the client. Indeed, a lawyer that does not know the law of insurance is litigating with duct tape firmly placed across his or her mouth.

A few examples of how lawyers are funded by the insurance industry include the following:

•     The tort lawyer is retained by a plaintiff and subject to a contingency fee agreement whose fee, is paid by an insurer.

•     The tort defense lawyer is paid directly by the client’s insurer(s).

•     The insurance defense lawyer is paid directly to defend an insurer.

•     The insurer client pays the insurance coverage lawyer whose practice is limited to litigating against insurers.

•     Insurers pay the regulatory lawyer who deals with regulatory agencies on behalf of or against the interest of insurers a fee.

•     An insurer pays the patent lawyer who determines that the suit for infringement is covered by insurance.

•     An insurer pays the transactional lawyer who writes contracts to compel insurance to be available for the benefit of his or her client.

•     The prosecutor whose practice is limited to the prosecution of insurance fraud is paid by funds paid to the state by insurers to prosecute crimes against insurers.

•     The criminal defense lawyer who defends a client against the crime of insurance fraud is paid by his client as a result of an insurance claim.

Every civil lawyer should understand that a major part of the law firm’s income comes, directly or indirectly, from insurance. Since insurance is an important source of funds for success of a civil law practice it is imperative that every lawyer have a basic understanding of the law of insurance. Similarly, prosecutors or criminal defense lawyers dealing with the crime of insurance fraud must understand the law of insurance to properly represent the state or the defendant. Indeed, the lawyer who is ignorant of the law of insurance cannot adequately serve his or her clients.

The E-book was designed to provide the law student, the practicing lawyer, the insurance lawyer, and insurance professionals with a complete survey of property and casualty insurance with the full text of insurance-related decisions of the United States Supreme Court, the US District Courts of Appeal, state appellate courts, and foreign courts that have molded the law that governs insurance transactions in the United States. It is updated daily by this blog, Zalma on Insurance.

Those who are new to the subject of insurance will find this book a resource and a starting point for research. It can also be used as a basic training course for those who are just beginning the practice of insurance law or the claims business; for those representing insurers, those representing those who are insured; or for those litigating against insurers the book can be used in conjunction with, or as a supplement to, the author’s other books and blog. 

The E-book, in more than 1100 pages, begins with a history of insurance starting with a 1776 decision of the British House of Lords that established the existence of the implied covenant of good faith and fair dealing and pushing through to issues relating to interpretation of insurance contracts, remedies available to insurers and the policyholder, and the litigation of issues with the full text of definitive cases and analysis by Mr. Zalma, an internationally recognized insurance coverage, insurance claims handling, insurance fraud and insurance bad faith expert and consultant. It also has appendices including the full text of the California Standard Fire Insurance Policy, a glossary of insurance terms, and some insurance fraud statutes from across the country.

Available for purchase at http://www.zalma.com/INSURANCE.htm.

A Group of banks asked the Minnesota Court of Appeal to overturn a summary-judgment that determined that the banks loan losses arising out of a financial-misrepresentation scheme were not covered by financial-institution bonds purchased from the insurers.  In Alerus Financial National Association, et al v. St. Paul Mercury Insurance Company, et al, No. A11-680 (Minn.App. 01/30/2012) five loans obtained between December 2004 and March 2006 by businessman Louis J. Pearlman, who pleaded guilty to various financial crimes, including a case involving a bank-fraud scheme that related to misrepresentations about the financial condition of Pearlman and his businesses.

FACTS

Pearlman retained North American Capital Markets (NACM), a Minneapolis-based investment broker, to place the loans. NACM in turn retained Minneapolis attorney James Dierking, of Winthrop and Weinstine, P.A., to assist with closing the loans. Each of the loans was structured to have one lead, or servicing, bank that loaned the money and later serviced the loan, with numerous other banks (“participating banks”) buying various percentages or “participations” in the loans. As collateral for the five loans, Pearlman offered guarantees from one of his business entities, Trans Continental Airlines (TCA), as well as TCA stock. Pearlman represented to the banks that TCA was a successful charter airline company. He later admitted that the corporation existed only on paper and had no business or assets.

Pearlman eventually defaulted on the loans, and each of the participating banks made claims against financial-institution bonds purchased from one of the three insurers. The insurers denied coverage, and the banks initiated this breach-of-contract and declaratory-judgment action. The insurers moved for summary judgment, arguing that appellants’ losses did not fall within the bonds’ coverage for losses resulting directly from employee dishonesty or forgery. The district court granted the motion, and this appeal followed.

ANALYSIS

Resolving the issues in this appeal requires us to interpret the financial-institution bonds (FIBs or bonds) issued by the insurers. FIBs insure against the dishonesty of a financial institution’s employees and provide coverage for other crime risks.

Courts have treated FIBs as insurance policies, applying general rules of contract construction to derive their meaning.  The banks first challenged the district court’s determination that the loan losses did not fall within the insurers bonds’ insuring clauses for employee dishonesty.  The banks’ assertions that their losses are covered by these clauses center on the conduct of Dierking, the attorney who closed the five Pearlman loans, and particularly on Dierking’s admitted failure to disclose to appellants his discovery, before closing the second loan, that the amended articles of incorporation necessary to authorize the stock being used as collateral had not been filed with the Florida Secretary of State.

Although not identically worded, the insuring clauses for employee dishonesty in both bonds provide as requisites to coverage of loan losses that

(1)  an employee

(2) commits dishonest or fraudulent acts

(3) with the intent to cause the insured to suffer a loss and

(4) seeks or obtains improper financial gain.

The bonds define an employee to include an attorney who was “retained by” and was “performing legal services for” the insureds. The district court determined that Dierking was not an employee of the banks as a matter of law, relying on both the language of the participation agreements between the servicing and participating banks a 2008 decision of the Minnesota Supreme Court.

Under Minnesota law, the existence of an attorney-client relationship is a question of fact that can be established under a contract or tort theory.

Dierking’s awareness of the identities of the participating banks does not support an inference that he was on notice that he was expected to represent them-much less that he agreed to represent the banks.

The banks also challenged the district court’s reliance on the language of the participation agreements, arguing that the agreements only governed the relationship between the servicing and participating banks, and do not bear on the relationship between Dierking and the participating banks.  In particular, the banks represented in the agreements that they were relying upon their own due diligence, credit investigation and credit analysis, and not on any representations, warranties or statements of the servicing banks.

Although the participation agreements may not be dispositive of whether Dierking was appellants’ employee, they provide relevant evidence that was appropriately considered by the district court.

The banks’ subjective belief that they were represented by Dierking is not, nor can it be, sufficient to demonstrate an implied contractual attorney-client relationship between Dierking and the banks. Minnesota follows the objective theory of contract formation, under which the parties’ outward manifestations are determinative, rather than either party’s subjective intent.

The banks also asked the court to rely on evidence that Dierking was paid out of loan proceeds to which they contributed. In some circumstances, determining who paid an attorney may help in identifying the client. The Court of Appeal concluded that the payment of fees was not helpful to its determination. While Dierking testified that he was paid from loan proceeds, he also testified that it was Pearlman, as the borrower, who actually paid his fees. Because none of the participating banks directly paid Dierking’s fees the Court of Appeal rejected the bank’ assertion that their contribution to Dierking’s fees creates a genuine issue as to whether Dierking was their employee. Since Dierking was not the banks’ employee as a matter of law any losses attributable to his alleged misconduct are not covered by the bonds.

In addition the district court granted summary judgment to the insurers on the forgery claims based on its determinations that the banks’ loan losses were not directly caused by reliance on the forged documents as a matter of law and that the forged corporate actions were not guarantees within the meaning of the bonds.

Although the bonds do not define “resulting directly from,” a majority of courts that have addressed the issue have held that loan loss is not directly caused by reliance on forgeries in documents constituting or referencing collateral when the collateral is worthless at the time of the loan.  It is well settled that the standard bankers bond is not a form of credit insurance. And a proper interpretation of the insuring clauses for forgery construes the insuring clauses in the context of the bond as a whole, taking into consideration the purposes of the bond.  Accordingly, the Court of Appeal concluded that the banks’ loan losses are not covered under the insuring clauses for forgery because those losses did not result directly from the forgeries, but rather from the worthlessness of the TCA guarantees and stock.

Pearlman has admitted that TCA did no business and that it existed only on paper  and for the purpose of facilitating his fraudulent schemes.

ZALMA OPINION

Whenever a lawyer and client agree to representation it is prudent for both to enter into a agreement as to the parameters of the representation. If a bank wants to have a lawyer involved in a transaction to represent them so that he is an “employee” under a bankers blanket bond they must reduce that relationship to writing. In this case the banks tried to create an implied in fact relationship between the banks and the lawyer.

In fact the banks entered into a written contract between themselves and agreed they were not relying on the lawyer retained by Perlman but were relying only upon their own due diligence, credit investigation and credit analysis, and not on any representations, warranties or statements of the servicing banks.

Perlman was a criminal. He defrauded the banks. Their due diligence, credit investigation and credit analysis was wanting. A real investigation would have made it clear to the banks that the security pledged for the loan was worthless. They fell prey to a devious borrower.

A bankers’ blanket bond, as an insurance policy, only indemnifies against the risks of loss taken by the insurer as a result of a contingent or unknown event. They were the victims of a fraud by an outside source, Perlman, not an employee and for that reason their claims against the insurers was fated to, and did, fail.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Box Falling Of Truck Causally Connected to Injury

Zalma on Insurance in Top 50

After a box fell off an unidentified truck Larry G. Squires (Squires) attempting to avoid the box crashed and was injured. He applied for uninsured motorist coverage which was denied because the insurer claimed the accident was caused by the box not by a motor vehicle. The insurer filed a successful complaint for declaratory relief and Squires Appealed. In Allstate Property and Casualty Insurance v. Larry G. Squires, No. 11-1664 (3d Cir. 01/26/2012) the Third Circuit Court of Appeal was called upon to resolve the issue.

Allstate Property and Casualty Insurance Company (“Allstate”) was resolved when the trial Court granted it a judgment on the pleadings as it held that Squires’ injuries did not “arise out of ownership, maintenance or use of an uninsured auto” as his policy required for Allstate to be liable to him for UM benefits.

Facts

On October 20, 2008, Squires was driving his pickup truck on State Highway 51 in Beaver County, Pennsylvania when he was injured after swerving to avoid an approximately two-foot square cardboard box lying in the middle of his lane. The parties to this action are uncertain as to how the box came to be left on the road but, for purposes of its motion in the District Court, Allstate stipulated that an unidentified vehicle dropped the box.

The Policy

Squires’s policy provides, in relevant part:

[W]e [Allstate] will pay damages to an insured person [Squires] for bodily injury which an insured person is legally entitled to recover from the owner or operator of an uninsured auto. Bodily injury must be caused by accident and arise out of the ownership, maintenance, or use of an uninsured auto.

The policy’s language tracks the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”), which requires that insurers offer UM benefits in motor vehicle liability insurance policies.The MVFRL provides for “uninsured motorist coverage” as follows:

Uninsured motorist coverage shall provide protection for persons who suffer injury arising out of the maintenance or use of a motor vehicle and are legally entitled to recover damages therefor from owners or operators of uninsured motor vehicles.

The MVFRL defines “uninsured motor vehicle” to include, inter alia:

An unidentified motor vehicle that causes an accident resulting in injury provided the accident is reported to the police or proper governmental authority and the claimant notifies his insurer within 30 days, or as soon as practicable thereafter, that the claimant or his legal representative has a legal action arising out of the accident.

Although Squires’s insurance policy – unlike the MVFRL – does not include unidentified motor vehicles in its definition of “uninsured auto,” Allstate did not dispute – and the District Court, quite reasonably in view of section 1702, assumed – that the unidentified vehicle was an “uninsured motor vehicle” for purposes of the Court’s coverage analysis.

The Sole Issue

The sole issue that the Court decided was “whether an accident caused by a box which fell from an uninsured motor vehicle can be attributed, as a matter of law, to the ‘ownership, maintenance or use’ of an automobile.”

Trial Court Decision

The Court answered this question in the negative, concluding that there is UM coverage for policies containing the “arising out of” language only when a vehicle – and not some other object such as the box – was “the instrumentality causing . . . the [a]ccident.” The trial Court granted Allstate’s motion for judgment on the pleadings, denied its motion to dismiss the counterclaims as moot, and dismissed Squires’s counterclaims as moot. Squires timely appealed.

Discussion

The parties agree that Pennsylvania law governs the court’s interpretation of Squires’s policy. Under Pennsylvania law, the interpretation of a contract of insurance is a matter of law for the courts to decide. In interpreting an insurance contract, the court is required to ascertain the intent of the parties as stated in the language of the written agreement. When the policy language is clear and unambiguous, the court must give effect to the language of the contract.

The Pennsylvania Supreme Court case of Manufacturers Casualty Insurance Co. v. Goodville Mutual Casualty Co., 170 A.2d 571 (Pa. 1961), held that “[c]onstrued strictly against the insurer, ‘arising out of’ [in an insurance policy] means causally connected with, not proximately caused by. ‘But for’ causation, i.e. a cause and result relationship, is enough to satisfy this provision of the policy.”

This formulation of “arising out of” is now well-settled in Pennsylvania. It has been applied in various insurance law settings.  Squires at this time only needed to allege  that the unidentified vehicle’s use was a cause of his injuries which would not have occurred but for the use of the unidentified vehicle.

The Third Circuit concluded, if faced with a set of facts similar to those here, the Pennsylvania Supreme Court would hold that Squires’s accident arose “out of the ownership, maintenance, or use of an uninsured auto.” In Squires’ case the Third Circuit inferred, since the parties stipulated, that the unidentified vehicle directly was involved in the accident as it was transporting the box as cargo – a common use for many types of vehicles traveling on a roadway.

Therefore, when the unidentified vehicle dropped the cardboard box, it had more than an “incidental involvement . . . in the situation that gave rise to Squires’ injuries.” The accident was a direct consequence of the use of the vehicle for its intended purpose.

As the Supreme Court of Pennsylvania set forth in Goodville, the central inquiry in assessing whether an incident “arose out of the maintenance, ownership, or use” of a motor vehicle concerns causation, which is informed by – but does not necessarily turn on – the “instrumentality” directly causing the accident.

The court in Fox v. State Automobile Mutual Insurance Co., 461 A.2d 299 (Pa. Super. Ct. 1983), faced a situation involving a plaintiff who was injured after tripping over debris left when a car suddenly crashed into her living room. In deciding that the plaintiff qualified as a “victim” under an insurance policy issued pursuant to the Pennsylvania No-fault Motor Vehicle Insurance Act, the court determined that the causal connection between the vehicle and the plaintiff’s injuries was strong enough to support a conclusion that the accident “arose out of” the maintenance and use of the vehicle. Finally the Third Circuit noted that the MVFRL is to be liberally construed in order to afford the greatest possible coverage to injured claimants and in close or doubtful insurance cases, a court should resolve the meaning of insurance policy provisions or legislative intent in favor of coverage for the insured.

ZALMA OPINION

This case is a clear explanation of why interpreting an insurance policy is different than interpreting whether a person is entitled to tort damages.  The single issue was resolved in favor of Mr. Squires because, but for the box falling off an unidentified truck, his accident would not have occurred. Boxes do not appear in the middle of an interstate highway by osmosis – they most like come off another vehicle. Allstate agreed that the box fell off a truck or other vehicle but since there was no contact with the unidentified vehicle, nor was it even seen, by Squires it believed the accident did not arise out of the use of an automobile, a necessary requirement for coverage to exist under an uninsured motorist policy. Allstate convinced the trial court.

The Third Circuit disagreed with a logical conclusion that the box was causally connected to the use of an automobile since, but for the box falling off a truck, Squires would need not swerve to avoid it and the accident would not have happened.

Insurers, as did the Third Circuit, read their policies as broadly as possible to provide coverage for the insured. Allstate acted in good faith, since there existed a series of Pennsylvania cases strong enough to convince the trial court. Sometimes court decisions – like those relied upon by Allstate and the trial court – cause insurers to rely on the statement of the courts rather than upon the need to fulfill the covenant of good faith and fair dealing.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2564 1 http://zalma.com/blog/?p=2559 http://zalma.com/blog/?p=2559#comments Fri, 03 Feb 2012 15:33:52 +0000 Barry Zalma http://zalma.com/blog/?p=2559 Continue reading →]]> State Attempts to Compel Insurer To Take Risks It Does not Want to Take

Insurance is a risk taking business. To effectively and intelligently make decision on which risk to take and which risk to refuse an insurance underwriter relies on information available that now includes the use of computer generated models. The use of such information, both actuarial and computer modeled, is part of the basic underwriting function.

As the California Court of Appeal recognized back in 1955: “An insurance company is entitled to determine for itself what risks it will accept … It has the unquestioned right to select those whom it will insure … to the end that a wise discrimination may be exercised in selecting its risks.” (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]) Discrimination in risks taken is, therefore the essence of insurance.

The Supreme Court of Marlyand was called upon to decide whether Allstate Insurance Company (Allstate) may refuse, that is wisely discriminate, to write new homeowners policies in certain geographic areas of the State. The state alleged that prohibitions against discrimination found in its code § 27-501(a) must be considered by the Commissioner to refuse Allstate’s petition to stop insuring high risk areas and claimed it failed in that duty in People’s Insurance Counsel Division v. Allstate Insurance Company, et al., No. 60 September Term 2011 (Md. 01/25/2012).

FACTS

In a memorandum and order filed on his behalf by an Associate Deputy Commissioner, the Commissioner concluded that the filing was subject to administrative review under the Maryland Code and that it satisfied the pertinent criteria under the statutes. People’s Insurance Counsel Division (PICD), a unit within the Office of the Attorney General, tried the case before the Circuit Court for Baltimore City who affirmed both aspects of the Commissioner’s ruling. On PICD’s appeal, the Court of Special Appeals affirmed the Circuit Court judgment, but its conclusion as to the statute rested on alternative grounds — first, that the statute did not apply to the filing and second, that, even if it did, the statute was not violated.

BACKGROUND

Section 19-107(a), which is part of the Title of the Insurance Article dealing with property and casualty insurance, provides, in relevant part:

“An insurer may not refuse to issue or renew a contract of … homeowners insurance … solely because the subject of the risk or the applicant’s or insured’s address is located in a certain geographical area of the State unless:

(1) at least 60 days before the refusal, the insurer has filed with the [Insurance] Commissioner a written statement designating the geographic area; and

(2) the designation has an objective basis and is not arbitrary or unreasonable.”

Title 27 of the Insurance Article deals generally with unfair trade practices in all lines of insurance. Subtitle 5, of which § 27-501 is a part, prohibits a range of discriminatory practices. Section 27-501(a) provides:

“(1) An insurer or insurance producer may not cancel or refuse to underwrite or renew a particular insurance risk or class of risk for a reason based wholly or partly on race, color, creed, sex, or blindness of an applicant or policyholder or for any arbitrary, capricious, or unfairly discriminatory reason. (2) Except as provided in this section, an insurer or insurance producer may not cancel or refuse to underwrite or renew a particular risk or class of risk except by the application of standards that are reasonably related to the insurer’s economic and business purposes.” (Emphasis added)

On February 13, 2006, Allstate filed with the Maryland Insurance Administration (MIA) a new underwriting rule stating that, from and after April 10, 2006, due to “catastrophe management actions,” it would no longer write new homeowners insurance policies on properties in all ZIP Codes located within what it defined as Hurricane Bands 4, 5, and 6. The exclusion, as so identified, would include all of St. Mary’s, Somerset, Talbot, Wicomico, and Worcester Counties and significant parts of Anne Arundel, Calvert, Charles, Dorchester, Prince George’s, and Queen Anne’s Counties.

On May 31, 2007, MIA advised Allstate that it had reviewed the filing under § 19-107 and, based on the information submitted, concluded that the geographic designation had an objective basis and was neither arbitrary nor unreasonable. The next day, PICD, which had received a copy of the filings, requested a hearing, which the Commissioner granted, and a stay, which the Commissioner denied. Allstate was permitted to intervene. With the denial of the requested stay, the new underwriting rule was put into effect on June 4, 2007; Allstate stopped accepting new applications on that date.

