Only in California “Once” is with “Such Frequency as to Indicate a General Business Practice”

 Only in California “Wilfull” is also “Unintentional” or “Accidental

The California Supreme Court suggested that only the California Department of Insurance (CDOI) could enforce the Unfair Claims Settlement Practices Act (California Insurance Code Section 790.03 (h)) by Regulation. The California CDOI enacted Regulations to do so that, in my opinion, allowed it to exceed the mandate of 790.03 (h), by allowing punishment of insurers for single acts in violation of the Regulations, by allowing punishment of acts not prohibited by 790.03 and by finding an innocent or unintentional act in violation of the Regulations to be a wilful violation.

In Pacificare Life And Health Insurance Company v. Dave Jones, As Insurance Commissioner, G053914, In The Court Of Appeal Of The State Of California, Fourth Appellate District, Division Three (September 2018) the California Court of Appeal agreed with the Commissioner and upheld the CDOI’s right to impose fine for more than $173 million.

INTRODUCTION

Dave Jones, in his capacity as Insurance Commissioner of the State of California (the Commissioner), appealed from an order enjoining him from enforcing three regulations, adopted in 1992, to implement the unfair claims settlement practices provision of the Unfair Insurance Practices Act (UIPA) (Ins. Code, § 790, et seq.)  The injunction was issued at the conclusion of the first phase of a trial in which PacifiCare Life and Health Insurance Company is challenging the Commissioner’s finding that it had committed over 900,000 acts and practices in violation of the Insurance Code.

The first of the three enjoined regulations states that, for purposes of the statute defining unfair claims settlement practices (§ 790.03, subd. (h) (790.03(h)), a violation occurs when the prohibited settlement practice is either “knowingly committed on a single occasion,” or “performed with such frequency as to indicate a general business practice.” (Cal. Code Regs., tit. 10, § 2695.1(a).)  The second regulation defines the word ‘“[k]nowingly”’ to include implied and constructive knowledge (Reg. 2695.2(l)).  The third regulation defines the word ‘“[w]illful”’ without requiring any specific intent to cause harm or violate the law.  (Reg. 2695.2(y).)

The trial court determined the first regulation was inconsistent with the language of section 790.03(h), which it concluded had been interpreted by our Supreme Court in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 303 (Moradi-Shalal), and in Zhang v. Superior Court (2013) 57 Cal.4th 364, 379-380, fn. 8 (Zhang), to apply only to insurers engaged in a pattern of misconduct.  The California Supreme Court’s only binding interpretation of that statutory language is found in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d. 880, 891 (Royal Globe), which was reversed by the California Supreme Court that concluded its finding incorrect about allowing direct action for the violation of the UIPA. Relying on the reversed Royal Globe case, the Court of Appeal noted it held that section 790.03(h) can be violated by an insurer’s single knowing act.

FACTS

In 2008, following a lengthy investigation, the California Department of Insurance filed an administrative enforcement action against PacifiCare, alleging it engaged in multiple unfair claims settlement practices described in section 790.03(h), as well as other violations of the Insurance Code.  Following an evidentiary hearing, the Commissioner issued a lengthy decision and order, finding PacifiCare engaged in over 900,000 acts and practices in violation of the Insurance Code.  As a result, the Commissioner imposed penalties in excess of $173 million.

PacifiCare claims the regulation’s language is inconsistent with section 790.03(h), which it contends does not include the single knowing commission of an enumerated act in its definition of an unfair claims settlement practice.  As a result, PacifiCare argues that this regulation is invalid.

The second challenged regulation is Reg. 2695.2(l), which defines ‘“[k]nowingly committed”’ for purposes of the fair claims settlement practices regulations as “performed with actual, implied or constructive knowledge, including but not limited to, that which is implied by operation of law.”  PacifiCare argues this definition is inconsistent with section 790.03(h) because “knowingly,” in ordinary parlance, must mean deliberately—a meaning PacifiCare claims is inconsistent with implied or constructive knowledge.

The third challenged regulation is Reg. 2695.2(y), which defines “‘[w]illful’ or ‘[w]illfully’ when applied to the intent with which an act is done or omitted [as] simply a purpose or willingness to commit the act, or make the omission . . . .  It does not require any intent to violate law, or to injure another, or to acquire any advantage.”

The trial court granted PacifiCare’s motion with respect to all three regulations, declaring that all three regulations “impermissibly conflict and are inconsistent with . . . . sections 790.03, subdivision (h) and 790.035.”

DISCUSSION

The UIPA was adopted in 1959, and was patterned after the National Association of Insurance Commissioners’ model legislation. Its purpose is to regulate trade practices in the business of insurance by defining such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. The UIPA authorizes the Commissioner to investigate those engaged in the insurance business to determine whether insurance companies are or have been engaged in any deceptive act or practice prohibited by Section 790.03.

Section 790.03(h) prohibits sixteen specific “unfair claims settlement practices” which are prohibited when “[k]nowingly commit[ed] or perform[ed] with such frequency as to indicate a general business practice.”

Ignoring the clear and unambiguous language of the statute the Court of Appeal argued that grammar – the placement of commas – caused the Court of Appeal to believe the phrase “unfair claims settlement practices” refers to practices that exist in the insurance industry generally.  Thus, it concluded amazingly that an individual insurer could engage in a listed “practice” by just once committing the described misconduct and be found to have done so with “such frequency as to indicate a general business practice. ”

In the years following its enactment, section 790.03(h) generated no small amount of debate as to its meaning.  Finally, in 1979, the Supreme Court decided Royal Globe, in which it resolved several disputes about how the statutory scheme embodied in the UIPA was intended to operate.  First, the court held that section 790.03(h) was not solely a basis for imposing administrative penalties.  Instead, a third party claimant could bring a direct civil action against an insurer to impose liability based on its commission of the unfair practices described in the provision.  (Royal Globe, supra, 23 Cal.3d. at pp. 885-888.)  The court also held that “a single violation knowingly committed is a sufficient basis for such an action,” and thus it was not necessary to prove the insurer engaged in an alleged violation as a general business practice.

Nine years later the Supreme Court reversed Royal Globe’s holding that section 790.03(h) gave rise to a private right of action because “[n]either section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).”  (Moradi-Shalal, supra, 46 Cal.3d. at p. 304.)

In December 1992, the Commissioner filed the Fair Claims Settlement Practices Regulations (Regs. 2695.1 et. seq.), which include the regulations challenged in this case.  Those regulations took effect in January 1993.

The Court of Appeal concluded that although the Supreme  Court overruled Royal Globe in Moradi-Shalal, it concluded that contrary to the full reversal the Supreme Court did so only with respect to Royal  Globe’s holding that section 790.03(h) established a private right of action in favor of a third party.

The Court of Appeal noted, to support its decision, that  six of the unfair claims practices listed in section 790.03(h) involve a failure to perform a specific act—e.g., “[f]ailing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.”  (§ 790.03(h)(2).)  Such omissions might easily be, and perhaps often are, accomplished “unknowingly.”  Moreover, an affirmative “misrepresentation,” which is also included in the list of unfair claims settlement practice, can be committed unknowingly. Regardless, the Court of Appeal – relying on Royal Globe – found these acts could be single acts regardless of the requirements of section 790.03(h). The Court of Appeal concluded an unfair claims settlement practice to be either an insurer’s single knowing commission of the described conduct, or its performance of the conduct “with such frequency as to indicate a general business practice.”

“‘Willful’ or ‘Willfully’”

Reg. 2695.2(y) states:  “‘Willful’ or ‘Willfully’ when applied to the intent with which an act is done or omitted means simply a purpose or willingness to commit the act, or make the omission referred to in the California Insurance Code or this subchapter.  It does not require any intent to violate law, or to injure another, or to acquire any advantage.”  This language mirrors that of Penal Code section 7, subdivision (1). The same is true of the other acts and omissions listed in section 790.03(h). Thus, as applied to section 790.03(h), the definition of “willful” or “willfully” set forth in Reg. 2695.2(y) does not blur the distinction between willful and nonwillful violations.

Finding no merit in PacifiCare’s contention that Reg. 2695.2(y) is invalid, we reverse the trial court’s injunction prohibiting its enforcement.

ZALMA OPINON

The statute and precedent – before this decision – concludes that the CDOI cannot fine or otherwise discipline an insurer for violating any of the provisions of the Regulations unless they are also a clear violation of California Insurance Code § 790.03 (h) and not the more restrictive language of the Regulations. Applying the principle of eApressio unius est exclusion alterius [The expression of one thing is the exclusion of another] the Legislature’s expressed intention to make exclusive the list of unfair methods of competition and unfair and deceptive acts or practices in the business of insurance set forth in section 790.03, any additional purportedly unlawful settlement practice is necessarily prohibited. One can only hope that, on appeal, the California Supreme Court will reverse this odd decision, conclude that “willfulness” requires actual intent, that only acts prohibited by section 790.03 (h) can be punished and that a single act can never be “performed with such frequency as to indicate a general business practice.” To rule otherwise, as has the Court of Appeal, will provide the CDOI with a bludgeon against every insurer and allow findings that are both unfair and unreasonable.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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How to Avoid Insurance Fraud

Tools to Investigate and Defeat Insurance Fraud

Insurers faced with a potential insurance fraud have available tools to defeat the attempted insurance fraud. One of the most effective tools is the examination under oath where the insured is required to appear before a representative of the insurer and testify under oath about the policy and the claim. The two books below will help the insurer and its personnel faced with a potential fraud to take an EUO and, from the stories in the “Heads I Win, Tails You Lose” book, how to recognize that a fraud is being attempted.

“The Insurance Examination Under Oath”

Product DetailsThe insurance Examination Under Oath (“EUO”) is a formal type of interview authorized by an insurance contract. It is taken under the authority provided by a condition of the insurance contract that compels the insured to appear and give sworn testimony on the demand of the insurer or find his, her or it claim rejected for breach of a condition. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

Available as a Kindle book.

Available as a paperback.

“HEADS I WIN, TAILS YOU LOSE”

Product DetailsA collection of columns originally published in the magazines “Insurance Journal,” “Insurance Week,” and “The John Cooke Insurance Fraud Report” insurance trade publications serving the insurance community in the United States that have been updated and revised.

The title, “Heads I Win, Tails You Lose” is meant to describe insurance fraud as it works in the Unites States. It means that whenever a person succeeds in perpetrating an insurance fraud everyone who buys insurance is the loser.

Available as a Kindle Book.

Available as a paperback.

Read about these and other insurance books written by Barry Zalma at http://zalma.com/zalma-books/

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Late Report of Loss Fatal to Claim to Excess Insurer

No Sufficient Excuse for Late Report

Every third party liability insurance policy contains a requirement that the insured report a loss, suit, or potential loss promptly as a condition precedent to suit. New York courts take that condition seriously and will enforce it unless there is a legitimate excuse for not reporting the loss promptly.

In Daimler Chrysler Insurance Company v. Elliot Keller, et al, RLI Insurance Company, 2016-01154, 2018 NY Slip Op 05999, Supreme Court Of The State Of New York Appellate Division, Second Judicial Department (September 12, 2018 ) a subrogation action to recover insurance benefits, the plaintiff appeals from an order that granted the motion of the defendant RLI Insurance Company for summary judgment dismissing the complaint.

FACTS

On June 26, 2002, Elliot Keller was involved in a motor vehicle accident with Ojie Ferguson. At the time of the accident, Elliot was driving a vehicle he and Susan Keller (hereinafter together the Kellers) had leased from Chrysler Financial Company (hereinafter CFC). The Kellers were insured under a primary policy with Travelers Insurance Company (hereinafter Travelers), and Elliot had an umbrella policy with RLI Insurance Company (hereinafter RLI).

In 2003, Ferguson commenced an action against the Kellers and CFC. The Kellers first notified RLI of the accident and the lawsuit in August 2006, four years after the loss and three years after the suit was filed. RLI issued a disclaimer letter on September 5, 2006, denying coverage to all defendants for “late notice of suit.”

The Ferguson action was settled in 2007, with Daimler Chrysler Insurance Company (hereinafter DCIC) paying $250,000 toward the settlement on behalf of its insured, CFC, and Travelers paying $250,000. Thereafter, DCIC commenced this action, as subrogee of CFC, against the Kellers, and subsequently moved, inter alia, to amend the complaint to add RLI as a defendant.

After RLI was added as a defendant, it moved for summary judgment dismissing the complaint insofar as asserted against it based on CFC’s failure to provide timely notice of the occurrence, claim, and underlying suit. The Supreme Court (trial court) granted RLI’s motion on the basis that CFC did not qualify as an insured under the RLI policy, a ground not raised by either party, and denied DCIC’s cross motion.

DISCUSSION

The appellate court concluded that the trial court erred in essentially searching the record and granting relief based upon arguments that were not raised. Contrary to the court’s determination, in its motion, RLI did not assert that CFC was not an additional insured, but rather asserted that, even assuming CFC could prove it qualified as an insured under the policy, it failed to satisfy the notice requirements of the policy.

Rather than sending the case back to the trial court to rule on the issue presented the appellate court decided the issue itself since the issues were totally briefed in the trial and appellate court. It concluded that RLI established, prima facie, its entitlement to judgment as a matter of law dismissing the complaint insofar as asserted against it based upon CFC’s failure to provide timely notice of the occurrence and suit.

The appellate court also concluded that the insured’s failure to satisfy the notice requirement constitutes a failure to comply with a condition precedent which, as a matter of law, vitiates the. In support of its motion, RLI submitted evidence that counsel for the Kellers and CFC in the underlying action performed an investigation and learned the detailed information regarding the umbrella policy in March 2005. Such knowledge is imputed to the plaintiff. As such, RLI established that RLI was given no notice of the accident or lawsuit until August 2006, and CFC did not provide notice until RLI was served with DCIC’s motion to amend the complaint in June 2010.

Contrary to DCIC’s contention, RLI did not waive its right to deny coverage to CFC based on its disclaimer letter dated September 5, 2006, since that disclaimer denied coverage based on late notice of suit of all the defendants, not just the named insureds.

Accordingly, the appellate court agreed with the Supreme Court’s determination granting RLI’s motion for summary judgment, albeit for reasons different from those stated by the court.

ZALMA OPINION

New York law should be emulated across the country – especially when the facts are as egregious as this case: three to six years – since the notice requirements are conditions precedent to the right to defense or indemnity. With the facts in this case, even in a state that applies the “notice/prejudice” rule a court would find it impossible to conclude that the excess insurer was not prejudiced.

 


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Zalma on Insurance Blog in Feedspot Blog Top 50 Insurance Law Blogs

My name is Anuj Agarwal. I’m Founder of Feedspot.
I would like to personally congratulate you as your blog  Zalma on Insurance has been selected by our panelist as one of the Top 50 Insurance Law Blogs on the web.
 
I personally give you a high-five and want to thank you for your contribution to this world. This is the most comprehensive list of Top 50 Insurance Law Blogs on the internet and I’m honored to have you as part of this!

We’d be grateful if you can help us spread the word by briefly mentioning about the Top 50 Insurance Law Blogs in any of your upcoming post.

Please let me know.

Best,

Anuj

 Anuj Agarwal
 Founder, Feedspot
Email: 
anujsagarwal@feedspot.com
Linkedin . 
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Ethics and Rescission

Insurance is, and has always been, a business of the utmost good faith requiring ethical conduct by insurers when dealing with their customers: the insureds. To do so requires an understanding of ethics and how ethical behavior controls the business. Similarly, the person insured is required to also deal with the insurer with the utmost good faith. If a policy is acquired by misrepresentation or concealment of material facts the insurer may have the right to rescind the policy from its inception, return the premium collected, and treat the policy as if it never existed. The two books will help the insurance professional understand how to maintain an ethical moral compass and what can be done when an insured fails to act ethically to the insurer.

Ethics for the Insurance Professional

Methods for Insurers and their Personnel to Act with the Utmost Good FaithProduct Details

Ethics is a process of systematically applying, using, defending and recommending concepts of right and wrong behavior. Ethical behavior is required of both parties to a contract of insurance for the system to work. Ethics is the essence of insurance. Ethical behavior is required of both parties to a contract of insurance for the system to work. If any party to the insurance contract acts unethically the ability of insurance to work effectively and profitably will fail. Ethics is the essence of insurance. Since insurance was first created it has been a business of utmost good faith. As a result, the insured and the insurer are expected to treat each other ethically.

Rescission of Insurance

Product DetailsRescission 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 approved in 1789. The viability and ability to enforce contracts was recognized as essential to commerce. Courts of law were charged with enforcing legitimate contracts. Courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair. The common law developed rules that courts could follow to refuse to enforce the terms of a contract that was entered into because of mutual mistake of material fact, a unilateral mistake of material fact, the breach of warranty (a presumptively material promise to do or not do something), a material concealment, or a material misrepresentation. The remedy – called rescission – created a method to apply fairness to the insurance contract and allow an insurer to void a contract and allowed courts to refuse to enforce such a contract entered into by misrepresentation or concealment of material facts.

Available as a paperback.

Available as a Kindle book.

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Abbe Bikila’s Name is an Advertising Idea

Potential for Coverage Requires Insurer to Defend

The key to the duty to defend is an analysis whether the plaintiff seeks damages from a cause that could potentially be covered by the policy. There is no need to plead an absolutely covered event. All that is necessary is a potential for coverage.

In Holyoke Mutual Insurance Company In Salem & another v. Vibram USA, Inc., SJC-12401, Supreme Judicial Court of Massachusetts (September 12, 2018) an appeal that arsoe from an insurance coverage dispute between the insured, Vibram USA, Inc. (Vibram) and two insurers: Holyoke Mutual Insurance Company in Salem and Maryland Casualty Company, which had issued several general commercial liability policies (the policies) to Vibram, came to the Supreme Judicial Court to determine if the insurers are required to defend Vibram from suit brought by the heirs of the late, famed marathon runner Abebe Bikila.

