Fraudulent Use of “Expert Software” Not Insured by CGL
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:
- 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
- The allegations of the underlying complaint can be construed as alleging Computer Sciences was negligent.
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.”
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.
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.
© 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.