The hearing was conducted by the Commissioner on December 13 and 14, 2007. Most of the evidence presented at the hearing came from the testimony, some of it pre-filed, of three expert witnesses called by Allstate – Robert Newbold, an expert in computer modeling, Ryan Michel, an Allstate actuary, and David Chernick, an expert in actuarial science.

Allstate, in the opinion of the Commissioner established several sequential propositions.

1. That managing catastrophic risk presents a unique challenge to insurance companies, for at least two reasons, one dealing with the distribution of the risk and the other dealing with the ability to measure the risk.
1. As to the first, Mr. Michel explained that, for many types of insurance, risk is diversified.
2. The more policies that are written, the less the overall risk in any particular event.
2. Catastrophic risk is different, the more insurance written in a specific area that may be subject to a catastrophic event, the greater the volatility.
1. Mr. Chernick confirmed that point – that adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk.
2. Mr. Newbold observed that, because of the lack of reliable information, it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur.
1. It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;
2. It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses;
3. Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;
4. It provides a means to determine the impact of new scientific information; and
5. It provides a framework for performing sensitivity analyses and “what-if” studies.
3. The model is updated annually.
1. The one used by Allstate in this proceeding was Model 7.0, which is used in 28 States, including the entire Eastern Seaboard.
3. In considering whether Allstate had met its burden of showing compliance with both statutes the Commissioner noted that in some cases insurers have been required to provide statistics to demonstrate the relationship between the underwriting standard applied and the insurer’s business and economic purposes.
1. The Commissioner concluded that that kind of evidence is not required in all cases.

The decision by Allstate to cease writing new property insurance policies in Hurricane Bands 4, 5, and 6 was based on a model. Allstate took the top 5% of events from the model and calculated “damage ratios” for each ZIP Code in the State (as well as in contiguous States).

Mr. Chernick stated that Allstate could not manage its Maryland catastrophe exposure simply by purchasing reinsurance. In light of the amount of reinsurance that would be needed, given Allstate’s significant market share, Allstate would need a consortium of 15 to 20 reinsurers, but there is not the capital available to purchase that amount of insurance. Mr. Chernick also explained why, in his view, additional catastrophic risk could not be managed through increased premiums. He gave as an example a home that suffers a total loss of $300,000. The premium for the insurance is $1,000, of which $250 represents coverage for the catastrophic risk. At that rate, it would take Allstate 1200 years to recover the loss. Even if Allstate were to increase the premium 10-fold and charge $2,500 instead of $250 for the catastrophic risk, it would take 120 years collecting that premium to recover the loss.

The Commissioner’s ultimate findings were that (1) the process used by Allstate to arrive at its business decision produced an underwriting decision that is reasonable and supported by reliable data, (2) it therefore complied with § 27-501(a), and (3) the geographic designations had an objective basis and were not arbitrary or unreasonable, and (4) they therefore complied with § 19-701(a).

DISCUSSION

After considering the textual language and the legislative history of §§ 19-107(a) and 27-501(a), both of which are part of the Insurance Code administered by the Commissioner, the Commissioner concluded that both statutes were applicable – that the Legislature did not intend to exclude from the anti-discrimination and nexus requirements of the statutes.

Allstate was not proposing to cease writing homeowners’ insurance in Maryland. It intended to remain very active in that market, including properties that it currently insured in the designated geographic areas. What it determined to do was to refuse to underwrite new business in those areas, which quintessentially constitutes discrimination against a class of applicants – the class being homeowners who live in the designated areas but were not current Allstate policyholders.

The Maryland Supreme Court concluded it can find nothing in either the texts of the two statutes or in their respective legislative histories to suggest an intent on the part of the General Assembly to give an insurer desiring to discriminate against insureds or applicants on a geographic basis a free pass to violate the prohibitions in the statutes.  The judgment was affirmed.

ZALMA OPINION

Insurance is not a benefit provided by a government. It is a business regulated by the various states who are called upon to keep insurers from wrongfully discriminating against residents of the various states for reasons prohibited by state statutes. Insurance regulators, needing to protect the public against risks of loss also need insurers to make a reasonable profit that can only be obtained by the insurer exercising its unquestioned right to select those whom it will insure to the end that a wise discrimination may be exercised in selecting its risks and thereby make a profit from its efforts.

The state of Maryland found that Allstate, exercising wise discrimination to avoid excessive risks of loss in areas of the state subject to catastrophic damage from hurricanes, did so appropriately and did not violate any statute or regulation.

Insurers who do not discriminate wisely on the risks it will take or not take will lose and go out of business. Other states should follow the lead of Maryland’s Supreme Court and understand the direction provided by the California Court of Appeal in 1955 on the business of insurance.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

]]> http://zalma.com/blog/?feed=rss2&p=2559 0 http://zalma.com/blog/?p=2555 http://zalma.com/blog/?p=2555#comments Thu, 02 Feb 2012 15:08:40 +0000 Barry Zalma http://zalma.com/blog/?p=2555 Continue reading →]]> VIRGIN GROUND

The First Circuit Court of Appeal was called upon, applying the law of Puerto Rico, whether a CGL policy provided coverage to an insured for claims that sounded in contract rather than in tort. The issue had never been brought to the First Circuit before with regard to contract damages and it made its decision as a decision of first impression. The First Circuit reached its decision in Lopez & Medina Corp., D/B/A Emmanuel Travel & Tours v. Marsh Usa, Inc., As Agent For Certain Subscribing and/Or Participating, No. 10-1702 (1st Cir. 01/26/2012).

FACTS

Plaintiff-appellant Lopez & Medina Corp. (“L&M”) appealed the district court’s order denying its cross-motion for summary judgment. The cross-motion was denied on the grounds that the insurance policy, pursuant to which L&M sought coverage, issued by defendant-appellee United States Aviation Underwriters, Inc. (“USAUI”), did not cover L&M’s losses arising from an alleged breach of contract.

In addressing whether USAUI’s policy covered L&M’s contractually based claim the First Circuit noted that it was treading on virgin ground in its circuit because it had not had the opportunity to address whether the phrase “legally obligated to pay as damages” in a commercial general liability (“CGL”) policy, which usually covers only tort claims, also provides coverage for claims in an underlying action arising out of and related to a contract between the parties.

On September 1, 2001, USAUI and other defendant co-insurers issued Airline Insurance Form PA-01, Policy #SIHL1-200A (the “Policy”) to Pace Airlines, Inc. (“Pace”). Pace was the “Named Insured” under the Policy, and two Boeing 737-200 aircraft were listed as the insured subjects. The Policy covered certain risks assumed by its insured, Pace, in its contractual arrangements with other companies, which generally consisted of charter programs.

Patriot and L&M prepared for their business venture, titled “Dream Air operated by Pace Airlines,” to take off. On June 22, 2002, the first chartered flight left Luis Munoz Marin International Airport, departing from San Juan, Puerto Rico to the Dominican Republic. The First Circuit, analyzing the factual situation with a plethora of puns stated the facts, including that “[b]usiness seemingly continued to soar into early July, with additional flights occurring on July 3, 4, 7, 8, 11, 12, and 14 of 2002. However, it was not long before L&M and Patriot’s business arrangement began to experience turbulence. As of mid-July, L&M and Patriot’s Dream Air operation had become a business venture nightmare. By July 18, 2002, Patriot had taken action and terminated the Passenger Agreement. Two months later, Patriot filed for voluntary bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Northern District of Texas.

L&M alleged three causes of action in its complaint:

1. the named defendants were liable under Puerto Rico’s Direct Action Statute, P.R. Laws Ann. tit. 26, § 2003, for risks insured under the Policy;
2. declaratory judgment, establishing that one or more of defendants’ insurance policies provided coverage for those risks associated with the breach of the Passenger Agreement, Charter Agreement, or any other agreements concerning Patriot and Pace’s charter operations; and
3. a determination that the Policy insured against a breach of contract risk, and therefore, defendant-insurers were directly liable to L&M within the maximum limit of their combined policies for losses arising from the alleged breach, which L&M contended amounted to ten million dollars.

Specifically, defendants requested, and the trial court agreed, that the district court dismiss the case with prejudice because the undisputed facts (namely, the plain language of the Policy) showed that the Policy did not cover L&M’s alleged breach of contract claim, regardless of whether a breach of contract ultimately was or was not established. The district court rejected L&M’s motion, concluding that the Policy “clearly and unambiguously does not provide coverage for a breach of contract claim.”

DISCUSSION

Insurance Policy Construction Under Puerto Rico Law

Puerto Rico law governs this diversity case. Article 1233 of the Puerto Rico Civil Code provides that when the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall be observed. On the other hand, where a policy’s language is unclear, we must construe the provisions against the insurer.

The First Circuit was aware, however, that where a contract’s wording is explicit and its language unambiguous, the parties are bound by its clearly stated terms and conditions, with no room for further debate. The court cannot dwell on the “alleged” intent of the parties at the time they entered into the contract.

Whether the Policy Extends Coverage to L&M’s Claims

L&M’s argument on appeal was that the Policy – in contrast to the district court’s finding – is not limited solely to tort claims, but instead covers both contract and tort actions. Thus, L&M’s claims also must be covered under the Policy. Because the analysis centers on the Policy’s language, which serves as the best evidence of the parties’ intentions, the First Circuit addressed the relevant terms of the CGL provision.

L&M’s Claims

A careful review of L&M’s pleadings, motions, and arguments on appeal establishes that L&M’s allegations against USAUI – based on L&M’s asserted damages for Patriot’s alleged failure to provide chartered air transport via Pace – sound in contract. For example, in its complaint, L&M repeatedly alleges that indirect air carrier Patriot (which leased aircraft from direct air carrier Pace) breached its written Passenger Agreement with L&M. L&M similarly argues in its cross-motion for summary judgment that Patriot breached its Passenger Agreement with L&M and therefore coverage for L&M’s resulting losses should extend to L&M under the Policy.

L&M’s arguments on appeal – generally, that the district court improperly limited L&M’s allegations to a breach of contract claim, despite defendants’ tortious act of refusing or withholding of transportation – do little to persuade the First Circuit otherwise as to the contractual nature of its claim.  Without belaboring the point, L&M repeatedly asserts in its complaint that Patriot breached its contractual obligations to L&M, and that such breach and its resulting losses are covered under the Policy. At no point in the complaint does L&M ever clearly or expressly assert a tort violation. Thus, in order for L&M to receive coverage under the Policy, it must establish that the Policy’s coverage extends to contract-based claims.

Relevant Policy Terms

L&M directs us to specific provisions in the Policy which it alleges support its claim of coverage. The contested form of coverage is that provided under “Part I – Liability Coverage,” also referred to by the parties as the “CGL provision.” L&M based its claim on the following CGL language:

        1. COVERAGE

        The INSURER will pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of:

        B. PERSONAL INJURY arising out of one or more of the following offenses committed during the policy period;

        Group 3. Refusal or withholding of transportation or other public accommodation; but coverage hereunder shall not apply to payments made by the Insured under the provisions of its tariffs or contract of carriage, to persons holding confirmed reserved space on a flight and who are denied boarding on such flights whether such space is relinquished voluntarily or involuntarily.

Furthermore, L&M, throughout its various pleadings and motions, has relied on the following specific language within the CGL provision to support its position that L&M suffered damages due to Patriot’s allegedly bad faith failure to provide air transportation to L&M in violation of their contractual agreement, and that the Policy extends coverage to such damages:

The insurer will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of . . . personal injury arising out of . . . refusal or withholding of transportation or other public accommodation.

The First Circuit noted, with a detailed recitation of cases from other circuits, that the circuit courts of appeals that have ruled on the interpretation of the phrase, “legally obligated to pay as damages,” in a CGL provision have all held that it applies to tort and not contractual liability. Renowned insurance treatises and commentators also agree that the purpose of a CGL policy is to indemnify a party against tort and not contract-based liability.

The phrase, “legally obligated to pay as damages,” refers exclusively “to the liability of the insured arising from the breach of a duty that exists independent of any contractual relationship between the insured and the injured party.”

L&M’s proposed interpretation of the Policy’s CGL language as applicable to contract claims asked the First Circuit to view well-settled insurance law through the looking glass. It is generally not an appellate court to contradict established, well-grounded law. Here, the well-beaten path does indeed make the right road, and the First Circuit refused to accept L&M’s invitation to wander from it. Indeed, the upshot of extending coverage to a breach of contract claim in this instance would be to turn the CGL policy into a performance bond. The First Circuit was unwilling change the policy wording and do what L&M asked.

Conclusion

Finding no ambiguity in the Policy’s clear language, the First Circuit decided to enforce the policy according to its express terms, which, as previously stated, provide no coverage for L&M’s contract-based claims.

In resolving this matter of first impression, the First Circuit  joined the majority of those circuit courts of appeals that have ruled on the issue. The First Circuit also concluded it need not address L&M’s other arguments, as they invite us to look outside the clearly delineated scope of the Policy to external documents and the parties’ alleged intent when entering the agreement.

ZALMA OPINION

The First Circuit followed a plethora of precedent that a CGL is a policy that only insures the person(s) insured against tort liability. It does not, nor can it ever, provide coverage for breach of contract. A CGL policy is not a performance bond nor does it promise, in any way, to guarantee that a person insured will fulfill the terms of a contract it makes with another.

 

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

February 1, 2012

With the third issue of the 16th Year of publication, Zalma’s Insurance Fraud Letter  (ZIFL) reminds each of you that both trial an appellate courts are starting to take insurance fraud seriously. Although insurance fraud continues to decimate the balance sheets of insurers, more perpetrators are convicted,their convictions are affirmed and they are sent to jail.

Mr. Zalma is now a commentator on the web based television news network, World Risk and Insurance News (http://www.wrin.tv) and asks that you click on the link, watch the initial programming and comment on his new segment in the news programs relating to insurance fraud in Mr. Zalma’s video reports called “Who Got Caught” that are online now at: http://wrin.tv/index.php/component/content/article/3-headline/114-qwho-got-caughtq-with-barry-zalma and  http://wrin.tv/index.php/component/content/article/3-headline/108-qwho-got-caughtq-with-barry-zalma.

The current issue of ZIFL reports on a the affirmation of a conviction for insurance fraud by the California Court of Appeal and a different result when prosecutors become over-zealous they caused a conviction can be overturned in Kentucky. Fire cause and origin experts were misused by the prosecution and the court prevented the defendant from having an expert to testify to counter the state’s witnesses, and the court found the state wrongfully obtain a conviction. ZIFL also reports briefly on three fraud convictions across the country that were affirmed by courts of appeal.

Volume 16, issue 3 also contains Chapter II of the serialized novel, “Murder and Insurance Fraud Don’t Mix.”

The issue closes, with a report from the Coalition Against Insurance Fraud on its 2011 Hall of Shame and, as always, with dozens of 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 many years in jail.

ZIFL is published 24 times a year by ClaimSchool, Inc. 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.

Mr. Zalma publishes e-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.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 331 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-book “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US.

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith to insurers and policyholders.  ZIFL reports to its readers that if you or your client face a potential insurance fraud, an insurance coverage issue or an insurance claims handling issue and wish to have the assistance of one of the very best insurance coverage counsel, insurance claims handling expert and consultant, you should contact Barry Zalma at 310-390-4455 or at zalma@zalma.com.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

 

Barry Zalma, Esq.

 

 

“Who Got Caught?” with Barry Zalma

Also see the weekly news at http://www.wrin.tv.

California Insurance Code section 2071 sets forth the California standard form fire insurance policy. It includes a provision requiring the insurer and the policyholder to participate in an informal appraisal proceeding in the event they disagree about the amount of an insured loss. This mandatory appraisal provision, or a similar one, is included in each fire insurance policy in California and is part of the homeowners policy issued by State Farm General Insurance Company (State Farm) to Khosrow and Violet Lalezarian covering their home in Beverly Hills.

The California Court of Appeal was called upon to decide in Khosrow Lalezarian et al v. State Farm General Insurance Company, No. B228361 (Cal.App. Dist.2 01/25/2012)whether, given the limited nature of the appraisal process, the trial court required to order an appraisal when there are disputes not only as to the amount of the insured loss but also as to coverage and the scope of the damage covered by the policy?

FACTUAL BACKGROUND

The appraisal process, a special form of arbitration, is limited:

The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy.’” (Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, 1094.)

The Lalezarians’ home on North Camden Drive in Beverly Hills was damaged in a wind and rain storm on February 21, 2008. At the time the property was insured under a homeowners insurance policy issued by State Farm. The Lalezarians promptly reported the claim. State Farm inspected the property and hired a consulting firm, Tri-Tech Restoration Co., to estimate the cost of repairs. On April 1, 2008 State Farm paid the Lalezarians more than $216,000 in benefits, including approximately $132,000 for the replacement cost of covered repairs based on the consulting firm’s estimates and $83,000 for anticipated additional living expenses during the time the Lalezarians expected to be out of their home while the necessary repairs were made.

With its April 1, 2008 payment, however, State Farm notified the Lalezarians there were significant disagreements as to coverage and the scope of the insured loss.  The Lalezarians hired a contractor to assist with their damage estimates and retained counsel to represent them in connection with the dispute.

18 MONTHS OF NEGOTIATION

Over the following 18 months counsel for the Lalezarians and for State Farm continued to discuss the outstanding issues; further inspections of the Lalezarians’ home occurred; and State Farm made approximately $125,000 in supplemental payments. In October 2009 the Lalezarians’ attorney demanded an appraisal to determine the actual cash value or amount of loss caused by the February 21, 2008 storm pursuant to Insurance Code section 2071. State Farm’s attorney responded, stating appraisal was not appropriate because the Lalezarians had not provided a statement of their position regarding the amount of the covered loss, so there was not yet a “failure to agree”; in addition, counsel wrote, “disputes over the scope of the loss or coverage are not proper subjects of an appraisal.”

The Lalezarians and State Farm remained unable to resolve their differences. On January 25, 2010 the Lalezarian sued. State Farm contended an appraisal is inappropriate when issues exist concerning whether some of the damages to be appraised are covered under the policy.

The trial court explained the Lalezarians’ initial request for an appraisal was improper because there was a dispute as to the scope of the covered loss and an appraisal panel may not determine questions of coverage or interpret policy provisions. The court stated, if permitted, the proposed appraisal “will not expedite this action (as intended by the statute), since it would at most resolve some portion of Plaintiffs’ existing claims.”

THE APPRAISAL PROCESS; THE LIMITED ROLE OF THE APPRAISERS

Fire insurance policies on California properties are required to use standard language specified by the Legislature. The Lalezarians’ homeowners policy includes the statutorily mandated appraisal provision.

An appraisal is a special form of limited arbitration. Notwithstanding the statutory directive to maintain the informality of appraisal proceedings, in general those proceedings must also conform to the procedural requirements of the Arbitration Act. Although an appraisal is a form of arbitration, the appraisers’ powers are far more limited than an arbitrator’s. The appraisers’ authority is restricted by statute and contract language to determining the actual cash value or amount of loss of the specific items submitted for their consideration.  An appraiser has authority to determine only one question of fact, namely the actual cash value or amount of loss of a given item. Nothing more.

Under the statutory provision and related case law construing and implementing it, trial courts have discretion to sever arbitrable claims from claims not subject to arbitration and to stay either the arbitration or the judicial proceeding pending the outcome of the other.

SIMPLY DENYING THE LALEZARIANS’ MOTION TO COMPEL AN APPRAISAL WAS ERROR

The Lalezarians and State Farm agreed to submit to the appraisal process any dispute concerning the actual cash value or amount of loss of items covered by the homeowners policy protecting the Lalezarians’ North Camden Drive residence.  The existence of additional issues not subject to appraisal or arbitration does not vitiate the Lalezarians’ right to an appraisal to resolve their disagreement with State Farm regarding the value of their covered loss.

The trial court disregarded the clear statutory mandate because it believed, with the scope of the covered loss unresolved, ordering an appraisal of the Lalezarians’ claims would almost inevitably lead the appraisal panel to impermissibly determine issues other than the actual cash value or amount of loss of specific items submitted for its evaluation.

The Court of Appeal agreed that the procedural complexities of an immediate appraisal proceeding that troubled the trial court are real. The Court of Appeal concluded that the trial court erred in attempting to avoid the complexities by simply denying the motion to compel an appraisal. Instead, the Court of Appeal ruled that the trial court should have granted the motion and ordered the parties to participate in an appraisal proceeding.