The heirs sued Vibram in Federal court for improperly using the name “Bikila” to advertise Vibram’s running shoes. Vibram tendered the defense to the insurers, who denied coverage on the ground that a provision in the policies covering improper use of another’s advertising idea did not cover the claims raised in this action. The insurers, however, agreed to fund Vibram’s defense under a reservation of rights.

FACTUAL BACKGROUND AND PROCEDURE

The Policies

Between 2009 and 2011, Vibram, a producer of minimalistic shoes that simulate walking and running barefoot, purchased from the insurers the policies, which, among other things, provide coverage for “personal and advertising injury liability.” With certain enumerated exceptions, the policies state that the insurers have a duty to defend Vibram from any suit seeking damages for covered losses, particularly for claims seeking damages against Vibram for “advertising injury.”

The particular form of advertising injury at issue in this case is the one described in clause (f) of the policies as “[t]he use of another’s advertising idea in your ‘advertisement.'” The policies do not define the term “advertising idea.”

The Underlying Action

In 2015, while the policies were in effect, the living heirs of Abebe Bikila (Bikila family), the famed runner who won the 1960 Olympic marathon while running barefoot, sued Vibram in the United States District Court for the Western District of Washington. The Bikila family’s complaint alleges that Vibram had misused their late relative’s name in advertising and promoting Vibram’s “‘FiveFingers’ line of minimalist running shoes . . . [that are designed] to mimic biomechanical properties of barefoot running while providing the protection of a conventional shoe.” The complaint contends that Vibram’s “Bikila model shoes are named after Abebe Bikila and are intended to associate [Vibram’s] commercial footwear with Abebe Bikila’s legendary barefoot Olympic feats.”

The Bikila family operated commercial uses of the name Bikila in various methods producing income for the family.  The suit alleged four counts:

  1. a violation of the Washington Personality Rights Act;
  2. Washington Consumer Protection Act claims;
  3. a claim of false designation and Federal unfair competition in violation of the Lanham Act, 15 U.S.C. § 1125(a); and
  4. a claim that Vibram had been unjustly enriched by its unauthorized use of Abebe Bikila’s name.

Coverage Dispute

After denying that they had a duty to defend Vibram and agreeing to fund the defense under a reservation of rights, the insurers commenced an action in Superior Court, seeking a declaration that they did not have a duty to defend Vibram in the underlying action because the complaint did not raise claims covered by the policies. Following cross motions for summary judgment, the motion judge agreed with the insurers. Specifically, the judge concluded that the complaint did not raise a claim that Vibram had used another’s advertising idea in Vibram’s advertisement. According to the judge, the complaint only raised claims implicating a “personality right” — an intellectual property right, and a claim that is excluded from coverage under the policies.

DISCUSSION

The issue before the Supreme Court was whether the allegations in the complaint raise a claim that is potentially covered under the policies, thus triggering the insurers’ duty to defend Vibram. It is settled that an insurer’s duty to defend is independent from, and broader than, its duty to indemnify. A liability insurer’s duty to defend is determined by comparing the allegations in the third-party complaint against the provisions of the insurance policy. The underlying complaint need only show, through general allegations, a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage. Accordingly, a duty to defend does not turn on the specific cause of action enunciated by the pleader or require that the complaint mirror the policy’s coverage language.

Vibram’s principal contention is that the Superior Court judge erred in concluding that the complaint did not assert a claim that it had used the Bikila family’s advertising idea when it advertised its running shoes. According to Vibram, the advertising idea alleged in the complaint was the Bikila family’s intentional association of their family name with Abebe Bikila’s legacy and desirable qualities, and their use of the name “Bikila” to advertise the family’s running-related commercial ventures.

The phrase “advertising idea” has been described as not having a single, plain and clear meaning; however, myriad other jurisdictions have interpreted “advertising idea” in these circumstances a broad definition. It is not surprising that given this broad definition, courts have concluded that a wide variety of concepts, methods, and activities related to calling the public’s attention to a business, product, or service constitute advertising ideas.

The Superior Court judge’s decision relied, at least in part, on the conclusion that the Bikila family had not actually used the name “Bikila” as an advertising idea, and thus there was no claim that Vibram used another’s advertising idea. Instead, the judge interpreted the complaint as alleging that Vibram had infringed Abebe Bikila’s personality rights, a claim not covered under the policies.

As an initial matter, it is uncontested that Vibram’s use of “Bikila” to advertise its minimalist FiveFingers running shoes constituted an advertising idea. Vibram used the name of a legendary barefoot marathon runner for purposes of calling attention to its running shoes that simulated barefoot running.

The Supreme Court concluded that the complaint reasonably may be interpreted as claiming that the Bikila family intentionally created a connection between their family name and Abebe Bikila’s legacy and desirable qualities for purposes of using “Bikila,” and everything it conveyed, to attract customers to their running-related commercial ventures.

In other words, the Bikila family’s advertising idea was using the name Bikila, and the legacy that name conveyed, to attract business to each of their ventures. Because the allegations in the complaint generally allege that the Bikila family used the Bikila name to advertise and promote their various running-related ventures, the Supreme Court noted that the trial judge erred in concluding that the Bikila family had not actually used the name Bikila as an advertising idea.

Given the standard under which appellate courts analyze insurance coverage disputes, the complaint generally asserts that the Bikila family intentionally and specifically connected the name to running-related ventures, and the name itself conveys a “barefoot dedication to succeed under any circumstances,” a desirable quality for any of these ventures.

Accordingly, the grant of summary judgment in favor of the insurers was reversed.

ZALMA OPINION

The key to every duty to defend case is the word “potential.” If there is a potential for coverage the insurer must defend. In this case the potential was clear – the Bikila family used the name of the great runner to promote various money making operations like television ads in Japan and an annual Marathon, among other things. When Vibran used the Bikila name to sell shoes it infringed the family’s right and was entitled to a defense from its insurers. Interestingly, by so arguing in the declaratory relief action, Vibram seems to admit that in infringed on the rights of the Bikila family. The insurers should have defended under its reservation of rights and allowed the defense to go to judgment before considering the declaratory relief action.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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California Claims Regulations Require Training Completed September 1, 2018

Have your people complied with the requirements of the California Fair Claims Settlement Practices Regulations and the California SIU Regulations? Every claims person dealing with claims in California are required to be trained annually concerning the Regulations or file a sworn declaration that they have read and understand the Regulations no later than September 1, 2018. If not the two books below make it possible for claims people to comply with the regulations.

California Fair Claims Settlement Practices Regulations

A Guide to Insureds, Public Insurance Adjusters, and Lawyers to Properly Investigate and Adjust Insurance Claims

This book was designed to assist insurance personnel who do business in the state of California. It will assist all insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, public insurance adjusters, policyholders and counsel for policyholders working with insurers doing business in California. All insurers doing business in California must comply with the requirements of the Regulations or face the ire of, and attempts at financial punishment from, the CDOI. That punishment is now questionable and limited because some courageous insurers fought the CDOI and succeeded before an administrative law judge who limited the right to punish. Regardless of difficulties in assessing punishment the state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath. To avoid the annual training the claims person can submit a sworn document that avers that he or she has read and understood the Regulations. Reviewing this book and the Regulations set forth below should be sufficient to comply with the training requirements of the Regulations. It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should also be familiar with the Regulations since they set a minimum standard for claims handling in the state.

Available as a Kindle book.

Available as a paperback.

California SIU Regulations

The State of California Imposes Control on the Investigation of Insurance Fraud

California SIU Regulations: The State of California Imposes Control on the Investigation of Insurance FraudCalifornia SIU Regulations is designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

Available as a Kindle Book.

Available as a paperback.

Read about these two books and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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If Your Have no Rights You Have Nothing to Assign

Policy Expires If Premium Not Paid

One month auto policies are issued to people who are high risks or who cannot afford a longer term. It allows them to comply with the statutes that require insurance to register an auto or be licensed to drive in California and are seldom renewed.  William Olivas purchased a one month policy, did pay the premium for a second month of coverage only to get into an auto accident the day after expiration.

After obtaining a $35,000,643 default judgment against William Olivas, Richard V. Forrest gambled that he could collect the judgment from the insurer for Olivas who refused to defend or indemnify Olivas because the policy expired. In Richard V. Forrest v. Hawaiian Insurance & Guaranty Company, B190677, Court Of Appeal Of The State Of California Second Appellate District Division Five (September 14, 2018) Forrest appealed from the grant of summary judgment in favor of Hawaiian Insurance & Guaranty Company (Hawaiian).

FACTS

Forrest was involved in a car accident with Hawaiian’s alleged insured, William Olivas. Hawaiian refused to defend Olivas on the basis that his monthly auto liability insurance policy lapsed on January 10, 2004 — one day before the accident occurred.

On August 5, 2015, Forrest filed the operative complaint, asserting causes of action against Hawaiian, SCJ Insurance Services (SCJ), Prompt Insurance Services (Prompt), Paul Ruelas, and Anthony Medina. As relevant here, the complaint alleged six causes of action against Hawaiian.

The complaint alleged that in June 2002, Hawaiian entered into a Producer Agreement with SCJ, which authorized SCJ to act as Hawaiian’s managing agent to contract with subproducers to solicit insurance policies. SCJ was prohibited from assigning or delegating binding authority to any subproducer under the agreement. SCJ had entered into an agreement with Paul Ruelas, the executive officer of Prompt. Per the agreement, Prompt could sell certain auto liability insurance policies of various insurers as an independent contractor. Prompt was required to sell any given policy in accordance with the underwriting guidelines and procedures of SCJ and the particular insurance company.

Olivas met with Ruelas to purchase auto liability insurance. At the meeting, Olivas paid Prompt $384 and executed an agreement appointing Prompt as his broker and granting Prompt limited power of attorney to execute insurance transactions on his behalf. At that time, Ruelas did not have a valid license to conduct insurance business in the state of California.

On December 10, 2003 Hawaiian issued a personal auto policy and temporary insurance identification card to Olivas the same day. The complaint contends the Hawaiian policy was a quarterly insurance policy. The policy, which is attached as an exhibit to the complaint, stated that coverage was “[e]ffective 12/10/03 at 12:01 am” and “[e]xpires 1/10/04 12:01 am.” The policy was set to be “continuous based on premium being paid when due,” and was “provided only for the specific coverages listed and charged for here.” It had a personal injury limit of $15,000. The temporary identification card also reflected coverage from December 10, 2003 to January 10, 2004.

The offer also stated, “There is no grace period and this is the only notice you will receive. A partial payment will not renew your policy. You must pay the full $210.00 by 01/10/04. [¶] If your policy lapses, it may be reinstated with a lapse in coverage, if your $210.00 is received at SCJ by 02/09/04. Coverage will begin again at 12:01 a.m. . . . on the day your payment is received at SCJ.”

On January 11, 2004, Olivas and Forrest were involved in an automobile accident. On March 15, 2004, Forrest filed suit against Olivas in Orange County Superior Court. Olivas tendered to Hawaiian, and Hawaiian denied Olivas a defense under the policy. A final default judgment was entered against Olivas in favor of Forrest for $35,000,643. Olivas assigned all of his rights as insured against Hawaiian, SCJ, Prompt, Ruelas, and Medina to Forrest, who then sued the many defendants.

Forrest’s claims against Hawaiian are based on his allegation that the insurer wrongfully denied coverage. Hawaiian filed a motion for summary judgment, or in the alternative, summary adjudication.  Forrest offered no evidence to contradict Hawaiian’s assertion that Olivas was issued a one-month policy effective December 10, 2003 to January 10, 2004. The policy expired by its own express terms on January 10 because Olivas failed to make a renewal premium payment in full prior to the expiration. Therefore, at the time of the accident, Olivas did not have insurance coverage with Hawaiian. Olivas failed to make a payment until the day after the accident, causing a lapse in insurance coverage at the time of the accident.

The policy provided that “[a]n insurance broker cannot change the terms of the policy.”

Forrest filed an opposition to the motion for summary judgment. Among other evidence, Forrest submitted Olivas’s declaration that he was rejected by a different insurer before his broker placed the one month policy with Hawaiian.

As Hawaiian’s only California agent, SCJ was expressly precluded from delegating any of its authority to a subproducer. There was no evidence from which an objectively reasonable person could believe that Hawaiian might have held Prompt or Ruelas out as an agent.

DISCUSSION

Forrest’s argument about coverage dates cannot overcome the plain language of the policy provided to him by Hawaiian with respect to the coverage dates of December 10, 2003 to January 10, 2004, nor Olivas’s testimony that he was told and believed that he was already covered as of December 9, 2003.

An insurer, as a principal, may be vicariously liable for the torts of its agent if the insurer directed or authorized the agent to perform the tortious acts, or if it ratifies acts it did not originally authorize. An agency is actual when the agent is really employed by the principal.

The Producer Agreement between Hawaiian and SCJ prohibited SCJ from assigning or delegating binding authority to a subproducer or third party. Ruelas’s unlicensed status triggered the proviso in the 1998 agreement mandating automatic termination.

Ostensible agency arises where the insurer intentionally or carelessly causes a third person to believe someone who is not really employed by the insurer is its agent. Ostensible agency cannot be established by the representations or conduct of the purported agent; the statements or acts of the principal must be such as to cause the belief the agency exists.

There is no evidence in this case that Hawaiian held Prompt or Ruelas out as an agent. Hawaiian’s only representations to Olivas, made through the initial policy, temporary insurance identification cards, and renewal offer were wholly inconsistent with Ruelas’s representations.

The policy and identification cards refer to Prompt as Olivas’s “broker.” A broker has no binding authority, transacts insurance with but not on behalf of the insurer, and is, as a matter of law, not a general agent for the insurer. Because Forrest made no showing that Hawaiian declared or acted in such a way that Olivas could reasonably believe an agency relationship existed, he failed to raise a triable issue of material fact as to whether Ruelas was an ostensible agent.

Hawaiian’s insurance policy clearly stated that failure to make a full premium payment by January 10, 2004 would result in a lapse in the policy. The documents Olivas received consistently reflect the policy and make clear there are no grace periods on making premium payments. With no knowledge of the additional $32 that Olivas deposited with Ruelas, Hawaiian could not knowingly waive its right under the policy. To the contrary, the evidence is consistent with Hawaiian’s intent to enforce the requirement that Olivas make full premium payments on time to extend coverage.

ZALMA OPINION

Olivas complied with the statute on the date he acquired the policy and let the policy expire. Insurance policies are contracts whose clear and unambiguous language must be enforced as written. Here, the policy issued to Olivas was for a one month period and expired by its terms before the accident. The more than $35 million judgment – by the decision of the Court of Appeal – became nothing more than wall paper and the gamble taken by Forrest was lost.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Posted in Zalma on Insurance | Comments Off on If Your Have no Rights You Have Nothing to Assign

The Compact Books of Adjusting Claims

Do you have new claims adjusters working for you? Do you have old insurance adjusters working for you who have forgotten or refused to learn the basics? Do your claims professionals fail to keep the promises made by the policies you issued? If so, they need the compact books to understand the obligation to keep the promises made by the insurance policy and to act as professional claims adjusters.

“The Compact Book on Adjusting Liability Claims”

A Handbook for the Liability Claims Adjuster

This Compact Book of Adjusting Liability Claims is designed to Product Detailsprovide the new adjuster with a basic grounding in what is needed to become a competent and effective insurance adjuster. It is also available as a refresher for the experienced adjuster.

The liability claims adjuster quickly learns that there is little difficulty with a claimant (the person alleging bodily injury or property damage against a person insured) if the claim is paid as demanded. The insured may be unhappy if the claimant’s claim is paid as presented since most do not believe they did anything wrong or fear an increase in premiums charged for subsequent policies.

The adjuster must be prepared to salve the insured’s emotions, explain why in the law and the policy it was appropriate to pay the claimant and that the settlement is in the best interest of both the insured and the insurer the adjuster represents.
The adjuster knows, and must be prepared to explain to an insured, that if a claim is resisted or denied the claimant will be unhappy, will probably file suit. If not promptly settled the claimant’s lawyers will rake the insured over the coals to prove that the insured is liable for the claimant’s injuries. The litigation will take time, effort, and money to establish the extent of the injuries and who is responsible for the injuries. Failure to settle promptly can cost the insured his or her reputation and will certainly cost the insurer much more than the claim could have been resolved for had it been resolved before the claimant retained a lawyer.

Available as a Kindle book

Available as a paperback.

The Compact Book of Adjusting Property Insurance Claims”

A Manual for the First Party Property Insurance Adjuster

The insurance adjuster is not mentioned in a policy of insurance. The The Compact Book of Adjusting Property Insurance Claims: A Manual for the First Party Property Insurance Adjusterobligation to investigate and prove a claim falls on the insured. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions that require the insured to, within sixty days of the loss, submit a sworn proof of loss to prove to the insurer the facts and amount of loss.

The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer can then either accept or reject the proof submitted by the insured.

Technically, if the wording of the policy was followed literally the insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insurer could reject the claim. If the insured submits a timely proof of loss the insurer could either accept or reject the proof of loss. If the insurer rejected the proof of loss the insured could either send a new one or give up and gain nothing from the claim. Suit on the policy would be difficult because the policy contract limited the right to sue to times when the proof of loss condition had been met.

Insureds and insurers were not happy with that system. It made it too difficult for a lay person to successfully present a claim. The system, as written into the standard fire policy seemed to run counter to the covenant of good faith and fair dealing that had been the basis of the insurance contract for centuries. Most insurers understood that their insureds were mostly incapable of complying with the strict enforcement of the policy conditions. To fulfill the covenant of good faith and fair dealing insurers created the insurance adjuster to fulfill its obligation to deal fairly and in good faith with the insured.

Available as a Kindle book.

Available as a paperback.

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Lie on Application & Lose Coverage

Taking an Assignment from Tortfeasor to Sue Insurer Not Always Profitable

Mark A. Link and Susan Link (collectively referred to as “the Links”) appeal the Allen County Common Pleas Court’s ruling granting summary judgment in favor of Wayne Insurance Group (“Wayne Insurance”) because their assignor, Patience Jackson, lied when she acquired a policy from Wayne. In Mark Link, Et Al. v. Wayne Insurance Group, Et Al., Case No. 1-18-13, 2018 Ohio 3529, Court Of Appeals Of Ohio Third Appellate District Allen County (September 4, 2018) the Ohio Court of Appeals was asked to reverse the trial court and allow the injured persons, the Links.

FACTUAL BACKGROUND

On June 4, 2015, Patience Jackson (“Patience”) filled out an application for homeowner’s insurance with Wayne Insurance. Thereafter, a policy of insurance was issued to Patience on June 8, 2015. The policy contained a clause that stated, in part, “I, or we, also understand that any misrepresentation or concealment of information in the application voids the insurance coverage under the policy for which it was submitted as if it were never bound or issued.”  On the application, Patience listed that she did not have any dogs on the premises, a false statement.

On October 19, 2015, Mark Link was attacked by two dogs that resided with Patience and Douglas Jackson (collectively referred to as “the Jacksons.”)  Upon learning of the dog attacks, Wayne Insurance sent Patience a “Cancellation Notice” on November 18, 2015, on the basis that Patience made a material misrepresentation on her insurance application, thereby voiding the policy issued June 8, 2015.

The Links sued the Jacksons to recover medical expenses related to the injuries Mark Link sustained from the dog attack. While not on appeal, it appears from the limited record before the court that the Links and the Jacksons entered into a consent judgment. In that agreement, the Jacksons agreed that the Links should be awarded damages arising from the dog bite incident in the amount of $100,000. The Jacksons further agreed that the Links be granted the Jacksons’ “chose in action” to pursue any and all claims between the Jacksons and the Wayne Insurance Group on the Jacksons’ behalf.

PROCEDURAL HISTORY

Patience and Douglas Jackson sought to recover damages against the insurer on breach of contract, refusal to defend, and bad faith claims.

Wayne Insurance filed a third party complaint (for a declaratory judgment against the Jacksons) that asserted that Wayne Insurance had no duty to defend or indemnify the Jacksons or the Links because Patience made a material misrepresentation on her application for insurance, which thereby voided her policy. The Jacksons failed to plead or defend the action after being duly served.

As a result of the Jackson’s failure to plead or defend the action, Wayne Insurance filed a motion for default judgment which was granted by the trial court. The trial court found that Wayne Insurance owed no duty to defend or indemnify the Jacksons. The trial court further ordered that the Jacksons were not entitled to coverage under the terms of the insurance policy issued by Wayne Insurance.

ANALYSIS

ASSIGNMENT OF ERROR NO. I – THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT DENIED PLAINTIFFS’ MOTION TO RECONSIDER.

Before a court can consider the merits of a legal claim, the person or entity seeking relief must establish standing to sue. Standing refers to whether a party has a sufficient stake in an otherwise justiciable controversy to obtain judicial resolution of that controversy. To have standing, the general rule is that ‘a litigant must assert its own rights, not the claims of third parties.

The appellate court found that the Links failed to establish third-party standing. Specifically, they failed to establish that they possessed a sufficiently close relationship with the Jacksons. Moreover, the Links have shown no hindrance in the way of the Jacksons, the proper party to the counterclaim, to request relief from the default judgment granted by the trial court. Accordingly, it found the Links’ failure to establish standing is fatal because competent and credible evidence exists in the record supporting that the trial court did not abuse its discretion when it denied the Links’ motion to reconsider.

ASSIGNMENT OF ERROR NO. II – THE TRIAL COURT ERRED BY GRANTING SUMMARY JUDGMENT IN FAVOR OF DEFENDANT WAYNE INSURANCE GROUP.

In their second assignment of error, the Links argue that the trial court erred by granting summary judgment in favor of Wayne Insurance. Specifically, the Links assert that the trial court erred in determining that the Links’ lacked privity of contract with Wayne Insurance by virtue of a valid assignment. Further, the Links’ argue that the trial court erred when it granted Wayne Insurance’s motion for summary judgment on the bad faith and failure to defend claims. For the reasons that follow, we affirm the trial court’s grant of summary judgment.

To support their motion for summary judgment, Wayne Insurance directed the trial court to its November 30, 2017 order declaring Patience Jackson’s insurance policy #SH02742571 null and void as a matter of law. Specifically, the trial court’s order stated that the policy was null and void as a matter of law.

Additionally, the trial court found and ordered that Wayne Insurance did not have a “duty to defend or indemnify the Jacksons nor were they entitled to indemnity under the policy.

The Links question whether Patience had a dog on the premises at the time she completed her application for insurance in an attempt to establish a genuine issue of material fact with regard to the breach of contract claim. However, the court found this allegation contradicts the facts pled by the Links in their initial complaint.

Since the trial court declared that Patience’s insurance policy null and void as a matter of law, and because there were no specific facts provided (to the trial court) to demonstrate the existence of a genuine triable issue, the Links’ failed to meet their reciprocal burden showing the existence of a genuine issue of material fact.

Having found no error prejudicial to the Links here in the particulars assigned and argued, the court overruled the Links’ first and second assignments of error and affirm the judgment of the trial court.

ZALMA OPINION

It doesn’t pay to lie to your insurance company. The Jacksons lie voided the insurance. They sold the Links on a non-collectable judgment by agreeing to a $100,000 judgment only collected from their insurer who owed them nothing. The Links lost out and gave up their right to collect from the Jacksons’ – the tortfeasors – by seeking to obtain a large judgment from the insurer. The gamble was lost.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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“Insurance Fraud & Weapons to Defeat Insurance Fraud”

“Insurance Fraud & Weapons to Defeat Insurance Fraud”

In Two Volumes

Product DetailsInsurance fraud continually takes more money each year than it did the last from the insurance buying public. No one knows the actual amount with any certainty because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do

so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

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

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

the effort to stop insurance fraud against Medicare and Medicaid has increased.

Insurance Fraud & Weapons to Defeat Fraud - Volume Two: A Manual for Those Working to Defeat Insurance Fraud by [Zalma, Barry]This book contains appellate decisions regarding insurance fraud from federal and state appellate courts across the country and full text of many insurance fraud statutes.

It is available as both a legal research tool and a product to assist insurers, insurance company personnel, independent insurance adjusters, special investigation unit investigators, state fraud investigators and insurance lawyers to become effective persons involved in the attempt to defeat or reduce the effect of insurance fraud.

Volume One available as a Kindle book and a paperback.

Volume Two Available as a Kindle book and a paperback

Read more about insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Zalma’s Insurance Fraud Letter – September 15, 2018

Ethics & the Insurance Fraud Investigation

 Uberrimae Fidei – Utmost Good Faith

Insurance adjusters and fraud investigators, like everyone else, can become frustrated. Every adjuster and fraud investigator have had “gut feelings” about a case that are not supported by the evidence. Frustration faced by an adjuster was responsible for allowing the California Supreme Court the foundation for creating the tort of bad faith in first party insurance claims.
In 1973 an insurance adjuster, without sufficient evidence, caused his employer’s insured to be arrested for arson and fraud. The adjuster was frustrated by his failure to prove that a bar owner had destroyed his bar by arson a few years before and was convinced he had done so again. The adjuster told a police officer of his suspicions, past experience with the insured and his gut feeling that the insured caused the fire.
The insurer demanded that the insured appear for examination under oath in accordance with conditions of the policy. The insured refused to appear because of the arrest citing his First Amendment Right against self-incrimination, but offered to appear as soon as the criminal charges were resolved.

The California Supreme Court, in Gruenberg v Aetna Insurance Co., 9 Cal 3d 566, 108 Cal Rptr 480 (1973), concluded that unfounded actions by an investigator which caused an insured to be arrested for arson required the application of the new tort of bad faith to first-party insurance cases.

The Current Issue Contains the Following 

  • Ethics & the Insurance Fraud Investigation
  •  Illumeo Continuing Education
  • Barry Zalma Speaks at Your Request
  • Fraud Attempt Fails
  • Wisdom
  • Training the Fraud Investigators
  • Barry Zalma
  • About Time – Michigan
  • Good News From the Coalition Against Insurance Fraud
  • Zalma’s Flat Rate Opinions
  •  Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Books from Barry Zalma
  • Books from the American Bar Association
  • Property Investigation Checklists: Uncovering Insurance
    Fraud, 12th Edition
  • Zalma on Insurance Claims

Zalma Books

New: Zalma on Insurance Claims in ten volumes, Construction Defects and Insurance in eight volumes.

Zalma on Insurance Claims includes:

Part 101 This part includes a discussion of industry basics, rules of contract interpretation (with a special application to the 9/11 World Trade Center loss), and policy basics by type of insurance contract. The rules of contract interpretation alone make this part an essential educational tool, not only for claims personnel, but also for any insurance professional, including underwriters, agents, attorneys, consultants, and risk managers.

Part 102 This part focuses on coordinating claims where multiple insurers are involved. Beginning with a discussion of Other Insurance clauses, it details the critical considerations, including allocating defense costs. It also examines relevant policy conditions, exclusions, and warranties.

Part 103 This part lays out the duties of all involved parties, particularly insurer and insured, and examines the processing steps involved in resolving claims. It also enumerates common mistakes that occur in the process.

Part 104 This part addresses specific issues dealing with property claims, such as mortgagees and valuation approaches.

Part 105 This part details investigative procedures, especially with regard to liability claims, and the determination of when the duty to defend exists.

Part 106 This part is largely devoted to bad faith claims against insurers, how to examine their merit, and how insurers can avoid such claims.

Part 107 This part provides additional detail on how to evaluate and settle property and liability claims, including the critical issue of when it is appropriate to settle early.

Part 108 While a minority of claims ever reach the trial level, understanding how to proceed effectively is critical, so this part focuses on trial preparation, including interviewing applicable parties.

Part 109 Mr. Zalma is recognized internationally as one of the foremost authorities on fraud and this part demonstrates why that recognition is well deserved. All aspects of fraud are examined, with notable attention to “red flags” to be aware of.

Part 110 This final part continues the fraud discussion and introduces considerations for unfair claims settlement practices and contract rescission by type of claim, concluding with tips on how to prepare the case, including procuring relevant expert testimony.

Read for detail at http://zalma.com/zalma-books/


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New Books from Full Court Press

New Books by Barry Zalma

From Full Court Press

Do you or your staff need access to easy to read, comprehensive, yet understandable information about insurance law and the litigation of bad faith suits seeking punitive damages? If you do, now available on Fastcase.com are three e-books that provide easy access to the needed information.

Full Court Press continues to publish expert secondary content. This time it’s a new collection of ew insurance law treatises from consultant, expert witness, arbitrator, and mediator Barry Zalma.

Barry Zalma practiced law in California for more than 44 years as an insurance coverage and claims-handling lawyer, and has spent more than 50 years in the insurance business. We welcome his deskbooks as the first published under our Full Court Press imprint. Three titles are available in ePub and MOBI format, as well as on the Fastcase legal research platform.

The following are available at fastcase.com from Full Court Press:

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers.

An annual subscription to secondary content on the Fastcase platform includes new editions and updates published by the author as they are rolled out, so you can rest assured that your research is up to date.

Go to fastcase.com for more detail and how to use the material on-line as part of your legal or insurance research or as stand-alone e-books.

Read about these and more insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Not Reading a Policy is Fatal to a Fire Claim

Foreclosure Voids Insurance Policy

In the last 51 years I have asked hundreds of insureds directly and under oath whether they read and understood their insurance policy. Most respond with nervous laughter. Only two, in 51 years, claimed to have read and understood the policy they purchased — both lied.

In Steve Papastefanou And Mary Papastefanou v. Kentucky Growers Insurance Company; PHH Mortgage Corporation; And First Security Mortgage Of Owensboro, Inc., NO. 2016-CA-001923-MR, Commonwealth of Kentucky Court of Appeals (September 7, 2018) failure to read the policy by the insureds and their mortgagee proved fatal to a claim.

After litigation Papastefanou sued the insurer only to find that the trial court concluded that  the filing of a foreclosure action by PHH Mortgage Corporation against Appellants voided a homeowner’s insurance policy. Not willing to accept the obvious both the insured and the mortgagee sued.

FACTS

The Papastefanous purchased a house in 2005. They took out two mortgages, one with PHH and one with First Security Mortgage of Owensboro, Inc. As part of this mortgage transaction, Appellants obtained an insurance policy through Kentucky Growers. In 2011, Appellants became delinquent on their mortgage payments and a foreclosure action was filed against them by PHH. The action was held in abeyance while Appellants and PHH tried to come to terms on a mortgage modification.

On November 12, 2012, Appellants’ home burned, resulting in a total loss. Appellants filed a claim with Kentucky Growers, but Kentucky Growers denied their claim. Kentucky Growers claimed that the insurance policy was void at the time of the fire due to the following language contained in the policy: “The entire policy shall be void . . . if, with the knowledge of the ‘insured’, foreclosure proceedings be commenced or notice given of sale of any property insured hereunder by reason of any mortgage[.]”

Kentucky Growers also denied recovery to the mortgagees as they were also named in the policy. This denial was based on the following policy language: “If a mortgagee is named on the Declarations, a loss payable under Coverage A or B will be paid to the mortgagee and ‘you’, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of precedence of the mortgages.”

The Papastefanous and the mortgagees sued Kentucky Growers. The insurer cross-claimed and First Security Mortgage answered the complaint and filed a counterclaim against Appellants and cross-claims against Kentucky Growers and PHH. PHH filed answers to Appellants’ complaint and First Security Mortgage’s cross-claim, but no claim against Kentucky Growers.

Ultimately, the trial court entered two orders granting summary judgment in favor of Kentucky Growers. The first order dismissed the Appellants’ personal claims and the second order dismissed the derivative claims.

ANALYSIS

It is well established that construction and interpretation of a written instrument are questions of law for the court. Two cardinal principles apply in the interpretation of insurance contracts by Kentucky courts. Those principles are:

  1. the contract should be liberally construed and all doubts resolved in favor of the insureds; and,
  2. exceptions and exclusions should be strictly construed to make insurance effective.

Terms used within insurance contracts should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them. Appellants claim that the foreclosure provision was hidden deep within the policy and is not easily understood. The Court of Appeal disagreed. The policy provision is clear and unambiguous as it has no other interpretation and Appellants do not allege how this provision could be misunderstood. In addition, the provision was not hidden. Although the policy is 22 pages long, the exclusionary provision is not hidden in small or fine print.

Courts cannot, however, make a new contract for the parties under the guise of interpretation or construction but must determine the rights of the parties according to the terms agreed upon by them. The terms and conditions of the policy are clear, and the Court of Appeal did not believe the court erred.

Appellants freely entered into this contract with Kentucky Grower. Insured persons are charged with knowledge of their policy’s contents. Since the policy is a written contract, its terms are binding on both parties, and after acceptance, the mere lack of knowledge of its contents by the insured could not furnish a sound legal basis for reforming it or voiding its provisions.

By entering into the insurance agreement with Kentucky Growers, Appellants were charged with knowing the contents of their policy; therefore, they knew or should have known about the voiding provision. This knowledge would have allowed Appellants the opportunity to purchase additional insurance once the foreclosure action was commenced or inform Kentucky Growers of the foreclosure and request continued coverage. The notice statutes set forth above do just that, provide notice to an insured of the cancellation or non-renewal of their policy.

Appellants were put on notice of the voiding of their policy via the policy itself. No public policy was violated in this case.

ZALMA OPINION

The Papastefanous and their mortgagees could, had they read their policy, protected themselves while negotiating the foreclosure proceeding by simply advising the insurer of the foreclosure and requesting extension of coverage or by acquiring insurance from a different insurer. They did not do so because they did not read the clear and unambiguous language of the policy. They have no one to blame but themselves.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Zalma on Insurance Claims

Zalma on Insurance Claims

Do you want to know what is needed to be an insurance claims professional? Do you want to  train your employees to be an insurance claims professional? Do you need to prove that your claims people acted professionally? Do you need to prove that claims people acted unprofessionally and in violation of the custom and practice of the insurance industry? If so, you need the ten volumes making up Zalma on Insurance Claims.

Barry Zalma has updated, revised, edited and recreated his seminal work “Insurance Claims: A Comprehensive Guide” into a  series of ten books is the latest addition to Barry Zalma’s insurance claims series of books and articles that will form the most thorough, up-to-date, expert-authored insurance claims guide available today at reasonable prices.

Written by nationally-renowned insurance coverage expert Barry Zalma, a semi-retired insurance coverage attorney, consultant, expert witness and blogger, Zalma on Insurance Claims provides in-depth explanations, analysis, examples, and detailed discussion of:

  • Property insurance claims;
  • Third-party liability claims;
  • Casualty claims; and
  • Insurance Fraud

Thorough, yet practical, this series of books form the ideal guide for any professional who works in or frequently interacts with the insurance industry.

Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), and business owners will benefit greatly from the ten volume guide. It is also the perfect resource for insurance educators, trainers, and students whose role requires an understanding of insurance law.

As you read through the various volumes of Zalma on Insurance Claims, you will find comprehensive—yet comprehensible—coverage of key topics, including:

  • What is Insurance?
  • The History of Insurance
  • The covenant of good faith and fair dealing.
  • The tort of Bad faith
  • Conditions,
  • Warranties,
  • Exclusions
  • Declaring a policy void
  • Duties of insured and insurer
  • Evaluation and settlement
  • Identifying insurance fraud
  • Investigation
  • Kinds of insurance policies
  • Other insurance clauses
  • Preparing a case for trial
  • Processing a claim
  • Responses to fraud
  • Subrogation and salvage
  • Underwriting and
  • Many more property and casualty insurance matters.

The author has provided checklists, sample procedures, form letters, tables and information and references to model statutes, state statutes, administrative regulations, and requirements of insurance departments nationwide.

Zalma on Insurance Claims Volume 101

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

In this first volume the book covers:

  • What is insurance?
  • The History of insurance.
  • Lloyd’s of London.
  • Acquisition of the policy.
  • Claims personnel
  • Differences between Property and Liability Policies.
  • Analysis of the policy.
  • The standard mortgage clause.
  • Assignments.
  • The Liability Policy.
  • Additional Insureds.