COVERAGE ISSUES ARE QUESTIONS OF LAW

In addition the Court of Appeal concluded the trial court should have exercised its discretion pursuant to the Code of Civil Procedure to order the appraisal, as mandated by statute and the insurance policy, and then stayed the appraisal proceedings pending resolution of the disputed coverage and scope of loss issues.

The dispute between the parties concerning coverage and scope of loss might well be resolved by the court on summary judgment, particularly to the extent it involves matters of contract interpretation, which are questions of law for the court.

Even if State Farm’s concerns were appropriate the purported inefficiency of using the mandated appraisal proceeding is not a sufficient basis for ignoring the plain language of the Insurance Code or the parties’ insurance contract. It is, however, an appropriate ground for the court to exercise its discretion to control the order of proceedings to reduce to the extent possible any unnecessary expenditure of the court’s or the parties’ time and resources. The trial court should resolve the coverage issues by summary judgment and then allow the appraisal to go forward.

ZALMA OPINION

For an insurance claim to be resolved it is necessary that both parties work together with good faith. The fact that State Farm and counsel for the Lalezarians negotiated for eighteen months, convinced State Farm to pay extra money to resolve the claim, only to be sued for bad faith and for a court order compelling arbitration.

As California Supreme Court Justice Kaus said in his dissent to the holding in White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985).

The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. (Emphasis added)

If there was an honest dispute between State Farm and the Lalezarians as to the extent of loss they could have appraised that issue before they spent 18 months negotiating trying to resolve the dispute.

Appraisal is a wonderful tool to resolve disputes as to extent of loss. Failure to use it properly results in litigation that should have been unnecessary.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

The New Hampshire Supreme Court was asked to resolve a dispute between the state and the U.S. Department of Labor (DOL) that sought priority to the assets of the insolvent Home Insurance Company regardless of  the limitations of the McCarrent Ferguson Act claiming a federal preemption of state law in Hilda Solis, Secretary, United States Department of Labor v. the Home Insurance Company and Roger A. Sevigny, New Hampshire, No. 10-cv-572-SM (D.N.H. 01/27/2012). The state claimed that the DOL was engaged in a power grab trying to take funds held in trust by the state and eliminate its rights to control insurance.

FACTS

The Home Insurance Company (“Home”) was declared insolvent in 2003 by the New Hampshire Superior court, which ordered its liquidation and appointed the New Hampshire Commissioner of Insurance as liquidator. During the subsequent insolvency proceeding, the United States Department of Labor (“DOL”) filed a proof of claim seeking over $2.6 million in assessments allegedly owed by Home to a “Special Fund” administered by DOL pursuant to the Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-50 (the “Longshore Act”).

State law establishes the priority in which payments from the assets of liquidated insurers are to be made. The Liquidator assigned DOL’s claim to priority Class III. Home’s assets are generally thought to be insufficient to cover Class III claims, so it is unlikely that DOL will recover anything substantial. The DOL brought this suit against Home and Roger A. Sevigny, New Hampshire’s Insurance Commissioner and Liquidator of Home, seeking a declaration that the Longshore Act preempts the state’s priority-setting statute.

The New Hampshire Superior Court (Merrimack County) declared Home insolvent and ordered its liquidation on June 13, 2003. The Liquidator (Sevigny), by statute, is vested with the title to all of the property, contracts and rights of action and all of the books and records of Home. The Liquidator is required by statute to each claim filed in Home’s liquidation, and determine whether the claim should be allowed, in what amount, and at what priority class level. After doing so, the Liquidator presents his findings to the superior court in the form of recommended action for the court’s approval.

The DOL filed a proof of claim and an amended proof of claim in 2003 and 2005, respectively, for assessments totaling $2,672,527 that Home allegedly owes to DOL under the Longshore Act for the period between 2000 – 2004 (collectively the “claim”). In October 2010, the Liquidator issued a notice of redetermination, which allowed DOL’s claim in full. Pursuant to New Hampshire’s statutes the Liquidator assigned DOL’s claim a Class III priority. He also rejected DOL’s argument that state priority law does not apply because it is preempted by the Longshore Act.

DOL filed this federal declaratory judgment action to press the preemption issue. It also asserted, on alternative state law grounds, that its claim against Home’s assets is entitled to either a Class I or Class II priority.

THE FEDERAL LONGSHORE ACT

DOL’s claim against the assets of Home arose from assessments DOL levied against Home pursuant to the Longshore Act. The Longshore Act creates an extensive workers’ compensation program that protects longshore and other specific classes of workers whose injuries occur upon navigable waters of the United States or adjoining facilities like piers and dry docks. The Longshore Act is similar to workers’ compensation programs provided for non-maritime workers.

Section 944 of the Longshore Act creates a “Special Fund” of money held in trust and administered by DOL.  The Special Fund operates primarily:

1. to provide to “second injury” workers compensation beyond that which employers are required to provide, and
2. to provide compensation to workers in the event of employer insolvency.

Section 944 authorizes the Secretary to fund the Special Fund through annual assessments on self-insured employers and insurance carriers. Second Injury Payments from the Special Fund Employer liability for worker compensation under the Longshore Act is limited in cases of “second injury,” that is, where a partially disabled worker suffers a work-related injury that increases her disability. Under such circumstances, the employer is usually liable only for 104 weeks of compensation payments. After that period, liability for payments shifts to the Special Fund.

Shifting liability to the Special Fund is meant to encourage employers to hire workers who have a previous partial permanent disability.

For fiscal years 2000 – 2004, assessments against insurance carriers comprised more than ninety-nine percent of the Special Funds’ revenues. Payments made from the Fund during that same period consisted primarily of second injury payments, which accounted for over 90% of all Special Fund outlays. The next largest category of Special Fund payments for that period consisted of “Section 918″ payments, which comprised less than 5% of payments from the Special Fund.

DISCUSSION

The federal priority statute, provides that a “claim of the United States Government shall be paid first when a person indebted to the Government is insolvent and an act of bankruptcy is committed. DOL’s claim, then, is arguably entitled to first priority in the state insolvency proceedings, notwithstanding the contrary state priority law. However, the U. S. Supreme Court, in United States Dept. of Treasury v. Fabe, 508 U.S. 491 (1993), held that, to the extent a state statute protects policyholders by requiring a different priority class for federal claims in insurance insolvency proceedings, it may supersede the federal priority statute under the McCarran-Ferguson Act, which seeks to preserve the supremacy of the States in the realm of insurance regulation. Because the Fabe decision precludes application of the federal priority statute to DOL’s claim, DOL seeks to conjure up a similar “absolute priority” requirement from the Assessment Provision of the Longshore Act – one DOL contends can survive reverse-preemption under McCarran-Ferguson.

There Is No Express Preemption

DOL bears the burden to present “clear evidence” that compliance with both the federal and state laws is a physical impossibility. DOL argues that defendants cannot comply with both state and federal law because federal law requires them to pay the federal assessment, but the state’s priority law forbids payment because Home’s assets are insufficient to pay DOL’s Class III claim.

Given that the state’s priority law rules out Class I priority for DOL’s claim, DOL need to show that the Assessment Provision requires it.  DOL must also show that the Assessment Provision creates a right of absolute priority for such a claim in state insurance insolvency proceedings. No provision of the Longshore Act speaks to the issue of assessment claim priority. DOL’s argument, therefore, rests entirely on the notion that a preferential priority is implied.

The New Hampshire Supreme Court found there is nothing to suggest that Congress meant to attach “absolute priority” status to assessments and that such a requirement should not be inferred from the silence of Congress.  The court noted that the Secretary may offset Home’s unpaid assessment by increasing next year’s assessments against other carriers and self-insured employers.

In sum, the state’s priority law, as applied in this case, poses an obstacle neither to the primary purposes of the Special Fund nor to the Assessment Provision’s subsidiary purpose of spreading Special Fund costs among industry participants.  The McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., was enacted to protect the continued regulation and taxation by the several States of the business of insurance. The Act prohibits federal preemption of state laws that regulate insurance, unless the federal statute expressly announces Congress’s specific intention to inject itself into the area of state insurance law.

For McCarran-Ferguson to protect a state law from the application of normal  federal preemption principles, three conditions must be met. 1.    The federal statute “must not ‘specifically relat[e] to the business of insurance.’”  2.    The state law must have been enacted for the purpose of regulating the business of insurance. 3.    The federal statute must invalidate, impair, or supersede the state law.

Since the parties agreed that the second condition is met in that New Hampshire’s insurer insolvency priority law regulates the business of insurance. Moreover the third condition is also met, because the federal law supersedes the state priority law under normal preemption principles. The federal statute does not specifically relate to the business of insurance. A federal statutory provision is related to the “business of insurance” where it affects the core relationship between a private insurer and its insured.

Section 908 of the Longshore Act limits employer liability for second injury compensation.  With respect to its primary function as a reserve for second injury compensation, therefore, the Special Fund operates beyond employer liability and, thus, outside the insurer-insured contract relationship.

Likewise, to the extent the Special Fund operates as a discretionary safety net in the event of employer insolvency, it does not regulate the core relationship between insurer and insured.

CONCLUSION

Because DOL has not shown a clear and manifest Congressional intent to preempt the state priority law. That law, in any event, is protected from federal intrusion under the McCarran-Ferguson Act.

DOL’s motion for summary judgment is denied and since plaintiff is not entitled to the relief she seeks, as a matter of law, judgment shall be entered in favor of defendants, and the case closed.

ZALMA OPINION

Since McCarren Ferguson was enacted insurance has been the province of the individual states. The federal government has no place in insurance and no right right to control insurance or take assets from insurers. Since the U.S. Government continues to run a deficit all departments, including the DOL, seek to add to the revenue of the government whether they have a right to do so or not.

This case tried to create a federal priority out of whole cloth and eliminate the effect of McCarren Ferguson and the Tenth Amendment of the U.S. Constitution to make a DOL fund for second injuries to encourage employers to employ people who had been injured once, is not insurance nor does it even come close to insurance. The New Hampshire Supreme Court saw through the ploy and entered judgment for the state.

Contrary to the arguments made by the DOL insurance is a contract between an insurer and insured whereby the insurer agrees to indemnify the insured against a contingent or unknown event. It can never be an action of governmental largess which is exactly what the second injury fund is and why it has no priority of rights over that of other creditors of the insolvent insurer.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

In Chanson Roque and Shannon Isenhour v. Allstate Insurance Company, 2012 COA 10 (Colo.App. 01/19/2012) the appellate court was asked whether exiting a car and then engaging in intentional misconduct breaks the requisite causal chain between use of the vehicle and the injuries. The Colorado Court of Appeal was called upon to resolve issues raised by a “road rage” incident. They needed to decide if the use of a car to block a second car, before the driver exits the first car and assaults persons from the second car, and whether such conduct constitutes use of a motor vehicle for the purposes of uninsured motorist (UM) insurance coverage.

BACKGROUND

Plaintiffs, in Shannon Isenhour’s car, and Richard Terlingen, in his car, exchanged verbal hostilities while driving next to each other. When plaintiffs turned into a McDonald’s parking lot, Terlingen followed. He parked directly behind the plaintiffs’ car, preventing their use of the car to leave. After all three of them exited their vehicles, Terlingen pulled a golf club from the trunk of his car and struck plaintiffs with it, causing injuries.

Terlingen held home, umbrella, and automobile insurance policies with American Family Mutual Insurance Company. American Family obtained a declaratory judgment in federal court that it was not required to cover Terlingen for the injuries that he had caused. The court ruled that the homeowners and umbrella policies expressly excluded coverage for injuries resulting from intentional or criminal acts, and that while the automobile policy covered Terlingen for third-party claims “due to the use of a car,” plaintiffs’ injuries did not result from such use. [Am. Family Mut. Ins. Co. v. Terlingen, 2008 WL 5156425 (D. Colo. No. CIV.08-CV-01273-REB, Dec. 9, 2008)].

Because this judgment rendered Terlingen an uninsured motorist, plaintiffs sought recovery for their injuries through the UM coverage in the Allstate policy covering Isenhour’s vehicle. When Allstate denied coverage, plaintiffs brought this action. The trial court granted Allstate’s motion for summary judgment, holding that plaintiffs’ injuries did not arise from the use of an automobile.

USE OF AN AUTOMOBILE

The Colorado supreme court defined “use of an automobile” for purposes of UM coverage in a fact situation where an assailant kidnapped the insured, drove her in her own car to a remote location, and sexually assaulted her in the vehicle. Her automobile insurer sought a declaratory judgment that its policy did not provide coverage for the injuries arising from the assault. In Colorado there is a two prong test for coverage:

1. The claimant must show that at the time of the “accident,” the vehicle was being used in a manner contemplated by the policy in question and inherent in the nature of the automobile as such. Unless articulated otherwise in the policy, the only use of a non-commercial passenger vehicle that is foreseeable or conceivable at the time of contracting for insurance is use as a means of transportation.
2. There must be a causal connection between the use of the vehicle and the injuries.
1. The claimant must first show that except for the use of the vehicle, the accident or incident in question would never have taken place.
2. To complete and satisfy the causal analysis, the claimant must show that the “use” of the vehicle and the injury are directly related or inextricably linked so that no independent significant act or non-use of the vehicle interrupted the “but for” causal chain between the covered use of the vehicle and the injury.

The Court of Appeal noted that Terlingen’s use of his car failed to satisfy either prong of the test.

First, because Terlingen’s car was a noncommercial passenger vehicle, the car’s only identifiable foreseeable use was for transportation. While Terlingen used the car for transportation during the verbal exchange on the highway and to follow plaintiffs into the McDonald’s lot, parking his car behind plaintiffs’ car to block their driving away was not using the car for transportation and not another use contemplated by the policy.

Second, Terlingen’s battery with a golf club constituted an independent significant act or non-use of the vehicle interrupting the “but for” causal chain between any covered use of the vehicle and the injury.

The Colorado Court of Appeal substantiated its decision by reviewing the decisions of those state courts that have faced the same issue finding that most states conclude that the act of leaving the vehicle and inflicting a battery is an event of independent significance that is too remote, incidental, or tenuous to support a causal connection with the use of the vehicle. The court referred to cases from  Illinois, Alabama, California, New Hampshire, Ohio and others.

UNINSURED MOTORIST STATUTE

Plaintiffs, as a last stretch to find coverage, contended that the Allstate policy is unenforceable to the degree it fails to conform to Colorado’s Uninsured Motorist Statute. Finding no conflict the Court of Appeal recognized that the statute requires automobile liability policies that insure against loss “arising out of the ownership, maintenance, or use of a motor vehicle” to provide supplemental insurance covering such injuries when caused by the operator of an uninsured motor vehicle. [§ 10-4-609(1)(a), C.R.S. 2011]

Neither the statute nor the Allstate policy defines “use,” and plaintiffs do not offer any reason why these provisions are in conflict. Plaintiffs’ disagreement with appellate interpretations of “use of an automobile” does not create a conflict between the statute and the policy, as both are governed by the same case law.

The summary judgment was affirmed.

ZALMA OPINION

Insurance is a contract even when the terms of the contract are mandated by statute. UM coverage is available to an injured person only if injured by an uninsured motorist and if the injury results from the use of an automobile. The word “use” is not defined by the policy or the UM statute for a simple reason, it is a common word whose meaning is clear and unambiguous.

It is sad that the victims of the intentional and vicious battery by Richard Terlingen was not covered by either his insurance or uninsured motorist coverage. Insurance policies do not cover every conceivable event.

Had Terlingen battered the victims on a golf course with no insurance the victims would have been limited to seeking damages directly from Terlingen and his assets. Their suit, and the judgment they will certainly receive, will allow them to take and sell Mr. Terlingen’s automobile, home and earnings for the rest of his life unless he files bankruptcy.

Although it is a maxim of law that for every wrong there is a remedy that does not mean for every wrong there is a remedy that will be paid by an insurers.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

The California Court of Appeal was asked to reverse a conviction for arson and insurance fraud, both five year felonies, because of what was claimed to be evidentiary errors. After a several week jury trial, Jasen Frank Meyn (Meyn)  was found guilty of three counts relating to a fire which burned his and his then-wife’s home in Napa County. Those three counts were for arson of a structure (Pen. Code, § 451, subd. (c)) and insurance fraud (§ 550, subd. (a)(5)). The trial court sentenced him to a generously short total prison term of four years. Meyn appealed. In The People v. Jasen Frank Meyn, No. A129362 (Cal.App. Dist.1 01/18/2012) the Court of Appeal reviewed the evidence and found it damning.

FACTUAL BACKGROUND

Meyn and Cherise Petker married in November 2005.  At about the same time they married, they bought the house at issue in this case, a house at 116 Ridgecrest Drive, Napa, for about $615,000. All of the cost of the home was covered by a first and second mortgage.

On the afternoon of July 28, 2006, at a time both Meyn and his wife were absent from their home, it started burning and soon became “fully engulfed” by the flames.

Before the fire Meyn read, and recorded in his computer, the following advice:

“Before you try to fake a fire, know how to do it properly. For instance, lots of the new carpeting on the market is now fire retardant, as there are many other sympathetic materials. So rather than start a fire in the middle of the room, start it under an electrical appliance or from a stove burner that has ‘carelessly’ been left on, or some other likely spot.

“Don’t ever use gasoline or other traceable materials to start your fire. Woodgrain alcohol is your best starter because it burns away all traces.”One good fire in an area that will create a lot of smoke from burning materials is preferred. Fire investigators can trace the origin of the fire, and two flames started simultaneously will immediately arouse suspicion.
“Never hang around to watch the fire you set. Police have been known to photograph the crowd; that’s how a lot of pyromaniacs get caught. Don’t let your curiosity get the better of you!”

TESTIMONY AT TRIAL

Four neighbors of Meyn’s home on Ridgecrest Drive testified regarding what they saw before and during the fire. The furniture in the house at the time was “pretty scarce.” At about 1:00 a.m. on July 28, 2006, the day of the fire, a witness saw most of the lights in Meyn’s house on and, the following morning, a truck parked in front of the house.There was activity most of the day of the fire and Meyn was seen going and coming from the house via the front door, and then leaving the house via the garage door and driving away shortly before 5 p.m. In so doing, Meyn manually closed the garage door, and did not use the automatic door opener. About an hour later, Meyn’s house was on fire.

A next-door neighbor of Meyn, heard a loud explosion at about 5:40 p.m. on that day. She went outside on her deck and saw large flames coming out of Meyn’s house. Other neighbors went into the house through a side door and noted that it appeared to be vacant and that the fire was in the entry area of the house. The latter fact appeared to the witness, a professional firefighter with the El Cerrito Fire Department, to be an unusual feature of a fire.

Fire fighters from Cal Fire responded to the 911 call and were able to put part of the fire out, and keep it from spreading to the hillside outside, but not until the center of the house was largely consumed by the fire.

A prosecution witness testified that, in his opinion, the debris he had tested had come in contact with “liquid gasoline.” An expert testified that in his opinion the fire was caused by arson, specifically by ignition from the water heater, leakage from the propane tank in the house, and gasoline poured into the interior of the house. Regarding his own actions on the day of the fire, Meyn told investigators that he had had no problems with the garage door and had, on July 28, exited the garage “by use of the electric door button.” He also specifically denied he had started the fire.

Meyn’s former wife, Cherise, testified and confirmed that she and Meyn purchased the home for $615,000 with 100 percent financing. She testified that their two mortgage payments totaled approximately $4,000 a month, and that, after the purchase, they invested another $70,000 in “home improvements.” Meyn advised his wife that he had adequate assets to pay the two mortgages but, in fact, never paid either after May 2006. Cherise confirmed to him that, because of the 90-day period required before foreclosure, the lender (Washington Mutual) could, effective August 1, 2006, opt to change the locks and take possession of the house.

At some point of time during the winter of 2005-2006, Meyn advised Cherise that there appeared to be a problem with the foundation of their house, specifically that “the stilts had moved forward” which, she said, made him “concerned.” It would, he told her, cost them “somewhere between about $60,000 and $80,000 to fix.”

Meyn also told Cherise that he had lost his grandfather’s Navy watch in the fire, a watch he had always kept near the bed. In fact, however, he had not, and he never told her that he now had the watch (a watch he had told the police he had recovered from a kitchen drawer in the house after the fire). The fire department personnel who responded to the fire had, however, searched for that watch after the fire, but had not found it. It was subsequently found in a console of Meyn’s truck in 2007, during the service of a search warrant at Meyn’s (then) Long Beach apartment. The police officer who found it had been one of the officers who had searched for the watch in the burnt house in 2006, at Meyn’s request.