Zalma on Insurance Claims Part 102

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the second part of Zalma on Insurance Claims and includes materials concerning:

  • Other Insurance Clauses
  • Underwriting
  • Conditions, Warranties and Exclusions

Zalma on Insurance Claims Part 103

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is part 103 of Zalma on Insurance Claims and will deal with:

1.Duties of the Insured and the Insurer
2.Declaring a Policy Void
3.Processing a Claim

When read with Part 101 and Part 102, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 104

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fourth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation of First Party Property Claims
  2. Rescission
  3. The Mortgage Clause
  4. Fortuity & Other Issues
  5. Determine the Amount of the Loss
  6. The Claim File

When read with Part 101, Part 102, and Part 103, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 105

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fifth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation – Liability
  2. Claims Made and Reported Policies
  3. The Notice Prejudice Rule.
  4. Types of Torts
  5. The Liability Claims File
  6. Discovery of the Insurance Claims File
  7. Tests for Determining Duty to Defend
  8. Appendices – forms for the claims person

When read with Insurance 101, Insurance 102, Insurance 103 and 104, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 106

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the sixth part of “Zalma on Insurance Claims” and will deal with:

  • Property Insurance & the Tort of Bad Faith
  • Grounds for Finding Bad Faith
  • Avoiding Charges of Bad Faith
  • Punitive Damages
  • Bad Faith & Liability Insurance
  • Defenses to the Tort of Bad Faith
  • California Civil Code Section 3294

When read with Part 101, Part 102, and Part 103, Part 104 and Part 105 this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 107:

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the seventh part of “Zalma on Insurance Claims” and will deal with:

  • Evaluation and Settlement – Property
  • Evaluation and Settlement – Liability
  • Subrogation
  • Salvage

Zalma on Insurance Claims Part 108

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the eighth part of Zalma on Insurance Claims, includes materials concerning:

1.Preparing a case for trial
2.Interviewing Techniques
3.The art of the Interview
4.Interview General Principles
5.The Interviewer
6.Preparing for the Interview
7.Beginning the Interview
8.Control Of The Interview
9.Dealing with Witness Types
10.Approaches the Work
11.Dealing with the Nervous Person
12.Bluffs
13.The Mutability Of Memory
14.The Examination Under Oath

Zalma on Insurance Claims Part 109   

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the ninth part of Zalma on Insurance Claims, includes materials concerning:

•Identifying Insurance Fraud
•Professional Conspiracies
•Multiple Types of Insurance Fraud
•How to Join the Fraud Fight
•Case Studies of Successful Fraud Investigations
•Checklist 1 – Types of Insurance Fraud
•Checklist 2 – Training Adjusters
•Checklist 3 – Red Flags of Fraud – Property Insurance
•Checklist 4 – Red Flags of Fraud – Liability Insurance
•Appendix A – Commonly Used Medical Acronyms and Abbreviations
•Appendix B – Glossary of Medical Terms

Zalma on Insurance Claims Part 110

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the tenth part of Zalma on Insurance Claims, includes materials concerning:

•Responses to Fraud
•Grounds for Rescission.
•The Fight Against Fraud
•Checklist 1—Responses to Fraud
•Checklist 2 – The Fight Against Fraud

Read about these ten books and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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No Coverage For Criminal Acts by Insured

Criminally Tampering With Evidence is Not Malicious Prosecution

Police officers are expected to be honest and present true and accurate evidence. Presenting false evidence to a court to support a criminal prosecution is a criminal act. No insurer intends to, nor should it ever, insure against criminal acts by an insured.

In Nicholas Sampson v. Investigator William Lambert, et al, St. Paul Fire and Marine Insurance Company et al, No. 17-1104, No. 17-1106, No. 17-1114, No. 17-1117, United States Court of Appeals For the Eighth Circuit (September 11, 2018) St. Paul Fire and Marine Insurance Co. (“St. Paul Insurance”) appealed the district court’s grant of summary judgment to Matthew Livers and Nicholas Sampson. The trial court concluded that St. Paul Insurance had a duty under its coverage policy to indemnify David Kofoed for intentional acts Kofoed committed against Livers and Sampson during his employment as a law enforcement officer for Douglas County, Nebraska. St. Paul Insurance contends that its own policy — with some narrow exceptions, including for malicious prosecution — bars indemnification of intentional criminal acts.

BACKGROUND

Commander David Kofoed of the Douglas County Crime Scene Investigation Unit tampered with evidence while investigating the April 17, 2006 murders of Sharmon and Wayne Stock. Murder charges — driven in part by the tampered evidence — were filed against cousins Matthew Livers and Nicholas Sampson, which charges eventually were dropped.

Livers and Sampson sued, among others, Kofoed, the Cass County Sheriff’s Office, the Nebraska State Patrol, and the Douglas County Sheriff’s Office. They alleged numerous constitutional violations, including: conspiring to coerce Livers’ confession; planting false evidence; concealing exculpatory evidence; making arrests without probable cause; failing to intervene; failing to train; and violating their due process rights under the Fifth and Fourteenth Amendments. Initially, Douglas County, Kofoed’s employer, retained outside counsel to defend Kofoed. While the civil case proceeded, Kofoed was charged criminally, tried, and convicted in Nebraska state court for evidence tampering. Subsequent to his conviction, Douglas County terminated Kofoed’s employment and stopped paying for his legal expenses. Kofoed’s counsel withdrew, and Kofoed proceeded pro se.

The police department defendants, without Kofoed, settled with Livers and Sampson, leaving Kofoed the sole remaining defendant in the case.

Kofoed took no action in the suits as a pro se defendant. The district court entered default judgment against Kofoed who failed to appear or attempt to defend himself, in Livers’s case. Sampson then moved for summary judgment against Kofoed, and the district court granted the motion in favor of Sampson, noting that “[t]he uncontroverted evidence submitted by [Sampson] establishes that Kofoed planted evidence in the homicide investigation at issue and conspired with others to fabricate evidence and to falsely implicate [Sampson] in the murders.”  The court awarded Sampson $965,000 in compensatory damages, $965,000 in punitive damages, $129,041.09 in costs, and $199,675 in attorney’s fees. It awarded Livers $1,650,000 in compensatory damages, $1,650,000 in punitive damages, $52,981.32 in costs, and $999,656.50 in attorney’s fees. Kofoed did not appeal the judgment.

Livers and Sampson then sued to collect from St. Paul Insurance based on the County’s insurance policy to protect its law enforcement officers from damage claims filed against them for tortious conduct on the job. The policy expressly excludes “[c]riminal, dishonest, fraudulent, or malicious acts” that was the basis of its refusal to defend or indemnify Kofoed.

The trial court concluded that Kofoed’s act, though criminal, is covered under St. Paul Insurance’s “malicious prosecution” exception; the insurance company thus had a duty to indemnify Kofoed for both compensatory and punitive damages, as well as costs and attorney’s fees. The district court then ordered St. Paul Insurance to pay $1,643,500 to Sampson and $3,356,500 to Livers—totaling $5,000,000, the policy cap—but denied prejudgment interests in the damages award.

DISCUSSION

The Eighth Circuit concluded that, contrary to the plaintiffs’ claims, St. Paul Insurance’s policy coverage is not illusory. It excludes coverage for acts with specific intent, but it covers general intent acts. Neither false arrest nor false imprisonment requires a specific intent.

Finally, while the policy excludes criminal, dishonest, fraudulent, or malicious acts, it also expressly states that it will not “apply [the] exclusion to personal injury caused by malicious prosecution.” Thus, the policy excludes many specific intent acts, but it makes a specific exception for malicious prosecution. The policy also covers general intent acts or omissions, or conduct where intent is not at issue. The policy can provide what it promises and is thus not illusory.

MALICIOUS PROSECUTION EXCEPTION TO COVERAGE EXCLUSION

The interpretation of an insurance policy is a question of law. When an insurer denies coverage, the plaintiff must prove coverage. The burden to prove that an exclusionary clause applies rests upon the insurer. The burden then shifts back to the plaintiff to show that an exception to the insurance exclusion applies.

Under Nebraska law, a person tampers with physical evidence if he, “believing that an official proceeding is pending or about to be instituted and acting without legal right or authority, . . . knowingly makes, presents, or offers any false physical evidence with intent that it be introduced in the pending or prospective official proceeding.” Neb. Rev. Stat. § 28-922(1)(b). In contrast, the tort of malicious prosecution comprises these conjunctive elements: “(1) the commencement or prosecution of the proceeding against the plaintiff, (2) its legal causation by the present defendant, (3) its bona fide termination in favor of the plaintiff, (4) the absence of probable cause for such proceeding, (5) the presence of malice therein, and (6) damages.” McKinney v. Okoye, 842 N.W.2d 581, 591 (Neb. 2014).

Criminal evidence tampering and civil malicious prosecution differ sufficiently such that one is not analogous to the other. A person who tampers with evidence does so either to undermine or to bolster a prosecution. A malicious prosecution purposefully misuses the government’s prosecutorial power to start or sustain criminal charges against a person without probable cause. A person may commit the tort of malicious prosecution without tampering with evidence in violation of the law. Likewise, a person tampering with evidence may not satisfy the elements of malicious prosecution.

The Eighth Circuit appropriately concluded that St. Paul Insurance’s malicious prosecution exception for intentional acts did not include the crime of evidence tampering for which Kofoed was convicted beyond a reasonable doubt.

Other than the conclusory allegation that Kofoed and the other defendants procured false evidence, the complaint pleaded no facts to support a claim of malicious prosecution.

Because Livers and Sampson failed to plead sufficiently the malicious prosecution cause of action in their complaints, the district court’s entry of default judgment against Kofoed did not include malicious prosecution. And, because Kofoed’s judgment did not include malicious prosecution—the sole exception to the excluded acts available to Kofoed under St. Paul Insurance’s policy—Livers and Sampson failed in their burden to show that an exception to the insurance exclusion applied. St. Paul Insurance thus has no duty to indemnify Kofoed. Therefore, the Eighth Circuit reversed the district court’s judgment.

ZALMA OPINION

Since Kofoed was convicted of the crime of tampering with evidence – a specific intent crime – there could be no question his acts were intentional and there was no indication of the fortuity required to allow for insurance coverage. Had the plaintiffs pleaded and presented evidence of malicious prosecution coverage would have been available. They did not and, as a result, they lost the ability to collect their multi-million dollar judgment against Kofoed and the county. Their lawyers should consider advising their E&O insurers of a potential claim.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Construction Defect

Construction Defects and Insurance

Are you faced with a construction defect claim? Do you insure contractors, builders, sub-contractors, architects, engineers or anyone facing a claim or suit for construction defects? Do you understand insurance of construction defects? Do you understand construction? Do you understand how to investigate, defend, or prosecute a construction defect suit? If not, you need “Construction Defects and Insurance.”

Barry Zalma has updated and re-edited his seminal work Construction Defects Coverage Guide into is the latest addition to Barry Zalma’s insurance claims series of books and articles that will form the most thorough, up-to-date, expert-authored insurance claims guide available today eight Kindle or Paperback Volumes at reasonable prices.

Thorough, yet practical, this series of books form the ideal guide for any professional who works in or frequently interacts with the insurance industry.

Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), and business owners will benefit greatly from the ten volume guide. It is also the perfect resource for insurance educators, trainers, and students whose role requires an understanding of insurance law.

The Eight volumes include:

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Accident – the name of the Insurance – Needed to Obtain ADD Benefits

Insurer Reasonably Concluded that Death from Natural Causes not an Accident

Life is a terminal disease from which all humans suffer. We all die eventually. Accidental Death and Dismemberment insurance (AD&D) only responds when the death or dismemberment is due to an accident. That simple, clear and unambiguous provision results in litigation even when there is an autopsy report revealing that the death was due to natural, non-accidental causes.

In Linda Grabowski v. Hartford Life & Accident Insurance Company, BAE Systems Funded Welfare Benefit Plan; BAE Systems Administrative Committee; BAE Systems, Inc., No. 17-2108, United States Court of Appeals for The Fourth Circuit (September 4, 2018) Linda Grabowski (Linda) tried to collect after her husband died from natural, non-accidental causes. The trial court denied her motion for summary judgment and granted the summary judgment to Defendant Hartford Life and Accident Insurance Company (Hartford). Linda challenged  Hartford’s decision not to pay AD&D benefits under an ERISA employee benefit plan following the death of her husband Mark Grabowski (Mark).

FACTS

On April 15, 2013, Mark flew from Binghamton, New York, to Los Angeles, California, as part of a business trip for his employer. Two days later, he collapsed and died at his employer’s Los Angeles office. Linda applied for benefits under the policies available from Mark’s employer. Hartford denied her claims on the bases that Mark’s death did not result from a traumatic accidental injury independent of all other causes and was caused or contributed to by sickness or disease. The district court affirmed the denial of benefits and granted summary judgment to Hartford.

ANALYSIS

Hartford had discretionary authority to determine eligibility for benefits under the plan’s AD&D policies and to construe and interpret terms and provisions therein. Where an ERISA plan grants an administrator discretion to award a benefit, a court must review its decision only for abuse of discretion and must not disturb the decision if it is reasonable, even if the appellate court would have reached a different conclusion. A plan administrator’s decision is reasonable if it is the result of a deliberate, principled reasoning process and if it is supported by substantial evidence.

When reviewing the administrator’s findings for substantial evidence, the Fourth Circuit’s review is limited to a review of the evidence that was before the plan administrator at the time of the decision. When an administrator has interpreted a plan’s terms, we do not construe ambiguities against the insurer who drafted the terms.

The Fourth Circuit applied the following in determining if the decision of the District Court was appropriate:

(1)       the language of the plan;

(2)       the purposes and goals of the plan;

(3)       the adequacy of the materials considered to make the decision and the degree to which they support it;

(4)       whether the fiduciary’s interpretation was consistent with other provisions in the plan and with earlier interpretations of the plan;

(5)       whether the decision making process was reasoned and principled;

(6)       whether the decision was consistent with the procedural and substantive requirements of ERISA;

(7)       any external standard relevant to the exercise of discretion; and

(8)       the fiduciary’s motives and any conflict of interest it may have.

Under the abuse of discretion standard Hartford only had to offer a reasonable, and not the most reasonable, interpretation of plan terms.

The policies under the plan condition AD&D benefits on the presence of an “accidental injury” and a “bodily injury resulting . . . directly from an accident.” Hartford determined these circumstances were not present because Mark died from the natural cause of a pulmonary embolism in the absence of any trauma.

Linda complains about Hartford’s claims review process, noting that it was performed by a benefits specialist, without input from or analysis by a medical professional but was unable to show that the specialist did not fairly interpret the facts and the policy. Rather, the Fourth Circuit concluded, after completing its analysis, that Hartford did not act unreasonably in determining that Mark’s death was not an accident or accidental under the policies. The Fourth Circuit also concluded that any lack of proof on this point has no bearing on the outcome of the case.

ZALMA OPINION

Mark died because a foreign body (an embolism), such as air bubbles or blood clots, blocked blood flow in his arteries. There are different types of embolism, including brain embolisms and Mark’s pulmonary embolism that stopped blood flow to his lungs and killed him. It was reasonable for Hartford to conclude his death was not due to an accident and, therefore, it owed nothing on the AD&D policy.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Tort of Bad Faith Must Be Eliminated

Time to Rescind the Tort of Bad Faith

The tort of bad faith was created by courts in the 1950’s to solve a problem of abuse by a few insurers. It has become a devise to enrich plaintiffs’ lawyers and increase the cost of insurance across the country. The book explains why it is time for the tort of bad faith to be eliminated.

Insurance and the Law of Unintended Consequences Paperback 

Insurance is, and always will be, a business of the utmost good faith. All parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract. Insurance is, and always be, nothing more than a contract.
The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.
The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation. If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.
Only if a true tort occurs can the insured waive the contract action and sue in tort. Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort. The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.
Read about this and other insurance books by Barry Zalma at http://zalma.com/zalma-books/
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No Coverage — No Bad Faith

Failure to Plead Plausible Claims Defeats Lawsuit

It is the obligation of every lawyer representing a plaintiff to plead plausible claims for relief or find the suit dismissed summarily. In Eileen Coonce v. CSAA Fire & Casualty Insurance Company, and Automobile Club Insurance Company; AAA Fire & Casualty Insurance Company, No. 18-7000, United States Court Of Appeals For The Tenth Circuit (September 4, 2018) the failure to plead plausible claims for relief resulted in dismissal by the trial court and affirmed by the Tenth Circuit.

FACTS

On February 15, 2014, tenants living in a certain house in Broken Arrow, Oklahoma, returned home from dinner to find the ceiling in the living and dining areas had caved in. An engineering survey determined the nails used in construction had failed to hold. The home’s owner, Eileen Coonce, made a claim against an insurance policy (the Policy) issued for the house by CSAA Fire & Casualty Insurance Company, doing business as AAA Fire & Casualty Insurance Company. CSAA denied coverage.

After giving Coonce two opportunities to amend her complaint, the district court granted CSAA’s Fed. R. Civ. P. 12(b)(6) motion to dismiss for failure to state a claim. It held the Policy excluded coverage for the ceiling collapse, and because the Policy did not cover the collapse, there could be no bad-faith claim.

ANALYSIS

In Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court directed:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has factual plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief. (Emphasis added)

Iqbal‘s plausibility standard controlled the outcome of the appeal. Coonce argued her Second Amended Complaint pleads plausible claims. To the contrary, the Second Amended Complaint fails to allege any facts to overcome the Policy’s unambiguous exclusions and limitations of coverage, and therefore it fails to plausibly establish coverage under the Policy or a bad-faith denial of coverage.

Although the Policy undisputedly covers the dwelling, it explicitly does not cover losses “[i]nvolving collapse, except as provided in [paragraph] Collapse under Section I – Property Coverages.”   The Second Amended Complaint invokes paragraph E.8. to allege coverage under the Policy.

Paragraph E.8. first defines “collapse” for purposes of the Policy. It then establishes coverage for direct physical loss to covered property involving collapse of a building or any part of a building if the collapse was caused by one or more of the following: (1) The Perils Insured Against named under Coverage C; (2) Decay that is hidden from view, unless the presence of such decay is known to an “insured” prior to collapse; (3) Insect or vermin damage that is hidden from view, unless the presence of such damage is known to an “insured” prior to collapse; (4) Weight of contents, equipment, animals or people; (5) Weight of rain which collects on a roof; or (6) Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation.”

Thus, the Policy makes it clear losses due to a collapse are covered only in certain specified circumstances.

The parties disputed whether the ceiling cave-in qualified as a “collapse” under the Policy, with the district court declining to decide the question in favor of CSAA at the dismissal stage. We need not decide that issue. Even assuming the cave-in was a “collapse,” the Policy covers only a “collapse” caused by one or more of the listed circumstances. But the Second Amended Complaint does not contain any well-pleaded facts to show any of these circumstances would apply. To the contrary, the sole averment concerning the cause of the cave-in is that CSAA’s “engineering firm concluded that the ceiling collapsed because the nails did not hold.” This assertion undermines any inference paragraph E.8.’s limited coverage would apply.

In addition, as CSAA argues, the Policy also unambiguously declines to insure “loss . . . [e]xcluded under Section I – Exclusions,” and “loss . . . [c]aused by . . . [w]ear and tear, marring, [or] deterioration.” In turn, “Section I – Exclusions” denied coverage for loss caused by “[f]aulty, inadequate or defective” “[d]esign, specifications, workmanship, repair, [or] construction” or “[f]aulty, inadequate or defective” “[m]aterials used in repair, construction, renovation or remodeling . . . of part or all of [the] property.” The Second Amended Complaint does not contain any facts showing these exclusions do not apply.

Instead, as with Coonce’s “collapse” argument, the allegations tend to show the exclusions would apply.

In sum, to overcome the motion to dismiss, Coonce had to plead plausible claims. And in light of the Policy’s plain language, to make plausible a claim for coverage of the ceiling collapse, she had to include well-pleaded facts showing one or more of the paragraph 8.E. circumstances would apply and the other unambiguous exclusions would not apply. Because she failed to do so, and therefore failed to nudge her claims across the line from conceivable to plausible, the Tenth Circuit concluded her complaint must be dismissed.

As for the bad-faith claim, under Oklahoma law, tort liability arises only where there is a clear showing that the insurer unreasonably, and in bad faith, withholds payment of the claim of its insured. When a court concludes there was no breach of an insurance policy, it follows a company’s denial of coverage was not unreasonable. Because the Second Amended Complaint lacks well-pleaded facts showing coverage and a breach under the Policy, the district court also did not err in concluding Coonce did not state a plausible bad-faith claim.

ZALMA OPINION

Either the insured’s lawyers were incompetent and could not plead a plausible set of facts that would allow for coverage of the “collapse” or, more likely, there were no facts that plausibly allowed for coverage, the suit was destined to fail. Lawyers, although creative, will not state false facts in a pleading to get to trial. There was simply no coverage for Ms. Coonce’s loss and the best that could be said was she presented a fair try and probably should have accepted the trial court’s decision to save the appellate lawyers’ fees.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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New Insurance Claims Books

The Making of an Insurance Claims Professional

It is the insurance claims person – the adjuster – who meets with the person insured and works to keep the promises made by the insurance policy. The adjuster cannot, however, help the insurer keep the promises made unless he or she understands insurance, insurance claims, the types of claims presented and the law surrounding insurance and insurance claims.

For the minimal cost of a paperback or Kindle book every insurer can place in the hands of their claims people information that will help them become professional, well trained, thoroughly educated claims professionals who are able to read and understand every insurance policy so that he or she is able to keep the promises made by the insurance policy.

Construction Defects and Insurance

Barry Zalma has updated and re-edited his seminal work Construction Defects Coverage Guide into is the latest addition to Barry Zalma’s insurance claims series of books and articles that will form the most thorough, up-to-date, expert-authored insurance claims guide available today eight Kindle or Paperback Volumes at reasonable prices.

Thorough, yet practical, this series of books form the ideal guide for any professional who works in or frequently interacts with the insurance industry.

Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), and business owners will benefit greatly from the ten volume guide. It is also the perfect resource for insurance educators, trainers, and students whose role requires an understanding of insurance law.

The Eight volumes include:

Zalma on Insurance Claims

Barry Zalma has updated, revised, edited and recreated his seminal work “Insurance Claims: A Comprehensive Guide” into a  series of ten books is the latest addition to Barry Zalma’s insurance claims series of books and articles that will form the most thorough, up-to-date, expert-authored insurance claims guide available today at reasonable prices.

Written by nationally-renowned insurance coverage expert Barry Zalma, a semi-retired insurance coverage attorney, consultant, expert witness and blogger, Zalma on Insurance Claims provides in-depth explanations, analysis, examples, and detailed discussion of:

  • Property insurance claims;
  • Third-party liability claims;
  • Casualty claims; and
  • Insurance Fraud

Thorough, yet practical, this series of books form the ideal guide for any professional who works in or frequently interacts with the insurance industry.

Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), and business owners will benefit greatly from the ten volume guide. It is also the perfect resource for insurance educators, trainers, and students whose role requires an understanding of insurance law.

As you read through the various volumes of Zalma on Insurance Claims, you will find comprehensive—yet comprehensible—coverage of key topics, including:

  • What is Insurance?
  • The History of Insurance
  • The covenant of good faith and fair dealing.
  • The tort of Bad faith
  • Conditions,
  • Warranties,
  • Exclusions
  • Declaring a policy void
  • Duties of insured and insurer
  • Evaluation and settlement
  • Identifying insurance fraud
  • Investigation
  • Kinds of insurance policies
  • Other insurance clauses
  • Preparing a case for trial
  • Processing a claim
  • Responses to fraud
  • Subrogation and salvage
  • Underwriting and
  • Many more property and casualty insurance matters.

The author has provided checklists, sample procedures, form letters, tables and information and references to model statutes, state statutes, administrative regulations, and requirements of insurance departments nationwide.

Zalma on Insurance Claims Volume 101

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

In this first volume the book covers:

  • What is insurance?
  • The History of insurance.
  • Lloyd’s of London.
  • Acquisition of the policy.
  • Claims personnel
  • Differences between Property and Liability Policies.
  • Analysis of the policy.
  • The standard mortgage clause.
  • Assignments.
  • The Liability Policy.
  • Additional Insureds.

Zalma on Insurance Claims Part 102

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the second part of Zalma on Insurance Claims and includes materials concerning:

  • Other Insurance Clauses
  • Underwriting
  • Conditions, Warranties and Exclusions

Zalma on Insurance Claims Part 103

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is part 103 of Zalma on Insurance Claims and will deal with:

1.Duties of the Insured and the Insurer
2.Declaring a Policy Void
3.Processing a Claim

When read with Part 101 and Part 102, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 104

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fourth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation of First Party Property Claims
  2. Rescission
  3. The Mortgage Clause
  4. Fortuity & Other Issues
  5. Determine the Amount of the Loss
  6. The Claim File

When read with Part 101, Part 102, and Part 103, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 105

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fifth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation – Liability
  2. Claims Made and Reported Policies
  3. The Notice Prejudice Rule.
  4. Types of Torts
  5. The Liability Claims File
  6. Discovery of the Insurance Claims File
  7. Tests for Determining Duty to Defend
  8. Appendices – forms for the claims person

When read with Insurance 101, Insurance 102, Insurance 103 and 104, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 106

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the sixth part of “Zalma on Insurance Claims” and will deal with:

  • Property Insurance & the Tort of Bad Faith
  • Grounds for Finding Bad Faith
  • Avoiding Charges of Bad Faith
  • Punitive Damages
  • Bad Faith & Liability Insurance
  • Defenses to the Tort of Bad Faith
  • California Civil Code Section 3294

When read with Part 101, Part 102, and Part 103, Part 104 and Part 105 this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 107:

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the seventh part of “Zalma on Insurance Claims” and will deal with:

  • Evaluation and Settlement – Property
  • Evaluation and Settlement – Liability
  • Subrogation
  • Salvage

Zalma on Insurance Claims Part 108

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the eighth part of Zalma on Insurance Claims, includes materials concerning:

1.Preparing a case for trial
2.Interviewing Techniques
3.The art of the Interview
4.Interview General Principles
5.The Interviewer
6.Preparing for the Interview
7.Beginning the Interview
8.Control Of The Interview
9.Dealing with Witness Types
10.Approaches the Work
11.Dealing with the Nervous Person
12.Bluffs
13.The Mutability Of Memory
14.The Examination Under Oath

Zalma on Insurance Claims Part 109   

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the ninth part of Zalma on Insurance Claims, includes materials concerning:

•Identifying Insurance Fraud
•Professional Conspiracies
•Multiple Types of Insurance Fraud
•How to Join the Fraud Fight
•Case Studies of Successful Fraud Investigations
•Checklist 1 – Types of Insurance Fraud
•Checklist 2 – Training Adjusters
•Checklist 3 – Red Flags of Fraud – Property Insurance
•Checklist 4 – Red Flags of Fraud – Liability Insurance
•Appendix A – Commonly Used Medical Acronyms and Abbreviations
•Appendix B – Glossary of Medical Terms

Zalma on Insurance Claims Part 110

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the tenth part of Zalma on Insurance Claims, includes materials concerning:

•Responses to Fraud
•Grounds for Rescission.
•The Fight Against Fraud
•Checklist 1—Responses to Fraud
•Checklist 2 – The Fight Against Fraud

Read about these and many more insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Who’s on First for Negligent Hiring?

Personal Auto Policy Limited to Acts of Owner/Operator

Auto liability insurance policies promise to defend the insured. When more than one policy provides coverage the question of who owes a defense and indemnity to whom is often complex with multiple insurers pointing fingers at each other.

In United Financial Casualty Company v. Princeton Excess And Surplus Lines Insurance Company, No. 17-2909, United States Court Of Appeals For The Third Circuit (August 30, 2018) one, of multiple insurers, provided a defense and indemnity to all defendants (because the other insurers refused) and then sought indemnity or contribution from the other insurers.

The District Court granted United Financial Casualty Company’s Motion for Summary Judgment, and denied Princeton Excess and Surplus Lines Insurance Company’s Motion for Summary Judgment, which determined the parties’ respective duties to defend claims of direct and vicarious liability arising from a settled state court bodily injury lawsuit.

FACTS

In January 2014 Joseph Nice—a delivery driver for courier service Prestige Delivery Services, Inc. (“Prestige”)—injured a mechanic, Kenneth Dunbar, in the course of delivering goods on behalf of Staples. In the wake of the accident, Dunbar filed a negligence suit in state court, asserting claims not only against Nice, but also against Prestige and Prestige’s client, Staples. Dunbar alleged that Nice was directly liable for his negligence. He also alleged that Prestige and Staples were (1) vicariously liable for Nice’s negligence under the doctrine of respondeat superior and (2) directly liable through theories of negligent hiring, supervision, and entrustment. United Financial Causality Company (“United”)—Nice’s insurance company—elected to provide a defense for all three defendants in the lawsuit.

United settled all claims with Dunbar.

United sued Princeton—Prestige’s insurance company—seeking (1) contribution on the vicarious liability claims and (2) a declaratory judgment as to which insurance policy (United’s or Princeton’s) was primary for the direct liability claims against both Prestige and Staples. United conceded that it was responsible for all costs of defending the direct claims against Nice and the vicarious liability claims against Prestige.

The parties cross-moved for summary judgment. Regarding the vicarious liability claim against Staples, the District Court found that Princeton was ninety-one percent responsible and United was nine percent responsible. Regarding the direct liability claims, the District Court found Princeton was primary and solely responsible for the cost of defending these claims. The District Court granted summary judgment in favor of United, awarding United $227,448.68 on the vicarious liability claim against Staples, and declaring Princeton solely responsible for the costs of defending the direct liability claims.

THE APPEAL

Princeton  only appealed the District Court’s order with respect to its ruling on the direct liability claims. Princeton argues that the District Court erred in two ways: (1) by failing to recognize that United’s policy should have been primary with regard to the direct liability claims; and (2) by relying on the reasonable expectations doctrine to bolster the conclusion that United’s policy covered vicarious liability claims only.

The District Court held that United was explicitly relieved of responsibility for these claims by the policy’s own language. The United policy contains a definitions section that explicitly limits responsibility of the insured, i.e., Joseph Nice, to injuries that arise out of Nice’s direct conduct. Specifically, the policy states: “we will pay damages, other than punitive or exemplary damages; for bodily injury, property damage, and covered pollution cost or expense, for which an insured becomes legally responsible because of an accident arising out of the ownership, maintenance or use of that insured auto.”

Thus, as the District Court pointed out, “[t]he trigger for coverage is conduct on the part of the policy holder or an authorized driver. As a matter of simple logic, there is no coherent factual scenario where Nice, the delivery man, can be deemed negligent for hiring, or failing to supervise, himself.”

ANALYSIS

Both policies here [United and Princeton] are automobile policies, and the policy issued by Princeton was a commercial auto policy explicitly meant to protect Prestige from liability connected to the operation of vehicles in its business. Princeton was obligated to cover the direct liability claims asserted against Prestige.

With regard to the direct liability claims against Staples, we note that Princeton’s policy states that its coverage will be considered “primary” for any liability assumed under an “Insured contract.” An “Insured contract” is defined by Princeton’s Policy as: “That part of any other contract or agreement pertaining to your business . . . under which you assume the tort liability of another to pay for “bodily injury” or “property damage” to a third party or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement[.]”

The Delivery Service Agreement negotiated between Prestige and Staples states requires Prestige to indemnify and hold harmless Staples.  Therefore, the contract between Prestige and Staples was an “Insured contract.” Accordingly, Prestige bears primary coverage for claims of direct liability against Staples.

The District Court found it persuasive that United’s policy extended only to acts which were the sole responsibility of Nice himself, making it “difficult to believe that United reasonably expected it was issuing coverage protecting third parties for the decision to hire him.” Since the wording of United’s policy suggests that it would not cover acts of a third party, it is more “reasonable” to assume that the courier service, in this case Prestige, would be held responsible for its own actions of hiring its workers—therefore, laying liability on Princeton and not United.

ZALMA OPINION

It should be logical and intelligent when more than one insurer potentially covers a loss for the insurers to work together to provide a defense or indemnity by sharing the costs of defense and indemnity. Then, after the insureds’ rights are protected, the insurers can resolve their differences by mediation, arbitration or suit. In this case only United stepped up to its obligation and obtained a judgment against the non-performing insurer.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Who’s on First? The Insured Must Allocate

Double Recovery Not Allowed

When a contractor is faced with a massive judgment that must be satisfied it looks first to its subcontractors who agreed to defend or indemnify the insured. If inadequate to pay the full judgment the contractor then looks to its own insurers. If its own insurers have limited coverages it is incumbent on the insured to allocate the payments from the subcontractors and their insurers to items covered by the excess policy and not losses not covered.

In Satterfield And Pontikes Construction, Incorporated, Amerisure Mutual Insurance Company v. United States Fire Insurance Company, No. 17-20513, United States Court Of Appeals For The Fifth Circuit (August 2, 2018) Satterfield and Pontikes Construction, Inc. (S&P), a general construction contractor, sued United States Fire Insurance Company (U.S. Fire), its secondary insurance provider, after U.S. Fire refused to cover damages S&P incurred when a courthouse construction project went awry. U.S. Fire argued that it could not determine whether the funds S&P recovered from subcontractors of the courthouse project went to damages covered under U.S. Fire’s policy because S&P failed to allocate those proceeds when settling with the subcontractors.

If the subcontractor settlements were used to pay for damages covered under U.S. Fire’s policy, then allowing S&P to collect under U.S. Fire’s policy would result in double recovery and unjust enrichment. The district court granted summary judgment in favor of U.S. Fire after it determined that S&P failed to meet its burden to show allocation of the settlement proceeds between covered and noncovered damages.

FACTS

S&P was hired as the general contractor for a courthouse building project by Zapata County, Texas. S&P, in turn, hired numerous subcontractors to perform various roles for the construction. The project was large and required several years of work.

S&P purchased a second layer of insurance from U.S. Fire that would kick in only when the first layer of insurance was depleted. This policy had a $25,000,000 limit. S&P also required its subcontractors to purchase insurance and sign indemnity agreements to cover damage they caused to the project.

But S&P’s coverage was not all-inclusive. The policy it purchased from U.S. Fire barred coverage for any “property damage” resulting from exposure to fungi, including mold, or bacteria. AGLIC’s policy contained similar exclusions. And U.S. Fire’s policy did not cover attorney’s fees or other legal costs.

The project did not go well. Zapata County eventually terminated S&P and retained new contractors to complete the construction. Zapata County sued S&P, and the parties arbitrated their dispute.

Determining that the damage S&P caused required significant repairs, the arbitration panel awarded Zapata County $2,800,000 for mold remediation and dome reconstruction, $855,000 for replacement of the courthouse roof, and $2,417,000 for fireproofing replacement, terrazzo/window repairs, and cleaning. The panel further awarded $430,458 in prejudgment interest to Zapata County, $1,500,000 for reasonable attorney’s fees, and some of the arbitration costs. In total, the final award was $8,032,367.74.

S&P entered into settlement agreements with fifteen subcontractors and two third parties, collecting $4,492,500 for its efforts. These settlements were complete releases of liability, but the agreements did not allocate the proceeds of the settlements to the damages/liabilities they covered.

Of course, the $4,492,500 was not nearly sufficient to cover the $8,032,367.74 arbitration award. S&P was obliged to draw on its insurance policies to make up the $3,571,141.78 shortfall. S&P turned to U.S. Fire, its excess insurance provider, to cover the remainder. U.S. Fire paid nothing, arguing that the first layer of insurance for covered damages had not been completely exhausted. Amerisure—although it believed U.S. Fire was obligated to pay the shortfall—paid $1,146,405.10 to help satisfy the arbitration award. Despite these payments from AGLIC and Amerisure, S&P was required to spend $439,131.98 to satisfy the balance of the award.