Two contractors and one structural engineer testified that Meyn had consulted them about the condition of the Napa house in early 2006. One contractor told him that fixing the major foundation problem the house had would cost about $250,000. Another contractor estimated the cost to be over $100,000. The structural engineer testified that he looked at the house and its foundation in May 2006, and told Meyn that it would not be possible to “repair this house because the whole hillside was moving and there was no way to stop it from moving . . . [and] then the house would be subject to a lot of different movements which tend to break it up.”

THE INSURANCE

The house was insured by Farmer’s Insurance, but its policy did not cover earth movement. A Farmer’s executive testified that Meyn reported the claim for the fire to his home the day after the fire. He later filed a written “proof of loss” form. The Farmer’s witness testified that its policy provided coverage of $380,000 for the house itself, plus $285,000 for personal property contents and $190,000 for additional living expenses.

DISCUSSION

The charges against Meyn derived from that fire and involved evidence occurring both before and after it. Trial by jury commenced on April 12, 2010, and concluded on May 5, 2010. On May 11, 2010, after two plus days of deliberation, the jury returned its verdict convicting Meyn of all charged offenses.

There Was No Abuse of Discretion in Admitting the Evidence of Meyn’s “Change of Identity” Query to His Wife or the “Arson” Material Found on His Computer.

Bearing in mind that the first count of the information charging Meyn was for the commission of arson in violation of section 451, subdivision (c), it was surely appropriate for the jury to be told, and to be able to see and hear, a portion of a publication that had been downloaded onto his computer in January 2006 (and revisited 10 days later), and a portion which dealt very specifically with how to commit arson and get away with it.

In summary on the altered appearance issue, the combination of Meyn’s “different identifications” conversation with Cherise on the cruise and the downloaded information about false identifications were clearly relevant to an effort by the prosecution to show that Meyn was attempting (even if arguably ineptly) to disguise his appearance at or around the time he was attempting to commit arson.

ZALMA OPINION

Amateurs should never attempt an arson-for-profit scheme. Mr. Meyn read up on arson, learned what accelerants to use, what evidence to avoid and how to avoid arrest. He left that information in his computer so that the police could find it.

Meyn did everything wrong. He knew his house had little or no value because of earth movement, he had obtained a 100% mortgage in a state where there is a statute that prevents a mortgage holder from suing for the difference between the value of the property and the mortgage, and yet decided to burn the house.

The local police and fire investigators did a thorough job collecting evidence and presenting experts who established how and why the fire happened. Since fire is dangerous, could have spread to a hillside and neighboring properties and could have injured or killed someone, Mr. Meyn is fortunate that he was sentenced to only four years in prison especially since he had good advice on how to get away with arson but decided to not follow the advice.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

]]> http://zalma.com/blog/?feed=rss2&p=2524 0 http://zalma.com/blog/?p=2518 http://zalma.com/blog/?p=2518#comments Wed, 25 Jan 2012 15:36:19 +0000 Barry Zalma http://zalma.com/blog/?p=2518 Continue reading →]]> IF INSURER FRONTS “SIR” TO SETTLE IT IS A VOLUNTEER

Axis Specialty Insurance Company (“Axis”) sued The Brickman Group Ltd., LLC (“Brickman”), alleging, among other claims, breach of contract for Brickman’s failure to repay funds Axis expended in settling a dispute covered by a liability insurance policy. Brickman counterclaimed, alleging that Axis breached its duties under the policy by failing to contribute to Brickman’s defense in its litigation of the same dispute.

The United States District Court for the Eastern District of Pennsylvania entered judgment in Brickman’s favor as to Axis’s claim, entered judgment in Axis’s favor as to Brickman’s counterclaim, and denied the parties’ motions in all other respects. Both appealed. in Axis Specialty Insurance Company v. the Brickman Group Ltd., LLC, No. Nos. 10-4688/4771 (3d Cir. 01/23/2012) the Third Circuit was asked to determine who, if anyone, owed what amount to whom.

BACKGROUND

A. Facts

In 2006, Deborah Peisel sued Brickman and Home Depot, seeking redress for injuries sustained when she fell in a Home Depot parking lot. Piesel claimed in her suit that Brickman, which had plowed the snow in Home Depot’s  parking lot, caused her injury by inadequately removing the snow.

At the time of Peisel’s accident, Brickman owned two liability insurance policies. The first policy, purchased from ACE American Insurance Company (“ACE”), provided coverage in the amount of $750,000 over a self-insured retention (an “SIR”) of $250,000. The policy did not require ACE to defend Brickman in litigation against it, but did state that ACE had “the right and opportunity to assume from the insured the defense and control of any claim or “suit.”

The second policy, purchased from Axis, provided coverage in the amount of $5 million in excess of what it listed as the $1 million of total coverage provided by the ACE policy. It required Brickman to maintain the ACE policy, but stated that failure to do so would “not invalidate t[he] insurance” Axis provided, which would instead “apply as if the underlying [ACE] insurance were in full effect.” The Axis policy further stated that Axis had a duty to defend Brickman in two circumstances:

We will have the right and duty to defend the insured against “suits” seeking damages for “bodily injury”, “property damage” or “personal and advertising injury” covered by this policy when the “underlying insurance” does not provide such coverage.We will also have the right and duty to defend the insured against “suits” seeking damages for “bodily injury”, “property damage”, “personal and advertising injury” or damages resulting from wrongful acts, errors or omissions arising out of the conduct of your business and covered by this policy, when the limits of insurance of the “underlying insurance” have been exhausted by payment of damages.

On January 23, 2008, after the parties in the Peisel action had just completed non-binding arbitration, Axis was informed by letter from an insurance broker that Axis’s coverage could be implicated in resolving Peisel’s claim. The letter stated that the arbitrator had concluded that Peisel sustained $2 million in pain and suffering damages and lost $172,748 in wages as a result of the accident, for which Brickman was cumulatively apportioned 65% of the liability. It advised, however, that the parties had 30 days to file an appeal, and that Peisel intended to do so inasmuch as she sought a $5 million settlement.

Axis stepped in and negotiated on behalf of Brickman, and ultimately reached a settlement with Peisel for $1.15 million. The settlement was funded by both Axis and ACE, which paid $400,000 and $750,000, respectively. Brickman never paid its $250,000 SIR under the ACE policy and did not contribute any funds to the settlement. Recognizing that Brickman had failed to pay that sum, Axis’s counsel stated at the time the settlement was placed on the record in the Peisel action:

[M]y understanding is that the $750,000 policy limits of [ACE] are available for the settlement, that a $400,000 offer on top of that $750,000 is made upon behalf of Brickman by [Axis] pursuant to its policy of insurance, that there will not be a concern addressed at this time and in this matter regarding the self-insured retention of . Brickman, which is represented to be $250,000, that we will work within our own group here, not as part of this case, and the plaintiff has not to be concerned about it, that the money will be given as set forth, [$]750,000 from [ACE], [$]400,000 from [Axis] on behalf of Brickman.(Emphasis added)

Counsel for Brickman did not object.

On March 5, 2009, Axis ’ lawyer wrote Brickman to “seek the payment of the $250,000.00 ‘retained limit’ which is applicable to the Peisel claim — as set forth in the underlying ACE policy.”

B. Proceedings in the District Court

Brickman never paid Axis that sum, however, and this lawsuit against Brickman followed.   Brickman interposed a counterclaim, alleging that Axis breached its duty to defend Brickman by failing to contribute to its legal expenses in the Peisel action. Upon the parties’ cross motions for summary judgment, the District Court entered judgment in Brickman’s favor as to Axis’s claim against Brickman, and judgment in Axis’s favor as to Brickman’s counterclaim against Axis.

DISCUSSION    

A. Axis’s Appeal

Axis argues that the District Court erred in granting summary judgment in Brickman’s favor on its breach of contract claim.

Under Pennsylvania law, “a plaintiff seeking to proceed with a breach of contract action must establish:

(1)     the existence of a contract, including its essential terms,

(2)     a breach of a duty imposed by the contract, and

(3)     resultant damages.

According to Axis, Brickman breached its contractual duty to pay Axis the $250,000 expended in settling the Peisel suit so as to satisfy its SIR under the ACE policy.

The Third Circuit concluded that the Axis position is fatally flawed. There is, as Axis tacitly acknowledges by urging us to read the Axis policy and the ACE policy as “part of a unitary liability insurance program maintained by Brickman”, no provision in Axis’s policy with Brickman that requires Brickman to pay the first $250,000 of any settlement or otherwise reimburse Axis for the payment it made.

Although the ACE policy does contain an SIR that Brickman was required to pay under that policy, Axis cannot use a duty created by a separate contract, to which it is neither a party nor a third-party beneficiary, to recover in contract against Brickman.

Nor can Axis create the missing contractual duty by relying on the provision that its coverage would “apply as if the ‘underlying [ACE] insurance’ were in full effect” even if Brickman failed to maintain the ACE coverage.  That Axis promised to provide coverage in excess of $1 million regardless of the existence of an underlying policy purportedly insuring Brickman up to that amount does not, and cannot, imply a corresponding, unwritten promise by Brickman to pay Axis back any sum expended above and beyond that which Axis was contractually required to pay.

Because there was no contractual duty in the insurance policy that requires Brickman to pay Axis the $250,000 that Axis expended in settling the Peisel suit, the Third Circuit affirmed the District Court’s judgment in Brickman’s favor on Axis’s contract claim.

Similarly, because the policy language does not support Brickman’s contention that Axis breached its contractual duty to defend, the Third Circuit also affirmed the District Court’s judgment in favor of Axis on Brickman’s counterclaim.

ZALMA OPINIONS

When I was a child I learned that the true meaning of the word “assume” is found by breaking it into its component parts. In this case the insurers and their counsel — anxious to settle a bodily injury claim with serious injuries assumed that the insured would be pleased to pay its self insured retention once the case was resolved. They did not include the repayment requirement in the settlement agreement and there was no language in the Axis policy requiring repayment.

Brickman did not object to the settlement because Axis made it a gift of $250,000 it did not owe. Axis, and its counsel, assumed that Brickman would be honorable rather than stand on the words of the contract of insurance.

This lawsuit and appeal could have been avoided by simply writing a settlement agreement that required Brickman to pay its $250,000 SIR into the settlement pot or its agreement to repay the insurer if the insurer funded the settlement. It could also have been avoided by making the payment of the SIR in the Axis policy.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

“Who Got Caught” with Barry Zalma

 Barry Zalma has joined World Risk and Insurance News with his first program, Who Got Caught. In this first edition of Who Got Caught?, Barry Zalma comments on crime and appropriate punishment in workers compensation fraud. Mr. Zalma, an internationally recognized insurance lawyer, consultant and expert witness, will narrate the new WRIN.tv series, Who Got Caught? Barry Zalma, will focus on the apprehension of perpetrators of all types of insurance fraud…from healthcare and workers comp fraud, to murder for life insurance, arson for profit, and more…

World Risk and Insurance News (WRIN.tv) is the online video-based insurance news network delivering late-breaking and relevant business-to-business information, analysis and forward-thinking programming for the global risk, insurance and financial services industries.

WRIN.tv  producers work closely with news outlets, research firms, industry analysts, trade associations and subject matter experts around the globe to deliver the relevant and valuable information, news and special programs today’s risk and insurance professionals need.

World Risk and Insurance News uses a unique blend of streaming video and integrated social media to connect professionals in the global risk and insurance industry with the people and information they need.

Visionary Leadership

CEO Dennis Richard launched the original Insurance Broadcast System (IBS) in 1997 as a direct satellite television company with two networks: the Property & Casualty Television Network and the Life/Health Television Network. IBS withdrew from the market in 2000 as the Internet replaced satellites as the preferred method of communication, but was unable to sustain video distribution.

Insurance Broadcast System has assembled a diverse leadership team and, with backgrounds in video news, new and social media, and the world of risk and insurance, to develop an online, broadcast quality news network that expands on the original vision of IBS.   Meet our visionary Management Team and Board of Directors

Broad Support

The launch of World Risk and Insurance News has received positive support from many within the global insurance community, including:

American Academy of Actuaries
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International Insurance Society
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Be part of the online video communications revolution.

Contact WRIN at:

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© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Plaintiff Timothy F. Long (Long) appealed from the summary judgment dismissal of his declaratory judgment action seeking underinsured motorist (UIM) coverage under his personal automobile insurance policy, issued by defendant Mercury Insurance Group. In Timothy F. Long v. Mercury Insurance Group, No. A-3238-10T1 (N.J.Super.App.Div. 01/17/2012) summary judgment was entered in favor of the insurer based upon a limiting exclusion.

FACTS

On January 15, 2009, Long, acting in the course of his employment, was operating a vehicle owned and insured by his employer, Admiral Nissan (Admiral), when Maureen Porter failed to stop at a stop sign and crossed into his lane of travel. As a result of the ensuing automobile accident, plaintiff suffered a shoulder injury necessitating surgery.

After notifying defendant and Admiral’s insurance carrier, Long accepted $15,000 to settle his underlying negligence action because it represented the liability limits of Porter’s automobile insurance policy. Long also recovered $20,000 from Admiral’s commercial vehicle insurance carrier. This amount was the difference between the UIM policy limit covering Admiral’s commercial vehicle ($35,000) and the sum tendered by Porter ($15,000). Although Long was not a named insured under Admiral’s commercial insurance policy, he was nevertheless an insured under the policy and entitled to coverage under its UIM provisions.

Long next submitted to Mercury a $65,000 claim as a named insured under the terms of his personal automobile liability policy. The sum sought represented the difference between his $100,000 UIM policy limits less the $35,000 he had received from Porter and Admiral. Mercury denied the claim and declined to submit the matter to arbitration, relying on an exclusion found among the UIM provisions.

Part III of the Mercury policy begins on page twenty-four and addresses UIM and uninsured motorists (UM) coverage. Part III’s “Limits of Liability” provision states: “[t]he amount of coverage is shown on the declarations page[.]” The declaration page details the UIM bodily injury coverage as “$100,000 Each Person, $300,000 Each Accident.”

Exclusion 5 is located on page twenty-eight of the 38 page policy under the section captioned, “When Coverage Does Not Apply[,]” which lists eighteen provisions when “[t]here is no coverage for property damage or bodily injury[.]“

Exclusion 5 states:

When Coverage Does Not Apply

There is no coverage for property damage or bodily injury:

5. For you while occupying a vehicle insured under another policy on which you are an insured.

Long sued Mercury asserting the it wrongfully denied coverage of a valid claim. Mercury successfully moved for summary judgment.

ANALYSIS

The purpose of UIM coverage is to provide as much coverage as an insured is willing to purchase, up to the available limits, against the risk of an underinsured claim.  The legislative mandate, requiring carriers to offer UIM coverage, reveals an “evident perception that in terms of obtaining an adequate recovery from a negligent driver, the victim, especially one sustaining serious injuries, is placed at financial risk not only by uninsured drivers but also by underinsured drivers,” especially those carrying only the minimum statutory liability coverage. Longworth v. Van Houten, 223 N.J. Super. 174, 177 (App. Div. 1988).

Long appealed claiming that the trial judge’s enforcement of Exclusion 5 was error because the provision — shifting recovery to another UIM policy — deviates from the Legislature’s intent. Prior to New Jersey’s legislature’s amendment of the UM statute in 2007 several cases examined commercial insurance contract clauses limiting recovery by stepping it down to the limits under an insured’s personal automobile policy. New Jersey Courts were confident enforcing such exclusions.
The Legislature reacted to the Court’s opinion by adding subsection f to N.J.S.A. 17:28-1.1, known as the “Scutari Amendment.” The amendment provides:

A policy that names a corporate or business entity as a named insured shall be deemed to provide the maximum… underinsured motorist coverage available under the policy to an individual employed by the corporate or business entity, regardless of whether the individual is an additional named insured under that policy or is a named insured or is covered under any other policy providing . . . underinsured motorist coverage. [N.J.S.A. 17:28-1.1f.] (Emphasis added)

The statutory section explicitly rejects the step-down practice  and changed existing law by assuring the expansive coverage of an employer’s automobile liability policy was fully extended to its injured employees.

Exclusion 5 is designed to limit the scope of defendant’s risk attached to the insurance contract by denying additional benefits once an insured is eligible to recover UIM benefits as an insured under another policy. Clearly, the provision differs from the step-down practice proscribed by the 2007 statutory amendment.  It is a limitation on recovery, somewhat the reverse of the prior practice. Long’s demand for coverage under his employer’s commercial vehicle policy was not denied, but was confined to the limits of the employer’s policy precluding benefits for supplemental UIM coverage under his personal automobile policy.

When reading Exclusion 5 with the other policy provisions and UIM statute, the Court of Appeal found an ambiguity exists preventing plaintiff from clearly understanding the significant limitations imposed on the particular UIM coverage he purchased. As a result it interpreted the contract to comport with the reasonable expectations of the insured and found coverage exists.

Exclusion 5 seeks to join UIM coverage to a covered vehicle with a lower limit, rather than the insured who purchased the coverage, thus conflicting with the precise statutory language requiring coverage to be offered “by an insurer to the named insured.”

Exclusion 5 confines plaintiff’s recovery to instances of injury when occupying his own vehicle or a vehicle not subject to UIM coverage. This imposes a major limitation on the principles and goals of the UIM statute and the anticipated scope of UIM coverage.

Other than Exclusion 5, found on page twenty-eight, deep into the thirty-eight page policy, defendant does not identify any alternative notice signaling a major limitation to the anticipated UIM coverage purchased.

An insured’s reasonable expectation when voluntarily purchasing UIM insurance is to obtain insurance covering damages that the insured is entitled to recover from the underinsured tortfeasor, less the amount of the tortfeasor’s coverage.  An insured would not reasonably believe UIM coverage depends on the fortuitous event of which vehicle he occupied.

There is no expectation that additional coverage bought and paid for would be tied to a vehicle and become a nullity simply because the insured occupied a vehicle with a lower UIM coverage limit when injured. Exclusion 5 was found by the Court of Appeal to be a “hidden pitfall” that defeats enforcement of Exclusion 5.

The exclusion, perhaps simply worded, was not prominently presented, despite its importance in circumscribing the availability of UIM coverage. It is the placement of the notice and not its specificity that is the issue. The Court of Appeal also found that Exclusion 5 is ambiguous when compared with other policy provisions addressing the availability of UIM coverage and the Court of Appeal, therefore, reversed the summary judgment and remanded the case back to the trial court.

ZALMA OPINIONS

As soon as the court mentioned the length of the policy Mercury was certain it was in trouble. In fact, the court used the length of the policy and the placement of the exclusion, to find an ambiguity where none existed in the wording of the policy and its exclusion 5.

This case teaches how difficult it is to write an insurance policy that is enforceable in a trial or appellate court. When the policy moves from a standard, as did the Mercury policy, it is prudent for the insurer to brag on the first page and on the declarations page the difference. It should also attach a letter to go with the delivery of the policy that it is different from other UM/UIM policies and provides less indemnity than other policies that cost more may provide. Hiding a clear exclusion in a 38 policy is dangerous because it give an appellate court a weapon to construe the policy against the insurer and in favor of the insured.

Of course, the amendment of the UM/UIM statute had a serious effect on the analysis and it was important for the change to be made clear, open and obvious. Mercury failed to do so and must now suffer the consequences by paying a claim it did not intend to pay when it wrote the policy wording.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

Frank Caballero (Caballero) signed a release when he left employment with Phoenix American Holdings (Phoenix) after which he filed a six count complaint against Phoenix.  Phoenix obtained a summary judgment and Caballero appealed. In Frank C. Caballero v. Phoenix American Holdings, Inc., et al., No. 3D11-957 (Fla.App. 01/18/2012) the Florida Court of Appeal was asked to determine the viability of the release.

FACTS

Caballero alleged the following counts:

1. retaliatory discharge and violations of the Florida Private Sector Whistleblower’s Act;
2. breach of Compensation Agreement;
3. fraudulent inducement with respect to the Compensation Agreement;
4. unjust enrichment;
5. promissory estoppel; and
6. tortious interference with a business relationship.

Caballero signed a release as part of a termination package between Caballero and his former employer, Phoenix American Warranty Company, Inc.