Both sides moved for summary judgment. S&P’s argument was simple: U.S. Fire, as its second layer insurance provider, was required to make up the shortfall after the first layer of insurance was exhausted.

U.S. Fire contended that S&P’s argument ignored that not all of the damages awarded by the arbitration panel were covered under its insurance policy—including the mold remediation award ($2,800,000), the attorney’s fees award ($1,500,000), the prejudgment interest award ($202,320.53), and the arbitration fees ($29,909.74). Once these sums, along with AGLIC’s $1,000,000 first layer of insurance, are removed from the $8,000,000 arbitration award, then no more than $2,500,000 was potentially recoverable from U.S. Fire.

Simply because roughly $2,500,000 of the damages were covered under its policy does not mean that U.S. Fire believed that it was obligated to pay that amount. After determining which damages were potentially covered, U.S. Fire looked to the $4,492,500 subcontractor settlement award and considered whether the proceeds applied to covered or noncovered damages under its policy. The waterproofing subcontractor, whose work probably caused the mold damage, paid $1,750,000 to settle S&P’s claims against it. U.S. Fire stipulated that this amount could be allocated to the uninsured mold damages. So $1,750,000 of the $4,492,500 subcontractor settlement award applied to the noncovered damages. U.S. Fire contended that the remaining $2,742,500 of the subcontractor settlement award applied to the covered damages that S&P sought to recover from U.S. Fire. That amount was greater than the $2,531,411.51 of potentially covered damages, and so there was no shortfall for U.S. Fire to pay. Allowing S&P to recover from both the subcontractors and U.S. Fire for the same damages would result in double recovery and unjust enrichment.

The district court granted summary judgment in favor of U.S. Fire, reasoning: “S&P chose not to insure a substantial portion of the risk it carried . . . [and now] seeks to leave its insurers on the hook for risks they did not agree to insure. This theory is not only lacking in case support, it would produce an unfair result.”

DISCUSSION

The Subcontractor Settlements Are “Other Insurance”

S&P characterized the subcontractor settlements as the products of “contractual risk transfer mechanisms.” It defines “contractual risk transfer” as “[t]he use of contractual obligations such as indemnity and exculpatory agreements, waivers of recovery rights, and insurance requirements to pass along to others, but would otherwise be one’s own risk of loss.” S&P ignored the fact that insurance, by definition, is a contractual risk transfer from the insured to the insurer.

Regardless, easoning that the indemnity clauses in the subcontractor contracts were intended to “shore up leaks or gaps in insurance coverage,” S&P argues that U.S. Fire had no right, either contractual or equitable, to avoid paying the shortfall since the subcontractor indemnity payments were meant to be applied to the gaps in the U.S. Fire coverage.

The plain language of the policy allowed the appellate court to affirm the district court’s summary judgment order. An indemnity agreement falls under the plain language of the “Other Insurance” provision of U.S. Fire’s policy—which is very broad—because it is a mechanism by which an Insured arranges for funding of legal liabilities for which U.S. Fire’s policy also provides coverage. And settlement proceeds resulting from an indemnity agreement also count as “Other Insurance.”

The issue here is whether an insured can round up general settlements from its subcontractors, unilaterally decide that they will be allocated to uncovered damages, and then go after the insurers that would cover the damages if the loss was properly allocated to that policy.

Nonsettling parties should not be penalized for events over which they have no control. Where a settling party fails to allocate its settlement, the nonsettling party is entitled to a credit equaling the entire settlement amount.

No Texas case casts doubt on the district court’s conclusion that Texas law places the burden of proof on S&P to show that it properly allocated the settlement proceeds between covered and noncovered damages. S&P bears the burden to show that the subcontractor settlement proceeds were properly allocated to either covered or noncovered damages. If S&P cannot meet that burden, the appellate court must assume that all of the settlement proceeds went first to satisfy the covered damages under U.S. Fire’s policy. Although U.S. Fire agreed that S&P could reasonably settle its claims with the subcontractors, that does not mean U.S. Fire granted S&P permission to allocate all of those settlement proceeds to noncovered damages.

As the district court noted, U.S. Fire did not have power to structure the settlements to attribute the proceeds to one kind of damages or another.

ZALMA OPINION

Faced with a greater than $8 million judgment S&P, by not allocating the money it received from its subcontractors and their insurers, attempted to dip into its excess insurer’s funds and collect for damages – mold or attorneys fees – specifically excluded from the U.S. Fire policy. Its attempt was to obtain indemnity to which it was not entitled. The Fifth Circuit refused to allow S&P to obtain a double recovery.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Have You Complied with California Claims Regulations?

Training Required to be Completed by September 1, 2018

Every insurer that does business in the state of California was required to train all of their integral claims personnel about the California Fair Claims Settlement Regulations and the California SIU Regulations no later than September 1, 2018. If your people have not been trained or have not submitted a sworn statement that they have read and understand the Regulations, you are in violation and can be fined serious money. To protect yourself from fines your people need to review the two books described below:

California Fair Claims Settlement Practices Regulations

A Guide to Insureds, Public Insurance Adjusters, and Lawyers to Properly Investigate and Adjust Insurance Claims

This book was designed to assist insurance personnel who do business in the state of California. It will assist all insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, public insurance adjusters, policyholders and counsel for policyholders working with insurers doing business in California. All insurers doing business in California must comply with the requirements of the Regulations or face the ire of, and attempts at financial punishment from, the CDOI. That punishment is now questionable and limited because some courageous insurers fought the CDOI and succeeded before an administrative law judge who limited the right to punish. Regardless of difficulties in assessing punishment the state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath. To avoid the annual training the claims person can submit a sworn document that avers that he or she has read and understood the Regulations. Reviewing this book and the Regulations set forth below should be sufficient to comply with the training requirements of the Regulations. It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should also be familiar with the Regulations since they set a minimum standard for claims handling in the state.

Available as a Kindle book.

Available as a paperback.

California SIU Regulations

The State of California Imposes Control on the Investigation of Insurance Fraud

California SIU Regulations: The State of California Imposes Control on the Investigation of Insurance FraudCalifornia SIU Regulations is designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

Available as a Kindle Book.

Available as a paperback.

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Lawyer: Never Lie to Your Insurer

More Than Two Million Judgment Against Client for Neglect to Protect Client Should Have Been Reported

Insurance is a contract where the parties are compelled, by an unwritten covenant of good faith and fair dealing, to do nothing to deprive the other of the benefits of the contract. To fulfill the covenant the insured must honestly represent to the insurer the facts it requests so that it can make a wise discrimination on the risks it wishes to take. When an insured misrepresents material facts when applying for insurance an insurer has the right to rescind the policy or declare the policy void because of material misrepresentations.

In Imperium Insurance Company v. Shelton & Associates, Professional Association, A Mississippi Professional Association; Jason L. Shelton, No. 16-60728, C/w 16-60730, United States Court Of Appeals For The Fifth Circuit (August 30, 2018) Imperium sought to rescind the legal malpractice policy issued to Shelton individually and the firm.

FACTS

In January 2013, Jason Shelton applied for legal-malpractice insurance on behalf of himself and his law firm, Shelton & Associates (collectively, the “Shelton Defendants”). In the application, Shelton represented that he and his attorneys were not aware of any “legal work or incidents that might reasonably be expected to lead to a claim or suit against them.” Relying on Shelton’s application, Imperium Insurance Company (“Imperium”) issued a claims-made insurance policy. During the policy year, two malpractice suits were filed against Shelton and his firm by former clients.

Following discovery, in a single opinion, the district court granted summary judgment in favor of Imperium in both cases.

The insurance policy at issue in these appeals is a claims-made policy. The policy provides coverage for malpractice claims arising out of “wrongful acts” committed by the insured. The policy excludes, however, coverage for claims arising out of wrongful acts occurring prior to the effective date of the policy if the insured “knew or could have reasonably foreseen” that the wrongful act for which coverage is sought “might be expected to be the basis of a claim.”

Imperium claims that Shelton’s answer on the application about known claims was a material misrepresentation that entitles Imperium to rescind the policy.

In September 2010, AFC filed a motion for summary judgment against Tyler. A state-court hearing on the motion was set for March 21, 2011. AFC served notice of the motion and hearing to a former Shelton attorney who was no longer with the firm. AFC discovered its mistake and re-served the notice on Shelton & Associates on February 2, 2011. The Shelton Defendants claim, however, that they did not actually receive the notice.

On March 21, 2011, the state court held its hearing on AFC’s motion for summary judgment. No one from Shelton & Associates showed up at the hearing. The state court granted AFC’s motion for summary judgment, specifically “noting that no reply or response whatsoever has been filed by [Tyler] in opposition” to summary judgment. The judgment against Tyler was entered, setting the amount at around $2.9 million, plus interest at the highest legal rate.

The state court found that the Shelton Defendants, and thus Tyler, had received proper notice of the summary-judgment motion and hearing. The Shelton Defendants appealed the state court’s decision to the state appellate courts.

On January 8, 2013, less than a year later, Shelton filled out his application for malpractice insurance with Imperium. He represented in his application that, after inquiry, neither he nor any of his attorneys were “aware . . . of any legal work or incidents that might reasonably be expected to lead to a claim or suit against them.”

On April 4, 2013, the Mississippi Supreme Court affirmed the judgment against Tyler, expressly rejecting the Shelton Defendants’ arguments that they had not received proper service; the state supreme court also called attention to the Shelton Defendants’ poor handling of the litigation.

ANALYSIS

Mississippi law applies in this diversity case. Under Mississippi law, if an applicant for insurance is found to have made a misstatement of material fact in the application, the insurer that issued a policy based on the false application is entitled to void or rescind the policy. To establish that, as a matter of law, a material misrepresentation has been made in an insurance application, (1) it must contain answers that are false, incomplete, or misleading, and (2) the false, incomplete, or misleading answers must be material to the risk insured against or contemplated by the policy.

A material misrepresentation must be established by clear and convincing evidence. Whether the misrepresentation was intentional, negligent, or the result of mistake or oversight is of no consequence

Imperium argues that when Shelton filled out the application, Shelton and the attorneys in his firm were (1) aware of legal work that (2) might reasonably be expected to lead to a malpractice claim. With respect to Shelton’s awareness, Imperium points to Shelton’s representation of Paul Tyler in the state-court lawsuit filed against Tyler by AFC. When Shelton resumed representation of Tyler in October 2007, Shelton knew that no one had responded to AFC’s requests for admissions and that there was a pending hearing on AFC’s request to have those admissions deemed admitted.

The Fifth Circuit held that, under the facts outlined above, every reasonable attorney aware of the facts would know that such facts “might reasonably be expected to lead to a claim or suit.”

First, even though a prior attorney failed to respond to the discovery requests, the Shelton Defendants had months to rectify Tyler’s failure to respond to AFC’s request for admissions. They did nothing. Instead, they waited until half a year after the entry of judgment against Tyler, which was a full three years after Tyler failed to respond to the discovery requests. The Mississippi Supreme Court, in particular, found “damning” the statements of the Shelton attorney at the hearing to have the requests admitted.

Knowledge of the rejections of their arguments about lack of service would put any reasonable attorney on notice that a malpractice claim “might reasonably be expected.” Any reasonable attorney would know that a judgment of $2.9 million entered against his client due to his failure to respond to, or even show up at a hearing for, a dispositive motion would be reasonably likely to lead to a malpractice claim. This conclusion is especially apparent when, as here, the state court has rejected all of the attorney’s arguments in defense.

Shelton made a misrepresentation when he represented that he was not aware of any “legal work or incidents that might reasonably be expected to lead to a claim or suit.”

A fact is material if it might have led a prudent insurer to decline the risk, accept the risk only for an increased premium, or otherwise refuse to issue the exact policy requested by the applicant.

Here, the record reflects that Imperium introduced deposition evidence from the insurance agent who procured the insurance policy for Shelton. The agent testified that, had Imperium known of the Tyler facts, “it would have either resulted in approval pending an incident exclusion, higher premium or a denial to write the risk at all.”

In sum, because Shelton made a material misrepresentation in his application for insurance by failing to disclose the potential Tyler claim, Imperium is entitled to rescind the policy.

ZALMA OPINION

It is difficult to understand why the Shelton defendants failed to report the potential claim to Imperium and lied on the application since the potential for the suit was obvious. When a state Supreme Court finds a lawyer’s actions “damning” while affirming a judgment against the client the fact of a potential malpractice suit should be as obvious as yellow snow plow working after a blizzard. Not only was Shelton negligent in the representation of its clients it was either intentionally fraudulent or negligent in protecting its own interest.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Mortgagee’s Right to Insurance Proceeds Primary

Regardless of Acts of Insured Mortgagee Gets Insurance Proceeds

When two or more people make claim to the proceeds of an insurance claim that the insurer admits it owes the prudent insurer interpleads the funds into court and allows the competing claimants to fight out their claims in court. When a divorce is involved, of course, the disputes must be vicious and litigious.

In Privilege Underwriters Reciprocal Exchange v. Kyle West, Angela West, and Arvest Bank, Case No. 17-CV-0661-CVE-JFJ, United States District Court For The Northern District Of Oklahoma (August 27, 2018) Privilege Underwriters Reciprocal Exchange (PURE) filed an interpleader action because it had received competing claims to insurance benefits payable under a homeowner’s insurance policy.

Angela West and Arvest Bank (Arvest) argue that the insurance proceeds should be paid to Arvest, because the insured property was subject to a mortgage that requires the insurance proceeds to be paid to Arvest to cover the cost of repairs to the insured property. Kyle West claims that Angela West received the insured property as part of a divorce settlement, and she agreed to accept the property “as is” and it would be inequitable to allow her to recover the insurance proceeds.

FACTS

Kyle and Angela West were married in 1993, and they purchased a home located in Tulsa, Oklahoma. The Wests later separated and the divorce became final in October 2017. On December 22, 2017, the state court issued a revised decision as to the division of property, and the Residence was awarded to Angela West. Angela West received the Residence pursuant to a stipulation by the parties to the divorce, and she agreed to assume all debt associated with the Residence. The Residence was valued at $920,000 and was subject to two mortgages in the total amount of $843,859.

The Residence is subject to a mortgage held by Arvest Bank, and one of the conditions of the mortgage is that the mortgagor obtain homeowner’s insurance for the property.

Angela and Kyle West purchased a homeowner’s insurance policy from PURE, and they are both named insureds on that policy. The insurance contract contains a mortgage clause stating that “[i]f a mortagee is named in this policy, any covered loss under dwelling or other structures coverages will be paid to the mortgagee and you, as interests appear.”

Angela West submitted a claim to PURE for damage to the roof of the Oswego Residence, and PURE agreed that the claim was a covered loss under the insurance policy. Angela West states that she was unaware of any damage to the roof until near the time that she made the claim, and the PURE adjustor used the date of the most recent hail storm as the basis for the claim. James Haley, a vice-president of Arvest, states that Arvest and the Wests have not otherwise agreed in writing as to the disposition of the insurance proceeds, and Arvest has determined that the repairs are economically feasible and that its security is not lessened.

Kyle West has made a claim for the insurance proceeds, and Angela West claims that he does not intend to use the insurance to repair the roof of the Residence.

PURE filed this interpleader action due to the competing claims of Angela West, Kyle West, and Arvest to the insurance proceeds, and the parties agree that the full amount of the insurance proceeds have been deposited into the registry of the Court.

DISCUSSION

Angela West and Arvest argue that the insurance proceeds should be paid to Arvest for disbursement to cover the cost of repair to the insured property. They rely on the mortgage agreement under which the parties agreed that Arvest had the right to hold any insurance proceeds paid for the purpose of repairing or restoring the insured property. Kyle West argues that Angela West accepted the Oswege Residence in “as is” condition as part of the property division in the divorce proceedings, and she has no claim to the insurance proceeds. He further claims that the “as is” value of the Oswego Residence exceeds the value of Arvest’s mortgage, and “Arvest is fully protected and has no higher claim to the proceeds.”

PURE does not deny that it is obligated to pay for the property damage claim, and it has deposited the insurance proceeds with the Court for distribution to the appropriate party. Arvest is listed as the mortgagee on the declarations page of the insurance policy. The mortgage agreement between Arvest and the Wests also contains language specifically addressing the disposition of insurance proceeds received for the purpose of repairing or restoring the Residence.

Tenth Circuit and Oklahoma Supreme Court precedent clearly support Arvest’s argument that it has a superior claim to the insurance proceeds. The Oklahoma Supreme Court has explained that homeowner’s insurance is a personal contract between insurer and insured, and the insurance does not attach to or run with title to the real property. However, one consequence of this principle is that a mortgage usually has a provision requiring a mortgagor to obtain insurance to protect a mortgagee’s interest. When an insurance policy contains such a provision, Oklahoma follows the general rule that a mortgage clause in an insurance policy creates a separate contract of insurance in favor of the mortgagee which cannot be defeated by acts of the insured, and the mortgagee is entitled to recover the insurance proceeds up to the amount of the outstanding mortgage debt.

The Court, after reviewing the facts and law, concluded that the insurance proceeds should be paid to Arvest for the purpose of repairing or restoring the Residence under the terms of the mortgage agreement and the insurance policy. The Court has determined that Arvest has a superior claim to the insurance proceeds and that neither Angela nor Kyle West should directly receive the insurance proceeds.

The insurance proceeds are not assets of either of the parties to the divorce, and the state court has no jurisdiction to determine if the insurance proceeds should be paid to either of the divorcing parties. Kyle West has not shown that he has any claim to the insurance proceeds, and the Court will direct the Court Clerk to disburse the interpled funds to Arvest.

ZALMA OPINION

The mortgagee named on a homeowners policy is an insured as its interest may appear. Regardless of the disputes between the parties or the actions of the parties insured, the mortgagee has the right to protect its interest and collect the proceeds of an insurance claim and ascertain that the dwelling, the security for its loan, is protected by causing the insurance proceeds to be used to repair the property. Regardless of the disputes between the named insureds the mortgagee gets paid.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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The Unattended Auto Exclusion in Jewelers Block Policies

An Exclusion That Is Interpreted Differently

The purpose of the unattended auto exclusions is twofold:

  • to curb what is called “moral hazard” and
  • to limit coverage in high-risk settings even when there is no moral hazard.