The releasees include Phoenix American Warranty Company, Inc., and its affiliates, which included those sued unsuccessfully by Caballero. The title of the release, “General Release,” was found to be a misnomer because the release was limited by its terms as follows:

(a) The released claims consist of and are limited to any and all Claims that in any way relate to: (i) employment of [Caballero] with Company, or the termination thereof, or Claims for compensation, bonuses, commissions, lost wages, or unused accrued vacation or sick pay.

Caballero’s first five claims relate to Caballero’s employment, termination, or compensation. The Court of Appeal, therefore, concluded the trial court properly granted summary judgment as to these counts of the third-party complaint.

The tortious interference claim, however, plainly relates to a subsequent employment relationship Caballero had with Road America Motor Club, Inc., which he claimed was terminated by Road America as a direct result of intentional and unjustifiable interference by the Phoenix. Because the allegations in this count are alleged to have occurred after the release was executed and pertain to actions outside of Caballero’s employment with Phoenix American Warranty Company, Inc., the Court of Appeal reversed the final summary judgment for further proceedings on that count only.

ZALMA OPINIONS

Drafting a release should not fall prey to a need for speed. A release provides protection against future involvement with the party granting the release by the party being released. In this case the drafter of the release limited its effect and as a result lost its protection.

Of course it is difficult, if not impossible, to draft a release that will protect against tortious actions happening after the release is executed.  The release was very limited and Caballero — by signing the release — gave Phoenix a sense of security only to open them to the need to defend a suit for tortious interference.

The lesson: take your time and draft as air-tight, broad and unambiguous a release as possible.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

Two Medicaid recipients obtained a judgment against a tortfeasor for the death of a child who was a Medicaid recipient who paid for the child’s medical care before she died. Medicaid, through its assignees, asserted a lien against the tort recovery. The plaintiffs insisted they were entitled to keep all of the money and were not required to reimburse Medicaid. In Amy Rathbun et al. v. Health Net of the Northeast, Inc., No. (AC 32712) (Conn.App. 01/24/2012) Amy Rathbun and Tanequa Brayboy (plaintiffs), asked the Connecticut Court of Appeal to resolve a dispute with Medicaid after the trial court granted a motion for summary judgment in favor of the defendant, Health Net of the Northeast, Inc. (Health).

On appeal, plaintiffs, who are Medicaid recipients, contend that the court erred in determining that the Health could assert a claim against the plaintiffs to recover the costs of medical care owed to the plaintiffs by responsible third parties.

FACTS

The following facts were stipulated to by the parties and accepted by the court.

1. Under the Medicaid Act (Medicaid); 42 U.S.C. § 1396 et seq.;
2. Federal financial assistance is provided to states that choose to reimburse the costs of medical care to the economically disadvantaged.
3. States may choose contractors to provide or to arrange for services under the state Medicaid plan, which is known as Medicaid managed care.
4. The state of Connecticut participates in the Medicaid program and has authorized the department of social services (department) to administer the program within the state.
5. The department contracted with the defendant directly.
6. The contract required the defendant to make efforts to determine the legal liability of third parties for health care services provided to Medicaid enrollees, and to “pursue, collect, and retain any monies from third party payers for services to [the defendant's] members under this contract . . . .”
7. Kay’ Anah Brayboy, the daughter of Tanequa Bray-boy, was a member of the defendant’s Medicaid managed care plan.
8. In July 4, 2007, Kay’ Anah was struck by a motor vehicle and subsequently died as a result of her injuries.
9. The defendant paid $13,541.45 for medical treatment affiliated with Kay’ Anah Brayboy’s injuries from the accident.
10. Tanequa Brayboy retained legal counsel to pursue possible tort claims against the driver of the motor vehicle that struck her daughter.
11. Tanequa Brayboy’s counsel was advised that the defendant had a claim for repayment for medical benefits paid on behalf of Kay’ Anah Brayboy in connection with the motor vehicle accident.
12. To date, the defendant has not been reimbursed for the cost of medical care provided to Kay’ Anah Brayboy.

ISSUES

The plaintiffs sought declaratory judgment of the plaintiffs’ rights and obligations to reimburse the defendant pursuant to Connecticut statutes, regulations and contract. Both parties filed motions for summary judgment. The trial court granted the defendant’s motion for summary judgment and denied the plaintiffs’ motion for summary judgment. The trial court also concluded that, under Connecticut law, the defendant, as the assignee of the department, was not required to bring a separate action against the third party tortfeasor to recover the medical expenses expended on behalf of the Medicaid enrollee.

ANALYSIS

The relevant statute, Section 17b-265 (a), provides in relevant part that “[i]n the case of such a recipient who is an enrollee in a care management organization under a Medicaid care management contract with the state or a legally liable relative of such an enrollee, the department shall be subrogated to any right of recovery or indemnification which the enrollee or legally liable relative has against such a private insurer or other third party for the medical costs incurred by the care management organization on behalf of an enrollee.”

In the present case, the department contracted with the defendant to administer the Medicaid managed care program. The department assigned to the defendant “all rights to third party recoveries . . . who may be responsible for payment of medical costs of [the defendant's] members.”

The contract further provided that the defendant was to make every reasonable effort to determine if there was third party liability for medical payments made to the defendant’s members and to pursue, collect, and retain any monies from third party payers for services to the defendant’s members under the contract. The Court of Appeal concluded that, the department, through its contract with the defendant, assigned its statutory right to subrogation under § 17b-265 (b) to the defendant.

THE RIGHT TO SUBROGATION

The primary issue on appeal is whether the defendant may assert its right to subrogation as a basis on which to recover money from the plaintiffs.  In its simplest form, subrogation allows a party who has paid a debt to ‘step into the shoes’ of another to assume his or her legal rights against a third party to prevent that party’s unjust enrichment.  In that way, an insurance company, for example, can be substituted for the insured in an action against a third party tortfeasor. The insured, having been paid by the insurer, in essence, transfers his rights against the tortfeasor to the insurer.  To obtain reimbursement when a third party is liable for a recipient’s medical expenses that the state has paid, the state may pursue those claims against the third party directly pursuant to the assignment and subrogation scheme or, alternatively, indirectly by placing a lien on personal injury judgments or settlements obtained by a medicaid recipient from a liable third party.

The defendant had a statutory right to subrogation, which the plaintiffs affected when they settled or secured judgment with the responsible third parties. Like the statute in Barton, the statute here does not reference the department’s express right to recover from the insured directly under its right to subrogation. Simply because the statute does not reference a direct right to be reimbursed from funds collected by the insured does not mean that such right does not exist. The statute specifically provides that the Medicaid enrollee must make a subrogation assignment to the department or its designee. It would thus be inequitable to allow the insured to bypass the dictates of the statute simply by securing a settlement or judgment and ultimately recovering a double payment.  As such, an insurer who possesses a subrogation right, such as the defendant in this case, has the right to seek reimbursement from the insured if the insured has effected a settlement or judgment with a responsible third party.

ZALMA OPINON

The right of subrogation is an ancient equitable remedy. Medicaid and Medicare are government sponsored programs where the government sponsored programs pay the debts of poor people who cannot afford to pay their own medical bills. The payments are not gifts because the statutory basis for the programs give the government the right to recover from a responsible tortfeasor or to assert a lien against suits filed by the beneficiary.

In this case the beneficiaries of Medicaid’s largess sought to profit by keeping the recovered medical bills and not honoring the lien of Medicaid and its assignees. They failed and the court in Connecticut affirmed the right of the government to recover and, thereby, reduce the full cost of helping the poor.

Medicaid and Medicare are similar to insurance and have the right to subrogate against responsible parties to recover what they paid to help the poor. It is not designed to help the poor profit from injuries.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

Several insurers who paid for an airliner after a 1985 highjacking sued state sponsors of terrorism to recover, in subrogation, what they had to pay the owners of the airliner destroyed by terrorists. In Certain Underwriters at Lloyd’s, London, et al. v. Great Socialist People’s Libian Arab Jamahiriya, et al., Civil Action No. 06-cv-731 (JMF) (D.D.C. 2011), Certain Underwriters At Lloyd’s v. Great Socialist People’s Libyan ) Arab Jamahiriya, et al, No. 06-cv-731 (JMF) ,08-cv-504 (D.D.C. 09/02/2011) the United States District Court for the District of the District of Columbia that the insurers are entitled to recover, plus interest, what they paid.

INTRODUCTION

Before me at this time are two actions: Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya, No. 06-CV-731, which was filed on April 4, 2006 (“Certain Underwriters I”), and Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya, No. 08-CV-504, which was filed on March 24, 2008 (“Certain Underwriters II”). The named Libyan defendants were dismissed from each of these actions pursuant to the enactment of the Libya Claims Resolution Act, Pub. L. No. 110-301, 122 Stat. 2999 (2008), but the plaintiffs’ claims remain pending against the following defendants: the Syrian Arab Republic; the Syrian Air Force Intelligence Agency (Idarat al-Mukhabarat al- Jawiyya); and Syria’s Director of Military Intelligence (General Muhammad al-Khuli) (hereinafter collectively the “Syrian defendants” or “Syria”).

SUMMARY OF FINDINGS

These actions seek judgment and an award of damages for acts of state-sponsored terrorism that resulted in the hijacking of EgyptAir Flight 648 on November 23, 1985, while the aircraft was bound for Cairo, Egypt from Athens, Greece, and the complete destruction of the EgyptAir Flight 648 aircraft, insured by the Certain Underwriters plaintiffs, that resulted from that hijacking.

The Court, having heard and reviewed the evidence, does hereby determine (i) that the hijacking of EgyptAir Flight 648 on November 23, 1985 (the “EgyptAir hijacking”) was an act of international terrorism; (ii) that the terrorist shootings of the American victims of the EgyptAir hijacking-Patrick Baker, Jackie Pflug, and Scarlett Rogenkamp-were acts of international terrorism that occurred during and as a result of the November 23, 1985 terrorist hijacking; (iii) the hijacking resulted in the reasonably foreseeable complete destruction of the aircraft owned by EgyptAir and insured by plaintiffs; (iv) that said hijacking was committed by terrorist operatives of the Abu Nidal Organization (“ANO”), which has been designated by the U.S. Department of State as a Foreign Terrorist Organization; (v) that the ANO, at the time of and prior to the EgyptAir hijacking, was sponsored and supported by Syria, which has been designated by the U.S. Department of State as a State Sponsor of Terrorism; and (vi) that the Syrian Arab Republic, the Syrian Air Force Intelligence Agency, Idarat al-Mukhabarat al-Jawiyya, and Syria’s Director of Military Intelligence, General Muhammad al-Khuli, conspired with and provided substantial and material support to the ANO terrorist organization, and that the Syrian defendants caused and are liable for the acts of international terrorism against the plaintiffs and the resultant damages, for which the Court will award damages as set forth below.

The Court further finds that the Syrian defendants provided material support and resources and conspired with the ANO in the planning, training, support for, and commission of the EgyptAir hijacking, and that the lead ANO terrorist operative, Omar Ali Rezaq, was trained and supported by the Syrian defendants. The Court finds that the Syrian defendants intended that their support of the ANO would promote and cause extra-judicial killings of American citizens, as well as necessarily result in the property destruction of the EgyptAir airplane incidental to the goals and objectives of the Syrian defendants and the ANO terrorists. The Court finds that Syria’s actions could not have occurred without the explicit authorization by then-Syrian President Hafiz al-Asad. Accordingly, the Court will enter judgment and grant an award of damages on behalf of the plaintiffs against the Syrian defendants as set forth below.

STATEMENT OF THE CASE

Plaintiffs brought this action pursuant to the provisions of the Foreign Sovereign Immunities Act (“FSIA”), codified at 28 U.S.C. § 1602, et seq. The Syrian defendants were served with process on June 28, 2003. The Syrian defendants have neither answered nor appeared.

A five-day hearing on liability and damages was held, commencing on May 3, 2010.

During the hearing, this Court accepted evidence in the form of, inter alia, live testimony, live video-link testimony, affidavit, de bene esse deposition, and original documentary evidence. The Court also accepted credible expert testimony from eight well-qualified experts on various subjects related to the issues pending before the Court in this matter.

• The Abu Nidal Organization Perpetrated the EgyptAir Flight 648 Hijacking
• Syria Sponsored and Supported the Abu Nidal Organization
• Syria is a State Sponsor of Terrorism
• The Total Destruction of the EgyptAir Aircraft was Reasonably Foreseeable Losses Sustained by Certain Underwriters, et al.

CONCLUSIONS OF LAW

In 2008, the National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, § 1083, 122 Stat. 3, 338-344 (2008) (hereinafter “2008 NDAA”) revised the FSIA framework under which state-sponsored terrorism cases may be brought by substituting 28 U.S.C § 1605A in place of 28 U.S.C. § 1605(a)(7). Perhaps most important, it furnished a cause of action against state sponsors of terrorism, while the earlier law, § 1605(a)(7), could only be used as a “pass-through” for plaintiffs seeking to bring suit in federal court against foreign sovereigns for terrorism-related claims; the claims themselves had to be based in state law. Murphy v. Islamic Republic of Iran, 740 F. Supp. 2d 51, 56 (D.D.C. 2010).

Service under the FSIA is governed by 28 U.S.C. § 1608. Subsection (a) governs service upon a foreign state or political subdivision of a foreign state, while subsection (b) provides for service upon an agency or instrumentality of a foreign state. In determining whether a foreign entity is to be treated as the state itself or as an agency or instrumentality, courts employ the “core functions” test as it was set out in Roeder v. Islamic Republic of Iran, 333 F.3d 228 (D.C. Cir. 2003). Id. at 234. The approach is categorical: if the core functions of the entity are governmental, it is considered to be the foreign state itself. Id. If its core functions are commercial, then it is an agency or instrumentality of the foreign state. Id.
Jurisdiction and Standing

The FSIA provides “the sole basis for obtaining jurisdiction over a foreign state” in United States courts. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 (1989). One of the enumerated exceptions to the FSIA is 28 U.S.C. § 1605A, the state-sponsored terrorism exception to sovereign immunity. Under § 1605A, a foreign state that is or was a state sponsor of terrorism shall be liable to a United States citizen for personal injury or death. 28 U.S.C. § 1605A(c). In such an action, a foreign state is vicariously liable for the acts of its officials. Id. Additional damages, including property damages, are available under § 1605A(d): “After an action has been brought under subsection (c), actions may also be brought for reasonably foreseeable property loss, whether insured or uninsured, third party liability, and loss claims under life and property insurance policies, by reason of the same acts on which the action under subsection (c) is based.” 28 U.S.C. § 1605(d). Under the language of the statute, once a party with valid standing has brought an action under § 1605A(c), it is unnecessary for a party filing suit under § 1605A(d) to establish standing separately; standing under § 1605A(d) is derivative of that under § 1605A(c). Furthermore, the legislative history of § 1605A(d) contains a specific reference to the case at hand:

Personal Jurisdiction

As noted above, the FSIA establishes requirements for proper service upon a foreign state in 28 U.S.C. § 1608; plaintiffs properly served Syria under § 1608(a)(3). Supra at V.B. Furthermore, having determined that Syria, as a foreign state, is the only defendant against whom an action may properly be maintained (id.), there is no issue of due process under the Fifth Amendment, as “foreign states are not ‘persons’ protected by the Fifth Amendment.” Valore, 700 F. Supp. 2d at 70 (quoting Price v. Socialist People’s Libyan Arab Jamahiriya, 294 F.3d 82, 96 (D.C. Cir. 2002)). Finally, “customary international law,” which may call for a “minimum-contacts-like test” is inapplicable in these circumstances. Valore, 700 F. Supp. 2d at 72. The Court has personal jurisdiction over Syria in this case.

Legal Standard for FSIA Default Judgment

Under the FSIA, a default judgment may only be entered if “the claimant establishes his claim or right to relief by evidence satisfactory to the court.” 28 U.S.C. § 1608(e). All uncontroverted evidence is accepted as true. Id. See also Campuzano v. Islamic Republic of Iran, 281 F. Supp. 2d 258, 268 (D.D.C. 2003) (the “satisfactory to the court” standard is identical to the standard for entry of default judgments against the United States in Federal Rule of Civil Procedure 55(e)). In light of defendants’ failure to object or enter an appearance to contest the matters in this case, the Court accepts the uncontested evidence and sworn testimony submitted by plaintiffs as true.

Liability

The basis of Syria’s liability is its provision of material support and resources to the ANO. The FSIA explicitly provides that “a foreign state shall be vicariously liable for the acts of its officials, employees, or agents.”

I find that the total destruction of the aircraft was reasonably foreseeable, given Syria’s sponsorship of a notoriously violent terrorist organization to conduct a mid-air hijacking. Syria is liable for the total destruction of the EgyptAir aircraft, along with the associated costs related to the destroyed aircraft, including charges for storage by the government of Malta, solicitors’ fees for work performed in relation to the destruction of the aircraft, and costs for the claims survey process under which damage was assessed and payments distributed under the applicable policy.

Property Damage

The evidence in this case establishes that the aircraft was declared to be a constructive total loss under the applicable policy as a result of the damage sustained during the hijacking. The total recoverable loss is $11,043,660.83.

Prejudgment Interest

It is within the Court’s discretion to award plaintiffs prejudgment interest from the date of the attack on November 23, 1985, until the date of final judgment. Plaintiffs sustained injuries in the form of total destruction of the aircraft, for which they reimbursed EgyptAir. The Court will award plaintiffs prejudgment interest on their actual property damage, minus salvage recovery, which equals $10,542,967. Interest will be computed at a rate of 7.03% per annum from November 23, 1985 to the present.

CONCLUSION

For the foregoing reasons, final judgments will be entered against defendants by way of a separate Judgment Order in the amounts set forth above, plus any applicable post-judgment interest allowed by law. Furthermore, the case at No. 08-CV-504, Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya (“Certain Underwriters II”), will be dismissed with prejudice.

ZALMA OPINION

I look forward to the insurer’s efforts to collect on this judgment which can be enforced upon any assets of the government of Syria that may reside in the United States. I hope this victory against those who would support terrorists will think twice when their money they though safely placed in U.S. banks disappears into the accounts of the insurers.

Further suits against state supporters of terrorism may be seeing many more similar suits that will take the profit out of terrorism.

Insurers have the assets to fight this type of case and should file as many as the insurer finds sufficiently large to justify the litigation. Aircraft, ships, and buildings paid for by insurers should be reimbursed by similar litigation against state supporters of terrorism.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

]]> http://zalma.com/blog/?feed=rss2&p=2493 0 http://zalma.com/blog/?p=2487 http://zalma.com/blog/?p=2487#comments Thu, 19 Jan 2012 14:45:16 +0000 Barry Zalma http://zalma.com/blog/?p=2487 Continue reading →]]> IGNORANCE IS CURABLE

STUPID IS FOREVER

The Texas Court of Appeal was called upon to deal with a workers’ compensation claim and suit brought by a party who filed pro se (acting as his own lawyer) in McClennon Cook v. Robin M. Mountain and Texas Department of Insurance, Division of Worker’s Compensation, No. 02-10-00465-CV (Tex.App. Dist.2 01/12/2012).  Although Mr. Cook may have been injured on the job the workers’ compensation panel found he was not injured. He filed suit and an appeal to get the benefits without the assistance of counsel.

Proving the maxim in the title correct, Cook lost his right to gain the benefits available under the Texas Workers’ Compensation law because he insisted on suing the wrong party even after he was advised of his error and given the opportunity to file against the correct party in a timely fashion.

INTRODUCTION

Appellant McClennon Cook, representing himself, appealed the dismissal of his claims related to an on-the-job injury. His first four issues address the sufficiency of evidence presented in the administrative hearing on his worker’s compensation claim, and the fifth addresses the dismissal by the trial court of his suit for want of prosecution.

DISCUSSION

On May 15, 2009, the appeals panel of the Department of Insurance, Division of Worker’s Compensation (the Division) filed its decision upholding the hearing officer’s decision and order denying Cook’s August 4, 2006 worker’s compensation claim.

On August 7, 2009, Cook filed a petition for writ of mandamus against “Robin M. Mountain et al Greyhound Line Inc.,” asking the trial court to compel the parties to respond and asserting that on June 5, 2009, he filed his original petition in the trial court regarding the appeals panel decision. Cook specifically complained that “opposing party Robin M. Mountain has failed to file any response in this cause of action,” and he asked that mandamus relief be granted to compel Mountain to answer.

Cook attached a copy of the hearing officer’s decision and order to one of his appellate filings. Under the order finding that the insurance company was not liable for benefits, the document contains the following information:

The true corporate name of the insurance carrier is ACE AMERICAN INSURANCE COMPANY and the name and address of its registered agent for service of process is ROBIN M. MOUNTAIN 6600 CAMPUS CIRCLE DRIVE EAST, SUITE 300 IRVING, TEXAS 75063.

Referencing the same document, Mountain argues that he is not a proper party to the underlying district court litigation or this appeal. Cook states the following in his reply to Mountain’s argument: “Appellant Cook asserts that the DWC Decision and Order Page-(4) of the order designates the true corporate name of the insurance carrier is Ace American Insurance Company and the name of it’s [sic] Registered Agent for service of process is Robin M. Mountain.” Cook argued that Mountain, simply a person available to accept service for Ace, is the proper party to this suit.

The Court of Appeal made clear that Mountain is merely the registered agent listed for the proper party-the insurance company. Cook did not sue the insurance company in this lawsuit.

Texas Labor code section 406.031 states that “[a]n insurance carrier is liable for compensation for an employee’s injury” if at the time of the injury, the employee is subject to “this subtitle”.  The employee and the insurance carrier are the only parties with an interest in the outcome of litigation following the exhaustion of administrative remedies in a worker’s compensation case. The Court of Appeal concluded that as in regular tort litigation, a claimant under the worker’s compensation system must correctly name the opposing party or parties in his district court litigation, and his time limit for filing suit continues to run until such time as the proper parties are joined.

Cook did not sue the insurance company in the trial court. Further, the applicable version of labor code section 410.252(a) sets out that Cook’s filing deadline to seek judicial review of the appeals panel decision was “not later than the 40th day after the date on which the decision of the appeals panel was filed with the division.”  The filing deadline under Texas statutes is mandatory and jurisdictional. When a plaintiff fails to name the proper party within the statutory time limit, the court has no option but to dismiss the employee’s suit.

Cook had only until June 24, 2009 to file suit against the insurance carrier. Cook allegedly filed his original petition in the trial court against Mountain and Greyhound Line Inc. on June 5, 2009, and he filed his petition for writ of mandamus regarding these parties on August 7, 2009.

Because Cook failed to sue the proper party: Ace American Insurance Company within the allotted time period the Court of Appeal concluded that dismissal of his suit was mandatory and proper.

ZALMA OPINION

Mr. Cook was obviously not a lawyer. He allowed emotion and lack of knowledge to

destroy his case. He not only had an idiot for a client he had an incompetent lawyer.

Courts, as did the trial court in this case, bend over backward to help a non-lawyer in litigation. They issued an order telling him who to sue and how to deliver service. Even with this assistance Cook went his own way. He gave the insurer rope to hang him, put it around his own neck, threw the rope over a tree and hung himself.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

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(c) 2012 by Barry Zalma & ClaimSchool, Inc.

This is the 2012 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more than 240 pages of new cases and statutes. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2012 was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property has been repaired. It will assist you in answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It will allow you to find the answer in the appropriate jurisdiction if the proper measure of damage:

• Is it cost of repair?
• Is it the difference between fair market value before and fair market value after it is damaged?
• Is it the cost of repair plus stigma damages?
• Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged?
• Is it something in the middle?

The subject of diminution of value damages caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay the cost of repair. It also caused concern to appraisers, adjusters, lawyers and every person who incurred property damage. The methodology used to establish true indemnity is different in each decision. The application of which measure of damages is to be used is different from state to state and from U.S. District Court of Appeal to District Court of Appeal.

Because of the differences in the various jurisdiction and apparent confusion concerning diminution of value damages this E-Book was created to more thoroughly review how each jurisdiction in the United States deals with the issue. The E-book covers each of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court.

Zalma on Diminution of Value Damages – 2012 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and tries to deal with the issue of establishing the amount of loss to property in each jurisdiction.

Since this is an update of the 2010 E-book, Zalma on Diminution in Value Damages some of the original information remains the 2012 version is, in effect, a new book.

The E-book covers in detail how each of the jurisdictions deal with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, or their insurers, to determine how to calculate what they must pay to those whose property is damaged by their actions.

Mr. Zalma also has written other e-books available at Zalma Books.

As I have said many times before insurance is a contract where an insurer agrees to indemnify the persons insured against contingent or unknown events. When one deliberately sets fire to a house, pleads guilty to the crime of arson, and then claims a right to recover under the policy of insurance that insured against the risk of loss by fire, is doomed to fail. In Barbara A. Lachman, et al. v. Farmers Insurance of Columbus, 2012 -Ohio- 85. (Ohio App. Dist.8 01/12/2012) the Ohio Court of Appeal was asked to compel the insurer to provide indemnity for the destruction of the house and to defend the arsonist from a suit brought by a neighbor whose house was also damaged by the same fire.

FACTS

Barbara A. Lachman, Craig Lachman, Victoria Greenleaf, and Christopher Hanczrik (Appellants) appeal from the decision of the trial court granting summary judgment in favor of Farmers Insurance of Columbus. The Appellants claimed that the trial court erred in determining that the intentional act exclusion applied, that they were not entitled to a defense on a subrogation claim, and that Greenleaf and Hanczrik were not covered insureds under the policy.

Barbara Lachman deliberately set a fire on March 24, 2009 to the home in which she lived with her husband, Craig, located in Lakewood, Ohio. On that evening, Barbara admittedly set fire to the comforter located in the master bedroom on the second floor of the residence. She did so in what Appellants characterize as a misguided attempt to have her husband become a hero by extinguishing the fire before any damage beyond the loss of the comforter occurred. Barbara used a cigarette lighter to ignite the blaze and then called to her husband to get a fire extinguisher. Craig did bring a fire extinguisher to the bedroom but was unable to extinguish the fire, which rapidly spread to other flammable objects and went out of control. Both Barbara and Craig fled the residence as the fire spread.

Although Barbara initially told investigating authorities that she was smoking in bed at the time of the fire, she later admitted deliberately setting the fire. The fire caused a total loss to the structure as well as to most of the contents contained therein. Additionally, the fire spread to the home next door causing damage to the exterior of that residence.

The Lachman’s residence was originally owned by Judith Hanczrik, the mother of Barbara, and her siblings, Victoria Greenleaf and Christopher Hanczrik. At the time of her passing in 2003, Judith Hanczrik’s estate passed to her three children in equal shares, leaving each adult child with a one-third interest in fee simple. From 2003 onward, both Barbara and Craig lived in the residence. Neither Victoria nor Christopher lived in the residence from 2003. Although Judith Hanczrik died in 2003, Barbara and her siblings continued to pay the premiums on the Farmer’s Insurance of Columbus homeowner’s policy, which remained in Judith Hanczrik’s name.

Subsequent to the fire, appellants filed an insurance claim seeking insurance proceeds for damage to the property as well as proceeds for lost personal property, contents, and living expenses. Farmers Insurance denied Appellants’ claim. Specifically, Farmers Insurance determine that because neither Victoria nor Christopher were permanent residents of the property, they were not insured under the policy. Additionally, as it related to Barbara’s claim for insurance proceeds, Farmers determined the following:

Your claim for coverage for damage to the dwelling and personal property located at 1570 Woodward Avenue, Lakewood, OH 44107 is denied because the fire was intentionally set by Barbara Lachman, an insured under the policy.

In particular, Farmers Insurance of Columbus determined that the Intentional Acts exclusion provision of the policy applied to bar Barbara’s claims for proceeds. The intentional acts exclusion provides as follows: “If any insured directly causes or arranges for a loss to covered property in order to obtain insurance benefits, this policy is void. We will not pay you or any other insured for this loss.”

THE LITIGATION

On June 17, 2010, appellants filed the instant complaint for declaratory judgment, seeking to recover policy proceeds and coverage for damages resulting from the fire as well as defense coverage for property damage sustained by the neighbor’s house. Farmers responded and then filed a motion for summary judgment that the trial court granted.

The trial court found that Victoria Greenleaf and Christopher Hanczrik were not entitled to coverage because they were not insureds under the insurance policy. Additionally, the court determined that Barbara and Craig Lachman were not entitled to coverage because Barbara’s conduct in setting the fire fell under the intentional act exclusion of the policy pursuant to the doctrine of transferred intent.

The trial court concluded as a matter of law that the act of a person setting fire to a comforter inside a bedroom, failing to take the proper precautions to prevent the fire from spreading is intrinsically tied with the resulting fire damage. Fire by its very nature is harmful, destructive, and extremely difficult to control. Lastly, the court determined that Farmers did not owe Barbara a defense or indemnification in connection with Westfield’s subrogation claim because her actions were: (1) excluded under the policy and (2) reasonably foreseeable to cause damage to the neighbor’s property.

THE APPEAL

Farmers also cited the Statement Under Oath of Barbara Lachman where she admitted to deliberately setting fire to the comforter in her bedroom. In particular, Barbara stated as follows:

And so I decided that I would make a symbolic gesture to kind of rally the troops, and so I thought what I would do is start a controlled fire and that we would put the fire out and then say, well, you know, come on, you know, things looked bad for a moment, we got that under control, we can, we can do this. So, but it got out of control more quickly than I had assumed, and my husband brought a fire extinguisher up to me, ran back down to get another fire extinguisher. By the time he came up with the second fire extinguisher, they, the room had gone up, and so we just got ourselves and the dogs out of the house.

Barbara further admitted that she had been drinking that evening and that she got the idea to start the fire to raise her husband’s spirits. Lastly, Farmers Insurance advised the court about Barbara’s two convictions for arson in connection with her actions on March 24, 2009. Specifically, Barbara pleaded guilty to two counts of arson thereby admitting that there was evidence beyond a reasonable doubt that the Barbara intentionally set fire to the house.

ANALYSIS

An insurance policy’s intentional act exclusion applies when the intentional act of an insured and the resulting harm are intrinsically tied together. Limiting the scope of the doctrine is appropriate because the rule is needed only in a narrow range of cases – those in which the insured’s testimony on harmful intent is irrelevant because the intentional act could not have been done without causing harm. Thus, an insured’s intent to cause injury or damage may be inferred only when that harm is intrinsically tied to the act of the insured.

The Court of Appeal concluded that the obvious was true, there is no other conclusion the court could reach. The intentional act of setting fire to a comforter can only result in harm. Whether Barbara intended the fire to spread to the remainder of the home is irrelevant; the damage caused by a fire cannot be separated from the act of intentionally setting that fire. Additionally, Barbara’s claim that she did not set the fire in order to recoup insurance proceeds is misplaced because insurance proceeds are exactly what the lawsuit and appeal sought. Fire by its very nature is harmful, destructive, and extremely difficult to control. Therefore, the Court of Appeal concluded that no one, including the Appellants, should be rewarded for partaking in an inherently dangerous activity.

The doctrine of inferred intent equally applies to the damage suffered by the neighbor. Barbara’s act of setting fire to her home cannot be separated from the damage suffered not only to her home, but to the residence of the neighbor. Barbara’s claim that she did not intend the resulting damage simply does not matter in this case. The act is intrinsically tied with the harm.

The plain language of the insurance policy precludes Farmers Insurance from providing a defense or indemnification in instances of intentional acts where the results are reasonably foreseeable. Appellants have failed to raise any set of facts where Farmers Insurance would owe Barbara a defense or indemnification and, as such, they have failed to raise a genuine issue of material fact to preclude the grant of summary judgment.

Victoria and Christopher offer no evidence that they attempted to modify the insurance policy to include themselves as named insureds, nor do they attempt to argue that they were permanent residents of the property. In the absence of such evidence, Appellants have failed to set forth any genuine issue of material fact to preclude the grant of summary judgment. The policy language is clear, and under that language, neither Victoria nor Christopher can be considered named insureds.

ZALMA OPINION

I am amazed that the court found there were reasonable grounds for this appeal. The insured intentionally set fire to the house. Her excuses and claims of true intent were defeated by her pleas of guilty to arson. She intentionally cause the fire beyond a reasonable doubt and allowing her or her husband to recover indemnity as a result of her acts would be unconscionable.

Her innocent syblings lost because they ignored their rights when their mother died. Insurance is a contract of personal indemnity and does not follow the title to the land. They each could have purchased a separate policy of insurance on the house based upon their obvious insurable interest or could have requested that the name of the insured be changed to include all of the owners as insureds, an act that could have been easily accomplished.

In California and some states an innocent spouse can recover his or her share of a loss regardless of the intentional act exclusion that in this case dealt with “any insured”.  For example, in Watts v. Farmers Insurance Exchange, 98 Cal.App.4th 1246, 120 Cal.Rptr.2d 694 (Cal.App. Dist.2 06/05/2002) found that the acts of the criminal spouse cannot be imputed to the innocent spouse. Interestingly, when the case was sent back to trial it was found that the “innocent spouse” was also intentionally involved in the fraud and the Watts’ recovered nothing.

Also, whenever the statutory clause limiting the insurer’s liability in case of fraud by the insured is used in Delaware it will be read to bar only the claim of an insured who has committed the fraud and will not be read to bar the claim of any insured under the policy who is innocent of fraud [Steigler v. Insurance Co. of North America (Del. 1978) 384 A.2d 398, 402].

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

]]> http://zalma.com/blog/?feed=rss2&p=2480 0 http://zalma.com/blog/?p=2471 http://zalma.com/blog/?p=2471#comments Mon, 16 Jan 2012 15:26:36 +0000 Barry Zalma http://zalma.com/blog/?p=2471 Continue reading →]]> INVITED ERROR

The California Court of Appeal was called upon to resolve an issue relating to what it called “the esoteric subject of reinsurance.” Rather than resolving the “esoteric” issue the California Court of Appeal, in Transport Insurance Company v. TIG Insurance Company et al, No. A122573 (Cal.App. Dist.1 01/13/2012) it decided the case on the doctrine of “invited error” rather than on what the parties desired, by determining the “esoteric” issues of accrual of a claim against a reinsurer and the commencement of the running of a statute of limitation.

INVITED ERROR

Under the doctrine of invited error, when a party by its own conduct induces the commission of error, it may not claim on appeal that the judgment should be reversed because of that error.

It has been said that the invited error doctrine applies with particular force in the area of jury instructions. The instruction was the subject of lengthy argument below, ten pages to be exact.

The invited error doctrine should not apply when a party, while making the appropriate objections, acquiesces in a judicial determination. An attorney who submits to the authority of an erroneous, adverse ruling after making appropriate objections or motions, does not waive the error in the ruling by proceeding in accordance therewith and endeavoring to make the best of a bad situation for which he was not responsible.

FACTUAL BACKGROUND

Appellant Transport Insurance Company (Transport) insured Aerojet-General Corporation (Aerojet) under a liability policy issued in 1973, and that same year entered into the three reinsurance contracts pertinent to the litigation. Numerous suits were brought against Aerojet, and as early as 1980 it began submitting claims for property damage to Transport, which it denied based on a policy exclusion. Notwithstanding that denial, Transport began paying some investigative expenses, and began to submit claims to the reinsurers. A December 1997 decision by the California Supreme Court held that site investigative expenses could be covered, and in late 1999 Transport finalized a settlement with Aerojet, agreeing to pay $26.6 million. Transport claimed that over $12 million of this was the responsibility of the reinsurers, and in December 1999 submitted its billing and final proof of loss to them.

Years went by without resolution. In 2006 Transport filed separate lawsuits against each reinsurer. The suits were consolidated. Following an 17-day trial, the jury quickly answered “No” to special verdict questions whether the lawsuits were timely filed, and judgment was entered against Transport.

Transport appealed. The appeal that has generated over 8,000 pages of appendices, 35 volumes of reporter’s transcripts, and 425 pages of well-written briefing, including a 180-page appellant’s reply brief. Transport told the Court of Appeal the case presented two issues of first impression in California, issues “that when decided by this court, will have an impact far beyond the confines of the specific dispute in this case. . . . [T]his court’s opinion is likely to become the lead authority on issues involving the statute of limitations in reinsurance claims, not only in California, but possibly throughout the nation.”

The Insurance Contracts

In July 1973, Transport’s predecessor, Transport Indemnity Company, issued to Aerojet a blanket excess liability insurance policy, providing coverage from July 15, 1973 to July 15, 1976. Following issuance of the policy to Aerojet, Transport entered into three contracts of reinsurance, the contracts pertinent to the appeal. The reinsurance contracts were with TIG and Seaton.

Reinsurance contracts are classified as either “facultative” or “treaty.” Reinsurance is facultative if it covers the reinsured’s risk on an individual policy. The majority of reinsurance contracts are placed under a treaty, which covers the reinsured’s risk for an entire class of policies. Under pro-rata reinsurance, the reinsurer assumes a specified percentage of the risk (and premiums) associated with the particular percentage of the risk (and premiums) associated with the particular policy or class of policies covered.  Under excess-of-loss reinsurance, the reinsurer pays losses only after they exceed a specified amount (the “retention”).

The classification of coverage as “pro rata” or “excess of loss” was germane to some of the issues between Transport and the reinsurers, and the subject of much testimony at trial. One provision in each of the reinsurance contracts is germane, however: when loss was to be paid. As to this, the TIG contracts stated that “Payment of its proportion of loss and expense paid by [Transport] will be made by [TIG] to [Transport] promptly following receipt of proof of loss.” The Seaton contract stated that “[p]ayment of [Seaton's] proportion of loss and expense incurred by [Transport] will be made to [Transport] promptly upon receipt and approval by [Seaton] of proof of loss in form satisfactory to [Seaton].”

REINSURANCE

Reinsurance is defined in Insurance Code section 620: “A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.” Reinsurance is a contract by which one insurer transfers to another insurer all or part of the risk it has assumed under a separate policy or group of policies in exchange for a portion of the premium.

In essence, reinsurance is insurance for insurance companies. Reinsurance provides insurers with the ability to spread the risk they have assumed, thereby preventing any one insurer from suffering a catastrophic loss. The insurer obtaining the reinsurance is called the “ceding insurer.”

One aspect of reinsurance that distinguishes it from other insurance is that reinsurance contracts have no limitation provision, no reference to when suit has to be brought on the reinsurance contract.  Among the other distinguishing attributes of reinsurance are the sophistication and expertise of the reinsured which are themselves insurance companies. Another is that the reinsurer does not itself investigate or adjust claims, but relies on the ceding insurer to do that.

Some case law even refers to reinsurers and their cedents as “partners” rather than adversaries. All issues between reinsureds and reinsurers are fair game, including statutes of limitations. However, because custom and usage have established a gentility and unity of interest between the reinsured and its reinsurer a generation ago the courts have doubted that the defendants would even have considered asserting a statute of limitations defense until the collapse of prominent British reinsurers, and the financial distress of Lloyd’s of London before the turn of the century times may have changed.

THE CLAIMS

Aerojet’s primary business was the development and production of missile and rocket motors for NASA and the armed forces. Aerojet was sued in a number of actions alleging damages caused by toxic contamination of groundwater involving pollution at Aerojet sites in Rancho Cordova and Azusa, California, and began submitting claims to Transport as early as 1980, including for both loss and expense. Following long and tortuous litigation through the lower courts the California Supreme Court held that while Transport had no duty to pay Aerojet’s losses at Rancho Cordova, if certain criteria were met site investigation expenses might constitute defense costs covered under the policy. In September 1999 Aerojet and Transport entered into a settlement by which Transport agreed to pay $26,655,000 in exchange for a release of all claims under the Aerojet policy, including for both Rancho Cordova and Azusa. The settlement agreement did not allocate the amount between loss and expense, or between Rancho Cordova or Azusa.

According to Transport’s brief, with this settlement “the reinsurers’ contractual obligation to pay for their proportionate share of the Aerojet claims arose.” And “[b]y letter dated December 20, 1999, Transport submitted its final billing in the Aerojet matter to TIG, seeking the full amount of its reinsurance claim, a total of $6,608,039. [Citation.] This was sent on Transport’s behalf by Vito Peraino . . . . Peraino sent the letter to William Pascale, TIG’s manager of assumed reinsurance claims. [Citation.] The letter stated: [¶] We have finalized our billings, having assembled all prior payments, and enclose our billing to you for this matter. As this matter was rather complex and carries with it a bit of history, we would like the opportunity to meet with you to present our claim, and to answer any questions you might have.”