Moral hazard refers to the effect of insurance in causing the insured to relax the care he takes to safeguard his property because the loss will be borne in whole or part by the insurance company.  Even if there were no moral hazard, an insurer might want to exclude coverage in especially risky situations; more precisely, the insured might agree to accept less coverage in exchange for a reduced premium.

Jewelers, and their counsel, must be aware that the jewelers block policy, although it still insures against almost all risks of physical loss, insurers will not take certain specified risks. Because of the risks attendant on high value property, the jewelers block policy contains a strict exclusion concerning theft losses from vehicles.

For example, a jeweler traveling with a case full of diamonds stops at a self-service gas station to fill his car with gasoline. He locks his car, leaves his case in the car, and walks fifty feet to the attendant to hand in his credit card. As he turns to return to his car, he sees a thief break the window of his car, snatch the case, and run away. The jeweler confidently reports the theft to his jewelers block insurer. He is shocked to learn that the loss is not insured.

The clause comes in various guises, including the following examples:

Unattended Auto — We do not cover theft of property in or on a vehicle that is not attended. An attended vehicle has a person actually in or on the vehicle. This person must be you, your employee or a person whose sole duty is to attend the vehicle. Jewelers Mutual Insurance Company Jewelers’ Block Policy.

and:

This Policy does not insure loss of or damage to property:

(i) while in or upon any automobile, motorcycle or any other vehicle unless, at the time the loss or damage occurs, there is actually in or upon such vehicle, the Assured, or a permanent employee of the Assured, or a person whose sole duty it is to attend the vehicle. Lloyd’s for O(L) (U.S.A.) NMA 2612 (9/3/95). Form approved by Lloyd’s Underwriters’ Non-Marine Association Limited.

The case law on the subject is not extensive. The case law that exists, however, almost universally supports the exclusion and adopts the positions taken by the insurers. That the exclusion in a theft policy for loss from an unattended and unlocked vehicle is proper, has been recognized in insurance policies and insurance law since before the invention of the automobile.

In E.M.M.I. Inc. v. Zurich American Insurance Co., 84 P.3d 385, 393 (Cal. 2004) the California Supreme Court, apparently rejecting its own, well-established, rules of construction of insurance policies, re-wrote the wording of a jewelers block policy. In what appears to be a case of reasoning backwards to provide insurance coverage for a jewelry salesman who was exceedingly stupid—he left his jewelry in his car with the keys in the ignition and the engine running to check on a clanking noise—only to have a thief jump in the car and drive away with the jewelry, the Supreme Court has compelled insurers to make their coverage more restrictive.

The Supreme Court majority, finding an ambiguity in the word “upon” has redefined an exclusion requiring an insured to be “in, on or upon” the automobile at the time of a loss for coverage to apply to mean “in close proximity.”

As Justice Kennard stated in her dissent “The majority’s holding misreads the plain meaning of the language, and is contrary to the holdings of the overwhelming majority of courts in other jurisdictions. We should enforce the contract between the parties as it is written, not rewrite its terms.”

Until the policy wording changes to comport with the holding of the California Supreme Court, stupid, lazy, or incompetent jewelers who—for more than 100 years knew there was no coverage for a theft unless they were in, on, or upon the vehicle, now can get coverage if they walk away—as long as they don’t walk too far away. The “close proximity” definition chosen by the California Supreme Court is so loose and ambiguous that it may result in hundreds of lawsuits to determine if two, four, ten or twenty feet from a vehicle is “close proximity.” Intelligent insurers will modify the language to provide less coverage and to avoid arguments of ambiguity by merely eliminating the words “on or upon” and require the insured to “actually be in” the automobile at the time of the theft for the loss to be covered.

The provision at issue exempted jewelry stolen from a vehicle from coverage unless the insured was “actually in or upon such vehicle at the time of the theft.” The question presented to the Supreme Court was whether the exception to that exclusion applies when the insured is not in the vehicle but is in close proximity to the vehicle and is attending to it when the theft occurs. The Supreme Court concluded the vehicle theft exclusion, as a whole, is ambiguous and fails to plainly and clearly alert insureds that there is no coverage if a theft occurs when the insured has stepped out of the vehicle but remains in close proximity and is attending to it.

In this case, Brian Callahan, a jewelry salesman, left his home with two “hard cloth garment bags” containing jewelry (some of which belonged to E.M.M.I. Inc., a manufacturer and marketer of jewelry) in the trunk of his vehicle. Shortly after driving away from his home, he heard a clanking noise emanating from the rear of the vehicle. Callahan stopped on the side of the road to investigate the source of the noise, got out of the car and closed the car door but left the engine running. He walked to the rear of the vehicle and, as he crouched down to visually inspect the exhaust pipes, he felt someone pass quickly by him. When he looked up, he saw an individual get into his car and drive away. Callahan was no more than approximately two feet from the car during the entire time he was outside the vehicle until the time of the theft. The police subsequently found the vehicle, but the jewelry was missing. In this case, two feet from the car, where he was too far away to stop the thief from entering his car and driving it off, is “close proximity” and therefore not excluded.

Jewelers block insurance was conceived at the turn of the 20th century. It provides coverage under a single policy for the “various risks inherent” in the jewelry business. In the present case, the policy excluded from coverage theft from a vehicle unless the insured or a designated employee was “actually in or upon” the vehicle at the time of the theft. As the Minnesota Supreme Court has observed, “The [exclusion] was obviously intended to cover any situation where a loss occurred when the property was not protected by the presence of someone in or upon the car” [Ruvelson, Inc. v. St. Paul Fire & Marine Ins. Co. (1951) 235 Minn. 243, 251 (50 N.W.2d 629, 634).]

In Minnesota, the Supreme Court in Ruvelson upheld the exclusion and concluded:

                The doctrine of substantial compliance has no application to the facts of this case. Where the words used in a contract of insurance expressly require actual compliance…

                [I]t is difficult to conceive of a more effective deterrent to a potential theft than the presence of someone in or upon an automobile.

New York Courts held there was no coverage in Royce Furs, Inc. v. Home Insurance Co., 30 App. Div. 2d 238, 291 N.Y.S. 2d 529, and concluded coverage did not apply even when the car was left unattended for only five minutes and the entire vehicle was under surveillance through a window of the hotel.

In Hanover Insurance Company v. A. M. I. Diamonds, 397 F.3d 528 (7th Cir. 2005) the Seventh Circuit upheld the exclusion for the following reasons, to curb what is called “moral hazard” and to limit coverage in high-risk settings even when there is no moral hazard. Criticizing the California Supreme Court, the Seventh Circuit held:

E.M.M.I. is an outlier. To read “upon” to mean “near” would open a large loophole of uncertain limits, something the cases we’ve cited, and others as well, such as Thomas Noe, Inc. v. Homestead Ins. Co., 173 F.3d 581, 583 (6th Cir. 1999); Equity Diamond Brokers, Inc. v. Transnational Ins. Co., 785 N.E.2d 816, 819-20 (Ohio App. 2003), and Nissel v. Certain Underwriters at Lloyd’s of London, 73 Cal. Rptr. 2d 174, 181 (App. 1998), have refused to do…If “in or upon” is given the same meaning in both places, and “upon” means “near,” then the exclusion is inapplicable if the diamonds are merely near the vehicle, and not in it — which would be preposterous.

Most cases interpreting similar policy language have found the phrase “in or upon the vehicle” to be unambiguous. See Annotation, Construction and Effect of “Jeweler’s Block” Policies or Provisions Contained Therein (1994), 22 A.L.R.5th 579; Couch on Insurance (3d Ed.2003), Section 154:74.

Based on exclusions with nearly identical language, courts have consistently “denied coverage to insureds who were not literally in or upon their vehicles at the time of the losses, even though the insureds may have been only a short distance away from the vehicle, watching the vehicle, or absent from the vehicle for only a short period of time.” “No insurance policy insures against every loss, however. In this case, EDB specifically assumed the risk by declining unattended-vehicle coverage.” (Equity Diamond Brokers v. Transnational Ins. Co., 2003-Ohio-1024, 151 Ohio App.3d. 747, 785 N.E.2d 816)

The United States District Court for the East District of New York held in Seelig v. St. Paul Fire & Marine Insurance Co., 109 F. Supp. 277 (1953), that the purpose of the policy with regard to this exclusion was to cover a loss only if it occurred in connection with the hold-up of a motor vehicle while being operated by a permanent employee of the insured. It concluded that there was no coverage although the employee was only a short distance from the vehicle at the time the theft occurred.

It therefore appears to be the consensus of those courts that have considered the issue, except the California Supreme Court, that unattended automobile exclusions, like the three quoted above, are clear, unambiguous, and enforceable.

“Indeed, the use of the word ‘actually’ in the requirement that the assured or properly-designated person be ‘actually in or upon’ the vehicle at the time of loss belies any contention that constructive possession of the type urged by Plaintiff can avoid the exclusion. (JMP Associates v. St. Paul Fire & Marine, 345 Md 630, 693 A.2d 832 (1997))

All parties involved in a jewelers block policy should be cautious before concluding the contract. Failure on the part of any of the individuals involved to be totally frank can cause, after a loss, the policy to be declared void. Once a policy is voided or a claim rejected, it is inevitable, because of the extent of uninsured loss, that the insured will file suit against the insurer, the adjuster, and the broker. If, on the other hand, serious effort is expended in the acquisition of the policy, in determining that the insured (before issuance of the policy) maintains adequate records, and the protective safeguards warranted, unnecessary litigation will be avoided and the parties to the insurance will fulfill the true intent of insurance: to provide indemnity to the insured at the time of a legitimate loss.

This article is adapted from Zalma on Insurance Claims – Volume 4 now available on Amazon.com.

Read about this and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Claims Personnel Keep the Promises Made by the Insurance Policy

Insurance Policies Make Promises to Insureds

The essence of every insurance policy is the promises made by the insurer to the insured to indemnify the insured against losses causing damage to the insured by a contingent or unknown event. How those promises are kept rely on the work of the people that make up an insurer’s claims personnel. Who they are and how they help the insurer keep its promises is important to every person or entity insured and to every insurer.

The Claims Personnel

The Claims Adjuster

The claims adjuster is the contact between the insured and the insurer. He or she can be an employee of the insurer, or an independent contractor retained by the insurer to investigate and adjust insurance claims on its behalf. The adjuster must explain to the insured:

  • the coverages available to the insured under the policy;
  • the duties of the insured after a loss:

–       to protect the property from further loss;

–       if a crime has occurred, to report the loss to the appropriate police agency;

–       to present documents that support the amount of the loss;

–       to provide assistance and cooperation to the insurer so it can complete its investigation;

–       to appear and testify at examination under oath if the insurer requires; and

–       to present proof to the insurer about the extent of the loss in a sworn document.

  • that the property belongs to the insured and that the insurer can only indemnify, that is, pay money to the insured to replace the property loss, but cannot repair or replace the property for the insured.

The adjuster will also investigate the loss on behalf of the insurer, review the policy wording to establish that the loss was due to a peril or risk of loss insured against, and investigate to determine if some third person is responsible for the loss who can contribute or pay all of the loss directly to the insured.

The adjuster usually has a great deal of experience responding to damage caused by fire, lightning, windstorm, hail, flood, earthquake, and other destructive events. If asked, the claims adjuster will recommend to the insured various reconstruction contractors, salvors, inventory specialists, accountants, or other professionals to assist the insured to prepare the evidence necessary to prove his or her loss and file a claim that will be accepted by the insurer.

The claims adjuster is empowered by the insurer to negotiate a settlement with the insured. He or she will “adjust” the loss, since values are often subjective and difficult to establish, to a dollar figure that is agreeable to both the insurer and the insured. Adjusters are often provided with authority to resolve claims up to a certain dollar amount without gaining permission from insurer management. Losses in excess of the authority must be approved by insurer management.

Once an agreement is reached with the insured and the insurer, the claims adjuster will also assist the insured in preparing the necessary closing documents.

The Claims Investigator

Although a small part of the work of the claims adjuster is to investigate, the adjuster does many more things. Insurance companies now retain the services—either by employing them directly or by use of independent contractors—of investigators whose expertise relates exclusively to insurance claims. The experienced claims investigator is usually a part of, or vendor to, a Special Investigative Unit (SIU) set up to protect the insurer and mandated by most states as a means to reduce the amount of fraud perpetrated against insurers.

The fact that an insured is contacted by a claims investigator does not, however, mean that the insured is suspected of committing fraud. By virtue of his or her training and experience, the claims investigator is more skilled than the claims adjuster in discerning facts and evidence that can be used in a court of law if a fraud has been attempted. When a third party is making claims against the insured the claims investigator will seek the assistance of the insured to determine if the third person is attempting fraud. The claims investigator will also contact independent witnesses and work with the police authorities to see to it that a fraudulent claim is defeated.

Although the majority of suspected fraud cases claims investigators work on are perpetrated by third parties, they also handle fraudulent claims perpetrated by insureds.

The Claims Supervisor or Claims Manager

The insured presenting an average claim will resolve it with the claims adjuster who first contacts the insured after the report of the loss, usually within 40 days of presentation or report of the claim.

The insurance company claims department is set up with a hierarchy based upon the complexity and value of losses. The claims adjuster’s authority is limited, whether he or she is an employee of the insurer or a contractor. The claims supervisor has more authority to resolve claims than the adjuster and will be consulted by the claims adjuster if the loss exceeds the adjuster’s authority. The supervisor controls the work of several adjusters, drawing on his or her greater experience, education, and training.

The claims manager supervises several claims supervisors and all of the adjusters supervised by the various supervisors. He or she has the maximum authority in the office to resolve insurance claims.

In large insurance companies there are several other layers of supervision at regional and home office levels. The insured must be aware that his or her adjuster must obtain clearance to resolve the claim through the multiple levels of authority. The time needed to resolve the claim will be extended as each level of authority reports to the next.

The prudent claims adjuster advises the insured at the first meeting as to how complex the process will be, so that the delays inherent in a hierarchical business structure will not come as a surprise to the insured.

Caims Counsel

The insured may meet with an attorney representing the insurer under two circumstances:

  • If the insured has been sued by a third person the insurer will retain counsel to defend the insured at the insurer’s expense. Counsel will meet with the insured and work to present the most effective defense to the suit. Insureds most often meet with claims counsel in a situation where the insured is in an automobile accident and a third party sues him or her for injuries incurred in the accident.
  • If there is a problem with coverage or with the extent of the claim, if the insured retains counsel to present his or her claim, or if fraud is suspected, the insurer will retain counsel to protect its interests. Attorneys who represent insurers in such situations are often referred to as “Coverage Counsel.” Coverage Counsel will usually deal with the insured’s attorney. The insured may meet with Coverage Counsel if an examination under oath is demanded by the insurer. In that case the insured must, as a condition of the insurance, appear before claims counsel and give sworn testimony.

This article adapted from

Zalma on Insurance Claims Volume 101

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

In this first volume the book covers:

  • What is insurance?
  • The History of insurance.
  • Lloyd’s of London.
  • Acquisition of the policy.
  • Claims personnel
  • Differences between Property and Liability Policies.
  • Analysis of the policy.
  • The standard mortgage clause.
  • Assignments.
  • The Liability Policy.
  • Additional Insureds.

Read about this and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Information to Develop Professional Claims Personnel

“The Compact Book on Adjusting Liability Claims”

A Handbook for the Liability Claims Adjuster

This Compact Book of Adjusting Liability Claims is designed to Product Detailsprovide the new adjuster with a basic grounding in what is needed to become a competent and effective insurance adjuster. It is also available as a refresher for the experienced adjuster.

The liability claims adjuster quickly learns that there is little difficulty with a claimant (the person alleging bodily injury or property damage against a person insured) if the claim is paid as demanded. The insured may be unhappy if the claimant’s claim is paid as presented since most do not believe they did anything wrong or fear an increase in premiums charged for subsequent policies.

The adjuster must be prepared to salve the insured’s emotions, explain why in the law and the policy it was appropriate to pay the claimant and that the settlement is in the best interest of both the insured and the insurer the adjuster represents.
The adjuster knows, and must be prepared to explain to an insured, that if a claim is resisted or denied the claimant will be unhappy, will probably file suit. If not promptly settled the claimant’s lawyers will rake the insured over the coals to prove that the insured is liable for the claimant’s injuries. The litigation will take time, effort, and money to establish the extent of the injuries and who is responsible for the injuries. Failure to settle promptly can cost the insured his or her reputation and will certainly cost the insurer much more than the claim could have been resolved for had it been resolved before the claimant retained a lawyer.

Available as a Kindle book

Available as a paperback.

The Compact Book of Adjusting Property Insurance Claims”

A Manual for the First Party Property Insurance Adjuster

The insurance adjuster is not mentioned in a policy of insurance. The The Compact Book of Adjusting Property Insurance Claims: A Manual for the First Party Property Insurance Adjusterobligation to investigate and prove a claim falls on the insured. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions that require the insured to, within sixty days of the loss, submit a sworn proof of loss to prove to the insurer the facts and amount of loss.

The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer can then either accept or reject the proof submitted by the insured.

Technically, if the wording of the policy was followed literally the insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insurer could reject the claim. If the insured submits a timely proof of loss the insurer could either accept or reject the proof of loss. If the insurer rejected the proof of loss the insured could either send a new one or give up and gain nothing from the claim. Suit on the policy would be difficult because the policy contract limited the right to sue to times when the proof of loss condition had been met.

Insureds and insurers were not happy with that system. It made it too difficult for a lay person to successfully present a claim. The system, as written into the standard fire policy seemed to run counter to the covenant of good faith and fair dealing that had been the basis of the insurance contract for centuries. Most insurers understood that their insureds were mostly incapable of complying with the strict enforcement of the policy conditions. To fulfill the covenant of good faith and fair dealing insurers created the insurance adjuster to fulfill its obligation to deal fairly and in good faith with the insured.