Much of the testimony at trial focused on the numerous communications between Transport and the reinsurers that ensued, and hundreds of exhibits were introduced. Similarly, much of the parties’ briefing sets out these communications in great detail.

Following the September 1999 settlement with Aerojet, Transport brought in a third law firm, Luce Forward, Hamilton & Scripps (Luce Forward), to allocate the settlement between the Aerojet sites and between loss and expense, in order to bill the reinsurers. Some issues arose as to just how to apportion, and one attorney at Luce Forward told Transport that “it is unlikely that anyone is just going to write a check” regarding the proposed allocation, and another that his “expectation was that the matter was likely to go to litigation at the end of the day.” They also warned Transport regarding the statute of limitations.

It was not until many years later that Transport filed any lawsuit.

TRANSPORT’S LAWSUITS

On January 26, 2006, Transport filed a complaint against TIG, followed four days later by a complaint against Seaton. Both complaints alleged two causes of action, for declaratory relief and breach of contract, based on the respective reinsurer’s failure to pay its proportionate share of the Aerojet settlement.

TIG filed its answer on March 7, 2006, Seaton on April 10. Both asserted the affirmative defense that Transport’s claims were barred by the four-year statute of limitations applicable to breach of contract claims.

THE TRIAL

The case proceeded to a jury trial, which began on May 12, 2008. The parties had submitted trial briefs, and as to the statute of limitations issue. Continental Casualty Co. v. Stronghold Insurance Co. 77 F.3d 16 held that the statute of limitations does not start to accrue until the reinsurance claim is denied. In passing discussion, the Stronghold court also noted that an alternative time would be a reasonable time following submission of the final proofs of loss if the reinsurer did not act upon the final proofs.

The jury instruction ultimately given on the statute of limitations was as follows: “Affirmative defense statute of limitations. [¶] In this case, Transport’s claims against the defendant accrued after Transport submitted its claims to defendants and when, one, defendants denied the claims, or, two, a reasonable period of time elapsed after the submission of the claims without a decision by the defendants. [¶] If Seaton either denied the claims or a reasonable period of time elapsed following submission of the claims by January 30, 2002, Transport’s claims against Seaton were filed too late and are time barred. [¶] If TIG either denied the claims or a reasonable period of time elapsed following submission of the claims by January 26, 2002, Transport’s claims against TIG were filed too late and are time barred.”

ANALYSIS

Transport Agreed to the Statute of Limitations Instruction. It arose in the context of, as Judge Woolard described it, “Jury Instructions Disputed by Transport,” and specifically in Transport’s argument that TIG had “agreed” to a different instruction than the one it proposed. The claimed “agreed” to instruction was the one to which Transport and Seaton had agreed: the instruction Transport complained of on appeal.

If It Did Not Propose It, and Any Claim That It Was Erroneous Is Barred By the Invited Error Doctrine

Transport’s first argument is that the trial court’s instructions regarding the statute of limitations was prejudicially erroneous because it contained an incorrect statement of law regarding accrual and utterly failed to address tolling.

However, in this case, Transport agreed to – if it did not propose – the language in the instruction. It did not object, let alone “strenuously.”

Judge Woolard herself said that she “wonder[ed] if I misspoke in my writing of these orders.” As also noted, counsel for Transport said nothing in response, which is perhaps not surprising, as Transport was pushing strongly for the instruction. Transport fought tooth and nail to keep Judge Woolard from giving TIG’s proposed instruction, an instruction that, as described at oral argument, was “worse for Transport.” Put otherwise, Transport made a strategic reason to vigorously argue for the instruction Judge Woolard gave, especially as there had to be some instruction on the subject – as Transport expressly admits.

Transport cited cases concerning tolling only in its summary adjudication papers. It never proposed a jury instruction based on equitable tolling or one even mentioning the leading case on the subject.

Finding that the issues of “accrual” and “tolling” are fact specific Transport expressly admitted that the law supports a finding of equitable tolling is a question of fact for the jury (or trial court) to decide on remand. Equitable tolling is a fact intensive issue and it is determined based upon evidence.

Moreover Transport’s lawyers had advised it that the statute of limitations might be a factor, a fact that militates against a claim of estoppel.

Transport failed to point to any evidence that it reasonably relied on conduct of either reinsurer in deciding not to sue. Its sloth resulted in a loss of the right to collect on its reinsurance contract with the defendants.

ZALMA OPINION

This case, from its beginning, was a comedy of errors. The reinsured simply sat on its rights and, rather than deal with the issue before it, wrote hundreds of letters and had its insurers write more demanding payment over a period of multiple years. What it failed to do was listen to its lawyers who advised it to sue the reinsurers because of counsel’s concern that all would be lost by the running of the statute of limitations.

By the time the reinsured got around to filing suit every possible statute of limitations had run. It hired exceptionally professional and proficient lawyers who spent hundreds of hours, destroyed dozens of trees in preparing documents for trial and appeal, all of which was thrown away by proposing a jury instruction that resulted in a prompt, deafening, and obvious ruling by the jury that the statute had run. It then tried to couch the case as one of first impression that required the court to resolve multiple issues of reinsurance law.

The Court of Appeal wisely refused to enter into such a discussion because it found that the doctrine of invited error destroyed the entire appeal and made it unnecessary to go into detail on the other issues.

The lesson taught by this case is that those who sit on their rights will lose those rights.  As the U.S. Supreme Court has stated, statutes of limitations represent a pervasive legislative judgement that it is unjust to fail to put the adversary on notice to defend within a specified period of time and that “the right to be free of stale claims in time comes to prevail over the right to prosecute them.” [United States v. Kubrick, 444 U.S. 111, 117, 100 S. Ct. 352, 356, 62 L.Ed.2d 259, 266 (1979) and Railroad Telegraphers v. Railway Express Agency, 321 U.S. 342, 349[, 64 S. Ct. 582, 586, 88 L.Ed. 788, 792] (1944)]

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The Kentucky Court of Appeal was asked to resolve the dispute Melissa Slone Hastings (Slone), who appealed from a summary judgment of a trial court in favor of Modern Woodmen of America (Modern Woodmen), against Modern Woodmen in a contract action involving an accidental death rider to a life insurance policy. The decision of the Kentucky Court of Appeal in Melissa Slone Hastings v. Modern Woodman of America, No. 2010-CA-002225-MR (Ky.App. 01/06/2012) interpreted an exclusionary clause dealing with abuse of drugs.

FACTUAL BACKGROUND

Slone was listed as the beneficiary on a life insurance policy secured by her husband Charles, now deceased, through Modern Woodmen. The policy included an accidental death benefit in the amount of $75,000 in addition to the standard policy amount. However, the accidental death rider contained the following specific exclusion:

No accidental death benefit will be payable if death of the insured results from, or is caused by: . . .

4) The voluntary taking or using of any hallucinogen, narcotic or drug, except on the advise (sic) of a licensed physician.

On January 20, 2005, Charles died from a prescription drug overdose.

The coroner’s report showed the presence of multiple drugs in his system, including methadone, diazepam, and hydrocodone. The drugs found in Charles’s system at his death were all drugs he had previously been prescribed, although not all of them were current prescriptions. Slone filed for the accidental death benefit from Modern Woodmen and the claim was denied on the grounds that the policy excluded from coverage any death resulting from the use of drugs not taken on the advice of a licensed physician. Slone thereafter filed suit in the Floyd Circuit Court.

After discovery, Modern Woodmen filed a motion for summary judgment. The trial court granted judgment and Slone now appeals.

On appeal, Slone argued that an issue of material fact existed as to whether the drugs found in Charles’s system were taken on the advice of a physician.

ANALYSIS

To determine whether there was a genuine issue of material fact regarding whether Charles took the medications which caused his death on the advice of a physician, the court must look to the evidence presented in support of the motion viewing it in a light most favorable to Slone.

The evidence showed that Charles’s last prescription for methadone was on December 16, 2004 (approximately one month before he died); his last prescription for diazepam was on February 10, 2004 (approximately eleven months before he died); and his last prescription for hydrocodone was on December 28, 2001 (approximately three years before he died).

State Medical Examiner Dr. Gregory James Davis testified in his deposition that the cause of Charles’s death was multiple drug intoxication. Dr. Davis testified that he could not form an opinion as to whether the medications found on the autopsy were taken on the advice of a physician. However, Dr. Davis testified that the pharmacy records indicated that Charles was not taking the medications as directed. Davis testified that medical examiners usually do not see multiple drug intoxication deaths except where the individuals are taking the medications in ways other than directed. Specifically, Davis stated as follows:

We do approximately one to two drug intoxication deaths per day in my office in Frankfort, which covers 58 counties in central and Eastern Kentucky. The vast majority of those, in fact, all that I can remember are in individuals who were not taking those medications as they were directed by a physician.

Slone argued that, although the drugs were not taken “as prescribed,” they were taken “on the advice of a physician.” Slone argued that the policy exclusion contains no requirement that the medications causing accidental death are taken “as prescribed,” and that the trial court essentially wrote this term into the contract.  Modern Woodmen argued that it is irrelevant whether the death was intentional or accidental because the policy rider required that the drugs causing death be taken “on the advice of a licensed physician,” and they were not.

Contrary to Slone’s assertion, the general standard in Kentucky is that the beneficiary of a policy of life insurance bears the burden of proving accidental death.  Slone is not entitled to recover under the terms of the policy unless the drugs found in Charles’s system at the time of death were taken “upon the advise (sic) of a licensed physician.” In order for Slone’s claim to survive summary judgment, there must be evidence, when viewed in a light most favorable towards her, from which the inference could be drawn that Charles was using the drugs on the advice of a physician.

INSURANCE POLICY INTERPRETATION

Ambiguous coverage exclusions in a policy of insurance are typically strictly construed against the insurer. Absent any ambiguity in the insurance contract, however, the contract shall be construed according to its plain and ordinary meaning.

In the present case, the exclusionary language, “on the advise (sic) of a licensed physician,” regardless of the spelling error, is not ambiguous. The Court of Appeal refused to interpret this clear and ordinary language to mean that an individual may retain old, unused medicine and combine it with new drugs without first asking his physician. In the present case, had Charles taken only current prescriptions, and/or perhaps engaged in some foreseeable misuse or minor error in following doctors’ orders, there might be a genuine issue of material fact raised. On the contrary, Charles took medications, prescribed by different doctors unaware of each other, two of which were not even current prescriptions. This unfortunate decision led to his death.

CONCLUSION

Taking a prescription that is three years old and one that is six months old, in combination with a current prescription written by a different doctor, cannot be considered as being on the advice of a physician.  Charles took prescriptions prescribed by different doctors, which were not prescribed for use concurrently, one of which was three years old.

The court concluded that Slone failed to present sufficient evidence to avoid judgment as a matter of law.

ZALMA OPINION

In Kentucky the beneficiary of  an accidental life insurance policy has the burden of proving that the death was accidental. Mrs. Sloane was unable to carry that burden because the evidence from the decedent’s physicians clearly established his death from drug intoxication was a result of abuse not taking drugs as prescribed or that had been prescribed in a manner that no physician had advised.

Insurers who wish to exclude risks of loss must do so in a clear and unambiguous manner. A computer’s spell check would not have resolved the error in spelling but an underwriter with a high school education would have avoided the misspelling. In this case, even with a misspelled word, the exclusion was clear and unambiguous.

To avoid litigation insurers should be more careful in drafting the terms and conditions of their policies and have the wording reviewed by underwriting, marketing and independent counsel.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Not Ambiguous

The Indiana Supreme Court was called upon to resolve a dispute between an insurer and a local youth soccer team. The players on the youth soccer team sought to recover under the state youth soccer governing association’s business auto-insurance policy for injuries sustained when the van in which they were riding was involved in an accident. Because the van was not being used in the business of the association, a condition for coverage under the insurance policy at issue, the insurer refused coverage. In Sarah Haag, Gordon Haag and v. Mark Castro, the Indiana Youth Soccer Association, Virginia Surety, No. 29S04-1102-CT-118 (Ind. 01/10/2012) the Supreme Court agreed with the insurer.

BACKGROUND

The plaintiffs in this case were players (or parents of players) on a soccer team called Carmel Commotion. Carmel Commotion was one of a number of teams fielded by the Carmel United Soccer Club in 2004. The Carmel United Soccer Club is an affiliated member in good standing of the Indiana Youth Soccer Association (“IYSA”). The IYSA is a not-for-profit corporation that governs youth soccer in Indiana; it is charged with developing and promoting youth soccer in Indiana in conjunction with various national organizations.

In June, 2004, Carmel Commotion traveled with the IYSA’s approval to Colorado to participate in a youth soccer tournament. Mark Castro, the team’s IYSA-certified coach, organized the trip.

On June 12, 2004, while attending the soccer tournament in Colorado, the team decided to go on a white-water rafting trip as a “team-building” activity. Castro transported the players to the rafting activity in a passenger van that he had rented for the team’s use during the trip. While en route, the van collided with another vehicle, resulting in injuries to several players.

The injured players, by their parents (referred to collectively as “Players”), sued Castro and the IYSA’s insurance carrier, Virginia Surety Co., Inc. The Players sought a declaration that the IYSA’s insurance policy through Virginia Surety provided coverage while Castro drove them to the white-water rafting activity. Both Virginia Surety and the Players moved for summary judgment. Following a hearing, the trial court granted summary judgment in favor of Virginia Surety.

A divided panel of the Court of Appeals affirmed, the majority holding under the relevant insurance policy language that Castro was not using the rented van “in the business of” the IYSA at the time of the accident.

DISCUSSION

Virginia Surety issued a commercial lines policy to the IYSA that provided business auto coverage in certain circumstances. At issue in this case is an endorsement for “hired” (rented) vehicles that reads as follows:

With respect to hired auto and employers non-ownership liability, the insured means the named insured, member associations and its clubs, leagues teams, employees, volunteers, executive officers, directors, stockholders, therein, but only while the automobile is being used in the business of the Named Insured. Coverage is not provided on behalf of the parents, managers, coaches, umpires, officials, referees, of the insured or volunteers using any automobile (personally owned, leased, borrowed or employer furnished) in the transportation of youth or adult participants to and from athletic games or athletic events, including but not limited to practices, exhibitions, post season and scheduled events. (Emphasis added)

The Players make three arguments about this endorsement.

First, they contend that under the first sentence of the endorsement, the rented van in which they were riding was being used in the business of the IYSA.

Second, they contend that the second sentence of the endorsement does not apply because they were not traveling to an athletic game or event; rather, they were traveling to a “team-building” event.

Third, they contend that the endorsement must be construed to provide coverage in these circumstances because if it is not, coverage would not be available under any reasonably expected set of circumstances and, therefore, would be “illusory.”

The policy does not define “in the business of” and the Players argue that this creates an ambiguity that should be construed against the insurer. Of course, that a policy does not define a term does not necessarily make the term ambiguous. The IYSA’s Articles of Incorporation declare its relevant purposes and a set of  “Playing Rules” that “are intended to provide a uniform set of guidelines governing: player eligibility, registration, team formation, player assignments, playing rules, and standards of Sportsmanship and conduct for all Member Organizations.”  The Supreme Court read the organizational documents to identify three lines of endeavor or “business” for the IYSA: (1) “promoting” soccer; (2) “regulating” competition, leagues, teams, and players (e.g., registering teams, certifying coaches and referees, sanctioning participation in tournaments, etc.); and (3) “conducting” specific events.

The Virginia Surety policy requires that the automobile be “used in the business of the [IYSA]” for there to be coverage, the policy requires that the automobile be used in one of these three lines of business — “promoting,” “regulating,” or “conducting.”

Perhaps because our state is home to so many sports governing bodies, there is wide-spread general familiarity with their business. These bodies are not in the business of “competing” in athletic events — their business is promoting, regulating, and sometimes sponsoring competition. Likewise, the IYSA is not in the business of “competing.” It is a state governing body, acting in conjunction with the United States Youth Soccer Association, the United States Soccer Federation (also known as U.S. Soccer, the national governing body of the sport), and the United States Olympic Committee.

CONCLUSION

What Carmel Commotion (with Castro’s help) was doing was participating in a specific event, a soccer tournament; Carmel Commotion’s “business” is competing — along with the practicing, “team-building,” and the like that comes with it.  When an IYSA-registered team, with the help of its coach, competes in a tournament (even a tournament sponsored or sanctioned by the IYSA), the team is engaged in its own business, not that of the IYSA.

Examining the second sentence of the endorsement helps in understanding this point. It specifies that the policy does not cover any automobiles used “in the transportation of youth or adult participants to and from athletic games or athletic events.” Why not? Because participating in the soccer games themselves — the competition — is not the business of the IYSA.

The fact that coverage is not available here does not make the coverage the IYSA purchased “illusory.” Coverage under an insurance policy is not illusory unless the policy would not pay benefits under any reasonably expected set of circumstances.

That the IYSA might need auto-liability insurance in respect of hired or non-owned vehicles is clear. In the course of traveling to promote youth soccer or in transporting a celebrity guest — perhaps a member of our national team like Lauren Cheney or Lori Lindsey — to an IYSA sponsored event, an employee or volunteer might be involved in an auto accident while using a rented vehicle. The coverage is not illusory.

We have not been asked to decide whether the Players had any claim against IYSA, only whether Virginia Surety has liability under the endorsement. Because Castro was not using the automobile “in the business” of the IYSA, the policy provides no coverage. The judgment of the trial court is affirmed.

ZALMA OPINION

This case has nothing to do with the injuries suffered by the Players. The suit was filed to gain an additional deep pocket to pay the Players for their injuries. It was creative, imaginative, and sufficiently well reasoned to get one justice on the court of appeal and one justice on the Supreme Court to file a dissent.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

A theft occurred at the business office where Donna Summers conducted her marketing and graphic design business. The computer on which Summers’s work product was stored was stolen. In the process of investigating Summers’s claim, her insurer, State Farm General Insurance Company (State Farm), requested that she provide it with hard copy samples of her work. Summers did so.

State Farm lost the samples.

Summers sued State Farm for negligence, conversion, and bailment for the loss of the samples, and for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing for its alleged failure to fully compensate her for her losses due to the theft. During the liability phase of a bifurcated trial, the trial court refused to instruct the jury on the elements of the claims relating to the lost samples because State Farm conceded liability. During the damages phase of the trial, the court instructed the jury, in relevant part, that the damages for the loss of the samples would be their fair market value. The jury awarded Summers $85,000. Summers appealed in Donna Summers v. State Farm General Insurance Company, No. G043853 (Cal.App. Dist.4 01/04/2012) seeking additional damages including the cost to replace the samples lost.

Summers is the sole proprietor of a graphic design business, Summers By Design, which creates marketing materials for business entities. On or about June 24, 2007, a theft occurred at Summers’s business, resulting in the loss of her computer equipment and other business personal property. She claimed that the computer equipment contained all of her work product, work in progress, invoices, and business records, and that she had no backup for any of this material.

Summers is the named insured under a general commercial insurance policy issued by State Farm. Summers made a claim under the policy for the loss of her business personal property. State Farm paid Summers a total of $45,925.51 for the lost computer equipment and the replacement cost benefits. State Farm also paid Summers in excess of $250,000 for lost income resulting from the loss of the computer equipment.

MEASURE OF DAMAGES

The lost samples were not unique items lacking any market value.

Summers also claimed a loss for two separate projects involving the production of CD directories of golf courses and wineries in California. State Farm ultimately denied this portion of Summers’s claim.

Summers sued State Farm for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing in connection with the losses due to the theft of her computer equipment. Summers also sued State Farm for negligence, conversion, and bailment in connection with State Farm’s loss of her samples.

State Farm admitted liability for the loss of the samples. The court bifurcated the trial into two parts: (1) liability for claims based on the insurance policy; and (2) damages.

In phase one of the trial, the jury found State Farm had not breached the insurance policy. In phase two of the trial, the jury determined that the fair market value of the lost samples was $85,000. Judgment was entered, and Summers timely appealed.

DISCUSSION

Summers argues the trial court erred in its instructions regarding the damages available for her claims based on the lost samples. In phase two of the trial, the jury was instructed as follows regarding damages for the lost samples claims:

“You must decide how much money will reasonably compensate plaintiff for her harm. This compensation is called ‘damages.’

“The amount of damages must include an award for each item of harm that was caused by the defendant’s wrongful conduct, even if the particular harm could not have been anticipated.

“Plaintiff does not have to prove the exact amount of damages that will provide reasonable compensation for the harm. However, you must not speculate or guess in awarding damages.

“The following are the specific items of damages claimed by plaintiff:

“1. Economic damages consisting of the fair market value of the samples at the time defendant wrongfully lost them;

“Or

“Non-economic special damages resulting from defendant’s loss of the samples; and

“2. Reasonable compensation for the time and money spent by plaintiff in attempting to recover the samples; and

“3. Emotional distress suffered by plaintiff as a result of defendant’s conduct.

“In order to recover special damages, plaintiff must prove:

“1. That at the time of the delivery of the samples, State Farm had reason to suppose from sources other than plaintiff that the samples had a peculiar sentimental or emotional value to plaintiff.

“2. That it was reasonably foreseeable that special injury or harm would result from the loss of the samples; and

“3. That reasonable care on plaintiff’s part would not have prevented the loss.

“‘Fair market value’ is the highest price that a willing buyer would have paid to a willing seller, assuming:

“1. That there is no pressure on either one to buy or sell; and

“2. That the buyer and seller know all the uses and purposes for which the [samples are] reasonably capable of being used.

“No fixed standard exists for deciding the amount of damages for mental suffering and emotional distress. You must use your judgment to decide a reasonable amount based on the evidence and your common sense.”

The instructions given set forth the damages available for the causes of action for negligence, conversion, and bailment that damages for conversion are fair market value plus compensation for expenses in attempting to recover the property.

Summers cited cases authorizing the use of replacement or re-creation cost as the measure of damages where the item of personal property lost has no market value. However, the lost samples did have a market value, determined by the jury to be $85,000. Summers testified the lost samples had a value of $700,000 on the open market, and could have been sold by her to existing or prospective clients for that sum.

CONCLUSION

The Court of Appeal concluded that the trial court did not err in instructing the jury that damages on the lost samples claims were the fair market value of the samples, not their replacement or re-creation cost.

ZALMA OPINION

Insurance provides indemnity it should never be asked to provide an insured with a profit as a result of the loss. The property lost by Ms. Summers had a value and the jury found the fair market value of the property after listening to the evidence and was not willing to allow Ms. Summers to collect what it would cost her to re-invent the wheel. By finding an amount that was the fair market value the jury placed her in the exact financial position she was in before the loss.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The South Carolina Court of Appeal was called upon to decide whether the insurance carried on a motor home and insurance on the automobile it was towing are both required to respond to defend and indemnify the insured of the vehicular unit. In Auto-Owners Insurance Company v. Joseph Gordon Long, Bruce A. Carter, Administrator of the Estate, No. 2012-UP-005 (S.C.App. 01/04/2012) coverage was determined based on whether the use of the vehicle was causally connected to the collision.

FACTS

Joseph Long was driving a motor home, insured by GMAC and the motor home was towing a Saturn automobile insured by Auto-Owners. The motor home, tow bar, and Saturn comprised a single vehicular unit that was over 50 feet long. Mr. Long had entered the intersection and was attempting to make a left turn onto Northbound US 76 (a four-lane highway divided by a 28-foot median) when a collision occurred between Mr. Long’s vehicular unit and Mrs. Carter’s 1996 Chevrolet Suburban SUV.

Auto-Owners acknowledged that its insured’s towed vehicle was “in use” when the collision occurred. As a result, the only question before the circuit court was whether a causal connection existed between the vehicle’s use and the collision that caused Martha Jean Carter’s injuries and subsequent death. The Saturn and the attached tow bar added over 16 feet to the total length of the vehicular unit. When the vehicles collided, Mr. Long’s vehicular unit was blocking the majority of Southbound US 76 – the direction in which Mrs. Carter was traveling. At the time of the accident Mr. Long’s vehicular unit was blocking over half the outside, 11-foot, Southbound lane; the entire inside, 11-foot, Southbound lane in which Mrs. Carter was traveling; the entire inside, 10-foot, Southbound turning lane; and 23 feet of the 28-foot median separating Southbound and Northbound traffic.

A witness testified that: “At the time of the impact, the motor home and Saturn blocked so much of the roadway that Mrs. Carter had nowhere to maneuver to avoid hitting the motor home.”

DECISION

The South Carolina Court of Appeal determined that Mr. Long’s use of the Saturn was causally connected to the accident and concluded that the test for determining whether an automobile liability policy provides coverage for an accident is not whether the automobile was a proximate cause of the accident but rather whether there is a causal connection between the use of the automobile and the accident.

Since the Saturn was causally connected to the accident and acted to defeat Mrs. Carter’s ability to escape the accident the Saturn’s insurer as well as the motor home’s insurer was required to defend and indemnify Mr. Long.

ZALMA OPINION

Serious injuries always make interesting law. In this case a woman died due to the negligence of the driver of an over 50 foot long motor home with an automobile attached that resulted in the death of a woman driving an large Chevrolet Suburban motor home. The decision allowed Mr. Long, the negligent driver, to access the limits of his motor home insurance policy with GMAC and his automobile insurance policy with Auto-Owners.

The estate, as a result, had the opportunity to collect more money than it would if the court limited coverage to the operator.

Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The accident was both a contingent and unknown event at the time the policies were acquired and clearly were purchased to respond to the claim of the estate of Mrs. Carter.

This case teaches insurers to work together in a serious injury case rather than force the insured into unneeded litigation.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The Wisconsin Court of Appeal was called upon to resolve a dispute that arose out of damages suffered by VPP Group, LLC the grew from construction work being performed by contractors on a building owned by VPP. VPP was insured by Acuity. Acuity paid the damage claims filed by VPP arising out of the construction work. Acuity then filed a subrogation action against the contractors and their insurer, Society Insurance. Society successfully moved for summary judgment noting that Society’s CGL policies did not provide coverage for damages caused VPP by the contractors because there was no “occurrence” within the meaning of the policies under the facts of the case in Acuity, A Mutual Insurance Company v. Society Insurance, A Mutual Company, No. 2009AP2432 (Wis.App. 01/05/2012).

BACKGROUND

VPP, Ron Stoikes d/b/a RS Construction (RS), and Terry Luethe d/b/a Flint’s Construction (Flint) entered into a contract to remove and reinstall a concrete wall on the south side of the “engine room” building which provided refrigeration and necessary utility services to VPP’s entire animal processing plant for a contract sum less than $9,000.

The work contracted for was limited to removal and replacement of the engine room’s south wall. VPP supplied all materials; RS and Flint provided all labor. RS and Flint began work in late May 2006. RS first shored up the engine room and removed the existing wall to grade level. The VPP processing plant continued at full operation during this phase of the work.

On June 12, 2006, during Flint’s excavation of a trench adjacent to the south wall site, the soil began to erode from under the concrete slab of the first floor of the engine room. As a result, the engine room’s first floor slab cracked and a portion deflected downward. The part of the building above the compromised floor, including the second floor and roof, likewise deflected downward. The engine room’s masonry walls adjacent to the south wall also sustained damage. As a result of this damage to the engine room, the utility service to the rest of the processing plant was disrupted, including electrical service, anhydrous ammonia, and the refrigeration functions of the engine room’s roof top condenser. Also, the roof top condenser was disabled because the water required to run it was too heavy for the damaged roof. Due to this damage, the entire processing plant’s refrigeration capacity was reduced by twenty-five percent. In addition to the engine room itself, an adjacent building which shared a common wall incurred large cracks in the cooler housed inside it, which impaired its ability to cool processed beef.

Beef being processed must be rapidly cooled, and the processing is monitored by United States Department of Agriculture (USDA) on-site inspectors during all processing shifts. Because of the reduced refrigeration capacity, VPP had to change its processing schedule, adding an extra animal “kill” day, to ensure that it could fill its customer orders. Because of the need to add another “kill” day, VPP incurred costs for additional personnel hours, additional USDA inspectors’ hours, extra freight and fuel charges, and other expenses in the amount of approximately $380,000.

VPP repaired the engine room by replacing that portion of the first floor concrete slab that had cracked, jacking up the second floor level to its original level and replacing portions of the roof slab that had cracked. Only after these repairs were made was RS able to complete the original job of rebuilding the south wall.

The Original Insurance Settlement by Acuity

VPP contacted its insurer, Acuity, following the loss. After adjusting the losses, Acuity paid a total of $636,466.39 to VPP in final settlement of the loss claims, which amount included the $380,000 claimed for the extra expenses and the remainder representing the damages relating to repairs to the building. Not included in this amount were the costs to VPP related to replacing the south wall.

Acuity commenced this subrogation action against RS and Flint and their insurer, Society Insurance, seeking to recover damages arising from the engine room collapse, and alleging breach of contract and negligence.

Discussion

The issue on appeal is whether there is coverage for VPP’s claims under Society’s CGL policies issued to RS and Flint.

Acuity argued that the partial collapse of the engine room that resulted from faulty excavation techniques by Flint constitutes an “occurrence” under the CGL policy. Society contends that the circuit court correctly found that there was no “occurrence” under the policy.  When interpreting an insurance policy Wisconsin courts use a three step process:

1. It examines the facts of the insured’s claim to determine whether the policy’s insuring agreement makes an initial grant of coverage.
2. If an initial grant is triggered, it looks to see if any exclusions apply.
3. It then looks to see whether any exception to that exclusion reinstates coverage.

Since neither party contended that any exception to the exclusions applies and the court could not find one so its analysis was limited to the first two steps.

Under the CGL policy, to trigger coverage, there must be “property damage” caused by an occurrence. “Property damage” is defined within the policy as “physical injury to tangible property, including all resulting loss of use of that property.” The damage to the engine room, the roof, and the resulting damage to the equipment is plainly “physical injury to tangible property.”  There was no question that there was property damage as defined by the policy.

An “occurrence” is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The factual pleadings in the amended complaint allege “property damage” caused by an “occurrence” within the meaning of Society’s CGL policy. The Court of Appeal found it clear that the damage was caused by the accidental soil erosion that occurred because of faulty excavation techniques.

In analyzing whether this was an “occurrence” under the insurance policy, we relied on the analysis in earlier Wisconsin Supreme Court cases and concluded that while faulty workmanship itself is not an “occurrence,” where the “damage” was caused by an accident in that the damage was not intended or anticipated it constituted an “occurrence” under the policy.  Faulty workmanship may cause an unintended event, such as soil  erosion, and that event–the “occurrence”– may result in harm to other property.

The Court of Appeal concluded there was an “occurrence” under the CGL policy issued by Society and therefore there is an initial grant of coverage.

The dispute in this case focused on what constitutes “[t]hat particular part” of the property on which work was being performed. Although the business risk exclusions “have generated substantial litigation,” no published case in Wisconsin has specifically interpreted the k.(5) exclusion at issue here, nor has a Wisconsin court construed and applied the phrase “that particular part” as used in both the k.(5) and k.(6) exclusions. The k.(5) exclusion, however, is commonly found in CGL policies written after 1986 and courts from other jurisdictions have construed its precise terms in other policies.

The Court of Appeal was persuaded that the phrase “that particular part” in the k.(5) and k.(6) exclusions applies only to those parts of a building on which the defective work was performed, which is determined based on the scope of the construction agreement. The scope of the contracted work was to remove and replace the south wall of the “engine room.” Applying the interpretation of “that particular part” in the business risk exclusions to the scope-of-work the Court of Appeal concluded that the k.(5) exclusion does not apply and that damage to the engine room building and the equipment in that building is covered under the policy.

Conclusion

The Court of Appeal decided that there was an “occurrence” within the meaning of the CGL policies issued to RS and Flint, and that neither exclusion k.(5) nor k.(6) in the policies apply. It, therefore, reversed the circuit court’s grant of summary judgment in favor of Society, and remand this case for further proceedings.

Zalma Opinion

This case adopts what I believe has been adopted by the majority of states — although faulty workmanship should never be an “occurrence” under a CGL because if it was the policy would be a guarantee of the work rather than an insurance policy insuring against accidents — if the faulty workmanship is the cause of damage to property not involved in the work there is an “occurrence.”

When analyzing coverage all of the facts and all of the wording of the policy must be considered and interpreted to give the parties to the contract the indemnity promised by the policy if doing so is linguistically permissible.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The California Court of Appeal was called upon to determine if an insurance agent sued for a tort he did not commit could successfully sue those who used his name to deceive an insured who then sued the agent in Dupre Insurance Services, Inc v. Samantha L. Hall et al, No. C066073 (Cal.App. Dist.3 01/05/2012). Dupre Insurance Services, Inc. (Dupre), an insurance agent, was sued by a third party for failure to procure liability insurance for the third party resulting in the insurance company’s denial of a defense in an action against the third party. Dupre then filed a cross-complaint claiming the cross-defendant’s negligence was responsible for the failure to obtain insurance, thus requiring the Dupre to defend against the action by the third party. The trial court granted the cross-defendants’ summary judgment motion on the ground they were not negligent.

Dupre claimed the trial court erred in entering summary judgment as to its “tort of another” cause of action because “the evidence and argument presented in the moving papers did not address the factual and legal basis for [that] cause of action,” namely that cross-defendants’ (collectively “Hall”) misappropriation and use of Dupre’s name led to Dupre having to defend itself in a lawsuit brought against it by a third party and to bring a defensive cross-complaint.

THE TORT OF ANOTHER DOCTRINE

Under the tort of another doctrine, a person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred.

Dupre’s tort of another cause of action is premised on cross-defendants’ alleged negligence in failing to procure liability insurance applicable in defense of third party’s action against Dupre. The trial court concluded that Hall were not negligent.

FACTUAL BACKGROUND

Ross Garrison dba Ross Garrison Construction (Garrison) sued Dupre, Insurenet, and others for professional negligence and negligence after Garrison’s insurance carrier refused to defend him in a lawsuit on the ground the carrier had not been paid for Garrison’s commercial general liability policy, and the policy had been cancelled. Garrison’s claims were based on Habbestad’s alleged negligence in procuring and maintaining the policy. Believing Habbestad “was employed by DUPRE and/or its successor-in-interest INSURENET,” Garrison named Dupre and Insurenet as defendants in his complaint.

Dupre cross-complained against Insurenet, Hall, and Habbestad for, among other things, negligence and “tort of another.” Dupre’s tort of another cause of action likewise was based on Hall’s purported negligent misrepresentation that she and Habbestad were agents or employees of Dupre, and Habbestad’s alleged failure “to exercise ordinary care” in procuring the insurance policy for Garrison.

The trial court granted Hall’s motions for summary judgment, finding: “There is no triable issue of material fact that any of these moving parties caused any damage to Garrison. There is no triable issue of material fact that they violated any duty to either Garrison or Dupre as these challenged causes of action allege. There is no triable issue of material fact that the moving parties made any money or were enriched due to the alleged use of Dupre’s name, license or good will.”

DISCUSSION

Dupre contended the trial court erred in granting summary judgment as to its tort of another cause of action while Hall asserted that the tort of another doctrine is limited to torts committed against third parties and does not extend to torts committed against the party asserting the doctrine.

The Court of Appeal concluded that because it was undisputed that cross-defendants committed no tort against Garrison, Hall’s assert that summary judgment was proper was correct.  The Court of Appeal noted that the tort of another doctrine, which allows a person to recover his attorney fees if he is required to employ counsel to prosecute or defend an action against a third party because of the tort of the defendant, is an application of the usual measure of tort damages.The theory of recovery is that the attorney fees are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

To recover under the doctrine, Dupre needed to establish a tort actually was committed. Dupre’s negligence cause of action, like its tort of another cause of action, was based, in part, on Hall’s alleged misrepresentation that she and Habbestad were agents or employees of Dupre. Since summary judgment was entered as to Dupre’s negligence cause of action, and Dupre did not challenge that portion of the trial court’s order on appeal Dupre was precluded from relying on Hall’s alleged misrepresentations as the basis for its tort of another cause of action.

There can be no tort of another without a tort. For that reason Dupre’s tort of another cause of action was barred as a matter of law.

ZALMA OPINION

Insurance agents and brokers are often sued when the named insured finds the insurance purchased does not cover the loss. Although the Hall cross-defendants were wrong, misrepresented their relationship with Dupre, and used Dupre’s name without his permission causing him to be sued, there was no harm done because the court found that the Hall defendants were not negligent in failing to obtain insurance for Garrison. Since they committed no tort against Garrison Dupre’s need to defend was not due to Hall’s tort.

To quote the late Chick Hearn, the announcer for the Los Angeles Lakers “No harm, no foul.”

The Hall Defendants should have been punished but what they did was not sufficient to allow Dupre to recover its attorneys fees from them.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Rescission

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

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

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

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

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

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission. In California the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or an innocent misrepresentation of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, are expected to be fair. California follows the ancient equitable remedies and has codified the right to rescission of insurance contracts because the legislature considered it unfair to make a contracting party abide by a contract that was not obtained fairly. The ancient maxim that “No one can take advantage of his own wrong” is applied when a court is faced with a request to confirm rescission.

California Law

Under California law, every party to an insurance contract must communicate to the other, in good faith, all facts within his knowledge which are material to the contract  and which the other has not the means of ascertaining.

When a party to a contract of insurance decides the policy must be rescinded it need only advise the other party in writing and return the consideration: either the premium collected by the insurer or the policy delivered to the insured who wishes to rescind. It is not necessary for either party to file suit to confirm the rescission, it is effected once notice is given and return of consideration is offered. If a party does not agree to the rescission he, she or it can file suit for a declaration by the court that the rescission was improper. If the party rescinding desires he, she or it can also sue for a declaration that the rescission was proper. Acceptance of the return of consideration is usually sufficient to confirm a rescission and will avoid unnecessary litigation.

If the parties do not agree to a mutual rescission the decision that a contract of insurance is effectively rescinded is a decision made only by a California court or U.S. District Court applying California law, sitting as a court of equity.  The court of equity must exercise its discretion and make a ruling that is fair to all parties.  When the court grants rescission it always requires that the both parties be returned to the status quo ante with all consideration paid or delivered is returned.

Rescission is the equitable process that authorizes a court of equity to conclude that it would be unfair to the parties to allow a contract to continue or be enforced.  It places the parties back in the position they were in before the contract date. Although most reasons for rescission are not discovered until there is a claim sometimes insurers learn of grounds for rescission by conducting an engineering survey, a visit by the agent, broker or underwriter to the insured’s premises or an inquiry from the insured.

For example an insurer learns after a policy was issued that a jeweler insured who applied for insurance against theft and reported that his premises were protected by a central station reporting burglar alarm system. The insurer’s loss protection engineer visited the premises and reported to the insurer that the alarm is only a local gong that does not report to a central station. The insurer is entitled to rescind for misrepresentation of a material fact since the security promised was not the same as that which actually existed. The insurer returns the premium to the insured with notice that the policy is rescinded from its inception. The insured is unconcerned since, before the rescission, he had not suffered a loss. The rescission of the jewelers policy would have been as effective if the insurer had learned of the misrepresentation after a loss.

Rescission Is A Remedy That Must Be Used With Care

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

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Where no valid ground for rescission exists, the threat or attempt to seek such relief,  may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.
California courts have made clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations, easily proved, of extra-contractual torts.

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

The primary bases for rescission in California are misrepresentation, concealment, mistake of fact, mistake of law and fraud. In California these bases are codified.
This book will include the full text of the relevant statutes and the decisions of the California Supreme Court, California Courts of Appeal, and the Federal Ninth Circuit Court of Appeal when it is called upon to interpret California law. By including the full text of the statutes and court decisions the insurance professional will be in a better position to recognize factual grounds that may give rise to remedy of rescission so that the factual bases can be presented to a competent, experienced insurance coverage lawyer for advice and counsel.

Before a party considers rescission, whether insured or insurer, the following must be established:

• The facts represented in the acquisition of the policy.
• Evidence that establishes whether an fact was misrepresented.
• Evidence that establishes that a material fact was concealed.
• Evidence that establishes that the fact(s) misrepresented was material to the decision of the insurer to insure or not insure.
• Evidence that the person seeking rescission did not have better knowledge of the facts claimed misrepresented or concealed.
• A sworn declaration from the underwriter who made the decision to insure or not insure concerning the effect true facts would have had on the underwriting decision.
• A review of the policy, application process, investigation results and applicable law by a competent insurance coverage lawyer.

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