Available as a Kindle book.

Available as a paperback.

Read about this and other insurance books by Barry Zalma at zalma.com/zalma-books/

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Zalma’s Insurance Fraud Letter – September 1, 2018

It’s Not Nice to Lie to Your Insurer

The covenant of good faith and fair dealing applies equally to the insured as it does the insurer. When applying for insurance the covenant requires absolute honesty in the representations made in the application for insurance.

In Joseph Smith v. United States Liability Insurance Company, J-A08019-18, No. 1287 EDA 2017, Superior Court Of Pennsylvania (August 15, 2018) an insured intentionally misrepresented material facts when applying for insurance. His suit against his insurer was lost and Joseph Smith was found by the jury to have acquired the policy by fraud. As a result the trial court ordered the policy void from its inception. Smith appealed from the order, entered in the Court of Common Pleas of Philadelphia County.

When a person intentionally presents false material information in an application for insurance to cause an insurer to agree to insure a person it would not otherwise insure, that person commits fraud. No insurance contract can exist if it is acquired as a result of fraud and that is why the trial court and appellate court concluded that the USLI policy was void from its inception.

  The Current Issue Contains the Following

  • False Answers on Application Equals Fraud
  •  Illumeo Continuing Education
  • Barry Zalma Speaks at Your Request
  • Insurance Fraud in the U.K.
  • Wisdom
  • California Created a Medicaid Program Vulnerability by Reporting Placeholders That
    Did Not Represent Actual Expenditures Supported by Documentation
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Zalma’s Flat Rate Opinions
  • Medicare Improperly Paid Hospitals Millions of Dollars for Intensity-Modulated
    Radiation Therapy Planning Services
    Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Books from Barry Zalma
  • Books from the American Bar Association
  • Property Investigation Checklists: Uncovering Insurance
    Fraud, 12th Edition
  • Zalma on Insurance Claims

  THE “ZALMA ON INSURANCE” BLOG 

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

Check in every day for a case summary at http://zalma.com/blog:

Zalma’s Insurance 101

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Time to Rescind the Tort of Bad Faith

Time to Rescind the Tort of Bad Faith

Insurance and the Law of Unintended Consequences Paperback 

Insurance is, and always will be, a business of the utmost good faith. All parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract. Insurance is, and always be, nothing more than a contract.
The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.
The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation. If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.
Only if a true tort occurs can the insured waive the contract action and sue in tort. Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort. The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.
Read about this and other insurance books by Barry Zalma at http://zalma.com/zalma-books/
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No Harm, No Foul when Agent Issues False Certificate

Insurance Agent’s Duty Limited to Insured

Plaintiff PWB Development leases its Oklahoma City property to Kampco Foods. The property sustained a March 2015 fire that caused Kampco’s rent to abate during nine months of repairs. Plaintiff alleges that before the fire, it requested Kampco and Frates, Acadia’s insurance agent, to add Plaintiff as a named insured to Kampco’s insurance policy that covers lost rents. Frates never added PWB to the policy, yet it issued “certificate[s] of property insurance” and “evidence of commercial property insurance” listing PWB as insured under the policy covering “business income.”

In PWB Development, L.L.C. v. Acadia Insurance Company and Frates Insurance & Risk Management, L.L.C., Case No. CIV-17-387-R, United States District Court For The Western District Of Oklahoma (August 27, 2018) Plaintiff sought $150,913.29 in lost rents from Defendants for misrepresenting that PWB was covered by the policy and causing PWB to rely on those misrepresentations when it declined to procure its own lost-rents coverage.

BACKGROUND

PWB’s lease with Kampco requires Kampco to carry “at its own expense” four types of insurance—none of which covers business income or lost rents—for the Oklahoma City property where Kampco operates a Johnny Carino’s restaurant. The lease also requires that PWB be named “as an additional insured” on Kampco’s policy for the coverage.

Given that the lease leaves PWB exposed for lost rents, PWB maintained its own insurance policy for lost rents from 2010 to early 2014, when that policy was cancelled. Without lost-rents insurance, PWB claims that it turned to Defendant Frates for coverage.

Frates issued PWB a certificate of property insurance (“CPI”) on February 12, 2014 covering the Johnny Carino’s property listing PWB as both an “insured” (alongside Kampco) and “certificate holder” on a Valley Forge Insurance Company policy. Below the policy number, the CPI reads “Business Income – Actual Loss Sustained 12 Mo,” but oddly the only “covered property” boxes checked are “building” and “personal property,” not the “business income” and “rental value” boxes.

Frates then issued a CPI identical to the earlier one with Acadia as the insurance provider. Despite that Acadia only bound insurance coverage for Kampco, the CPI again listed Kampco and PWB as “insured” due to what Frates calls “an inadvertent scrivener’s error.” The CPI included the same disclaimers and lack of clarity over coverage for business income or lost rents. Frates issued evidence of commercial property insurance form (“ECPI”) — a form “no differen[t]” than the CPI other than it is “more specific” about coverage — listing PWB as both a “named insured” (alongside Kampco) and “additional interest.” The ECPI’s disclaimers are nearly identical, and it marks “business income” as covered, but not “rental value.”

The Johnny Carino’s restaurant sustained a significant fire in March 2015 that caused rent to abate until repairs finished in December 2015.  Acadia denied PWB’s claim.

DISCUSSION

The moving party bears the initial burden of demonstrating the basis for its motion and of identifying those portions of “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,” that demonstrate the absence of a genuine issue of material fact. If satisfied, the burden shifts to the nonmoving party to demonstrate the existence of a genuine issue of material fact.

The nonmoving party “may not rest upon mere allegations” in his pleading to satisfy this requirement.

Frates appeared to be soliciting—accepting an insurance application and a proposed amendment to the new policy—when it made the misrepresentations at issue. Therefore, any act done by the agent in connection with the issuing of said policy was the act of the company itself, rendering Acadia liable to the extent of its agent Frates.

A deceit claim, otherwise known as common-law fraud requires (1) a material and false representation; (2) made knowingly false or “recklessly, without any knowledge of its truth”; (3) with the intention that it should be acted upon; (4) which is justifiably relied upon; (5) to Plaintiff’s detriment.

Beginning with the satisfied elements, Frates made false representations in the CPIs and ECPI that PWB was insured under Kampco’s policy with Acadia. These representations were material because had PWB been covered under Kampco’s policy, it would have had coverage for lost rents. Frates did so recklessly, as Defendants present no evidence that Frates ever checked the Acadia policy before making these affirmative representations of coverage. Instead, Frates seems to have relied merely on Kampco’s request to issue the forms.

Frank Smith admitted “[t]here is a significance” to “telling someone they are an insured,” as opposed to a “certificate holder,” and he understands that “people are going to rely on the [CPIs].” Granted, the CPI and ECPI forms showing PWB as insured include “information only” disclaimers that the forms “do[] not . . . amend, extend or alter the coverage afforded by the polic[y]”. The forms list PWB as not only a certificate holder and additional interest, but also as “insured” and “named insured,” and they “certify that the policies of insurance listed have been issued to the insured named above.” Lastly, Plaintiff relied on these representations. PWB claimed had Frates not represented that PWB was insured, PWB would have sought coverage for lost rents elsewhere. Because PWB never procured lost-rents coverage, it lost $150,913.29 in abated rent during fire repairs.

To justifiably rely on Frates’s false representations, they “must have been of such a nature and made under such circumstances that the injured party had a right to rely upon it.”  PWB could not justifiably rely on the certificates:

  1. The representations were equivocal. The forms’ discussion of coverage is also ambiguous. The CPIs have the words “Business Income” typed out below the policy number, but oddly the only “covered property” boxes checked are “building” and “personal property,” not the “business income” and “rental value” boxes.
  2. PWB and Kampco’s lease delineates four types of insurance that Kampco was obligated to procure at its own cost with PWB as the additional insured, none of which covers lost rents.
  3. PWB concedes it never requested or read the Acadia policy to which it claims coverage. It argues that it had no reason to because of the false representations that labeled PWB insured looking to the justifiability of Plaintiff’s reliance, it strains credulity that Plaintiff would expect a certain type of coverage without even requesting the policy to read its terms.
  4. PWB never asked for lost-rents insurance—not to Kampco, not to Frates, and not to Acadia.

To summarize, Plaintiff PWB—after receiving Frates’ forms ambiguously referring to business-income coverage that is not owed to PWB under its lease with Kampco, and having never read the policy or requested lost-rents coverage—believes its decision was “justifiable” not to procure its own lost-rents coverage. Considering all the evidence and Oklahoma’s “clear and convincing” standard for proving a claim of deceit by misrepresentation, the Court found summary judgment appropriate.

DECEIT BY NONDISCLOSURE OR CONCEALMENT

Neither could a jury find in favor of Plaintiff on its claim for deceit by nondisclosure or concealment. The claim requires Plaintiff to have concealed or failed to disclose a fact “with the intent of creating a false impression of the actual facts in the mind of [Plaintiff].” Under all of the evidence it is conclusive that the defendants intended to and did overreach the plaintiff.

Plaintiff offers no evidence that Defendants possessed the requisite knowledge to intentionally deceive Plaintiff. To the contrary, Frates never checked the policy to learn that the CPIs and ECPI were incorrect, and Acadia did not learn about any of the erroneous forms until PWB filed a claim in 2016 attaching a CPI labeling PWB as insured on Kampco’s policy. Thus, Defendants are entitled to summary judgment on Plaintiff’s claim for deceit by nondisclosure or concealment.

BAD FAITH CLAIM AGAINST ACADIA

Plaintiff cannot show that Acadia violated the “duty to deal fairly and act in good faith with its insureds” because PWB was not insured. There is simply no evidence in the record that Acadia acted in bad faith or that had it investigated the claim differently, Plaintiff would not have sustained injury.

Although the court found Frates’s apparent carelessness troubling, issuing several incorrect insurance forms in 2014 and even again in 2016 after the Johnny Carino’s fire, Frates had no duty to PWB. As a result, Frates is entitled to summary judgment on Plaintiff’s multiple claims.

ZALMA OPINION

As Mrs. Gump said to her son, Forest: “stupid is as stupid does.”  The agent Frates was stupid in issuing certificates without reading the policy or confirming the coverages represented. The “insured” was stupid in believing it had rental income coverage because it asked for it but never received a certificate or policy that provided the coverage. Frates’ stupidity caused no damage and PWB’s stupidity was honored by its loss of rents it could not obtain from an insurer.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Insurance Fraud

“Insurance Fraud & Weapons to Defeat Insurance Fraud”

In Two Volumes

Product DetailsInsurance fraud continually takes more money each year than it did the last from the insurance buying public. No one knows the actual amount with any certainty because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do

so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

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

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

the effort to stop insurance fraud against Medicare and Medicaid has increased.

Insurance Fraud & Weapons to Defeat Fraud - Volume Two: A Manual for Those Working to Defeat Insurance Fraud by [Zalma, Barry]This book contains appellate decisions regarding insurance fraud from federal and state appellate courts across the country and full text of many insurance fraud statutes.

It is available as both a legal research tool and a product to assist insurers, insurance company personnel, independent insurance adjusters, special investigation unit investigators, state fraud investigators and insurance lawyers to become effective persons involved in the attempt to defeat or reduce the effect of insurance fraud.

Volume One available as a Kindle book and a paperback.

Volume Two Available as a Kindle book and a paperback

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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World Trade Center Recovered Total Loss From the Insurers

Is This the Last Insurance Decision Re September 11, 2001?

The terrorist attack on the World Trade Center on September 11, 2001 gave rise to much litigation concerning insurance and tort damages. The plaintiffs, the holders of the leases of the real property, sought part of the recovery – reached by settlement – from airline defendants who were alleged to be tortfeasors responsible for allowing the terrorists to perform their heinous acts destroying the World Trad Center structures.

In Re September 11 Litigation, World Trade Center Props. LLC, 1 World Trade Center LLC, 2 World Trade Center LLC, 3 World Trade Center LLC, and 4 World Trade Center LLC v. Certain Underwriters At Lloyd’s, London Syndicates Numbered 1212,79, 2791, QBE Insurance (Europe) Ltd. F/K/A QBE International Insurance Ltd., 21 MC 101 (AKH), 10 Civ. 1642 (AKH), United States District Court Southern District Of New York (August 2, 2018) was a contest between insurers and insureds for a portion of a settlement ending subrogation litigation. It was the last case before the trial judge dealing with the massive property losses caused by the terrorist attacks of September 11, 2001.

Plaintiffs, the insureds, are owners of the long-term leases of the World Trade Center Properties. Plaintiffs settled with their insurers for their loss, and also made a settlement with the tortfeasors (the “Aviation Defendants”). The insurers, exercising their subrogation rights, also settled with the tortfeasors. Plaintiffs now want a portion of QBE’s settlement with the tortfeasors, citing a provision of the insurance contract which they argue grants them that right. QBE now moves for summary judgment dismissing the complaint in this case.

BACKGROUND

On July 16, 2001, less than two months before September 11, Plaintiffs paid $2,805 billion to the Port Authority of New York and New Jersey for 99-year net leases to World Trade Center Towers One, Two, Four and Five.” Through a series of contractual provisions that insured against the actual replacement cost of the Towers as well as lost revenue caused by business interruptions, Plaintiffs obtained insurance coverage from QBE and other insurers totaling $3,546,800,000 “per occurrence.” After the Towers were destroyed, and following extensive litigation focused on whether the September 11 terrorist-related crashes of American Airlines Flight 11 and United Airlines Flight 175 constituted one or two occurrences, Plaintiffs settled their claims against their insurers, including Defendants, for approximately $4.1 billion.

Having become subrogated to Plaintiffs’ claims as a result of the settlement, the insurers, including QBE, filed tort claims against the Aviation Defendants to recover the amount of their insurance payments to Plaintiffs. In February 2010, the insurers entered into a settlement with the Aviation Defendants, resolving their aggregate claims for $1.2 billion. Over Plaintiffs’ objection, the trial judge approved the settlement “as the ‘fair and reasonable’ result of ‘hard-fought, arms-length, and good faith negotiations.'” The Second Circuit affirmed. However, believing that the insurance settlement did not fully compensate their losses, Plaintiffs also filed tort claims against the Aviation Defendants (the “Tort Action”) and this declaratory judgment action against its insurers, claiming priority over the insurers’ subrogation settlement with the Aviation Defendants (the “Subrogation Action”).

Plaintiffs’ insurance coverage was found to “correspond[ed] completely to Plaintiffs’ potential tort recoveries related to the lost value of their leaseholds, and that the insurance recoveries should be set off against such potential tort recoveries, reducing them to zero.” In re Sept. 11 Litig., 957 F. Supp. 2d 501, 507 (S.D.N.Y. 2013).

As to the Subrogation Action, the Second Circuit affirmed the trial judge’s interpretation of the WilProp form—that is, that Plaintiffs were entitled to priority to the insurers’ subrogation settlement with the Aviation Defendants only if Plaintiffs suffered legally recoverable tort damages exceeding their insurance recovery.

The litigation between Plaintiffs and the Aviation Defendants having been resolved, QBE now moves for summary judgment in this case.

DISCUSSION

Subrogation

Subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for the loss. By allowing the insurer (rather than the insured) to sue the alleged tortfeasor, subrogation forecloses insureds from recovering twice for the same injury while also preventing tortfeasors from escaping liability.

Equitable subrogation is limited by the “made whole” rule, under which the insurer may seek subrogation against only those funds and assets that remain after the insured has been compensated. This designation of priority interests assures that the injured party’s claim against the tortfeasor takes precedence over the subrogation rights of the insurer. The made whole rule complements the doctrine of equitable subrogation by allowing the insurer to step into the shoes of the insured and hold the tortfeasor responsible for the loss, while still ensuring that the actual victim—the insured—is the first to recover in full. Plaintiffs’ claim rests entirely on the application of the made whole rule to this case.

Under New York law the made whole rule is triggered only when the sources of insurance recovery ultimately available are inadequate to fully compensate the insured for its losses. Only when the tortfeasor is judgment proof or lacks available insurance coverage is the insurer—who has been paid by the insured to assume the risk of loss—barred from sharing in the proceeds of the insured’s recovery from the tortfeasor. But the made whole rule does not apply unless, for one reason or another, an insurer is competing with its insured for a limited pool of money available from the tortfeasor. No such inequity is presented in this case.

Plaintiffs elected to settle their claims against the Aviation Defendants without exhausting the sources of recovery available to them and without resolving the underlying issues in the Tort Action. Because the made whole rule does not apply, Plaintiffs cannot claim priority to QBE’s subrogation recovery.

Plaintiffs do not dispute these principles of equitable subrogation. Instead, Plaintiffs argue that the WilProp Form modifies the equitable rule.  Regardless, nothing in the WilProp Form suggests that the parties changed the rule by contract. The WilProp Form’s subrogation provision provides that: “If any amount is recovered as a result of such proceedings, the net amount recovered after deducting the costs of recovery shall be distributed first to the Insured in reimbursement for the deductible amount retained and for any uninsured loss or damage resulting from the exhaustion of limits under this policy or primary or excess policy(ies).”

Nowhere in the relevant portion of the WilProp Form can the word “exclusively” be found. And drawing an inference that the contractual subrogation clause diverges from the equitable rule based solely on what is missing from the contract’s terms is inconsistent with the maxim that equitable subrogation principles apply “absent an evident intention to the contrary.” Nothing in the text of the WilProp form suggests that the parties intended to contract around equitable subrogation principles. Under these settled principles of New York law, Plaintiffs’ settlement with the Aviation Defendants bars further recovery here.

Moreover, by settling their claims in the Tort Action, Plaintiffs have forfeited the opportunity to litigate both the liability of the Aviation Defendants and whether Plaintiffs have suffered legally recoverable tort damages, both of which were central to the Tort Action.

Applying the made whole rule after Plaintiffs have settled their claims against the alleged tortfeasors and are not competing with QBE for a limited source of recovery is wholly inconsistent with the goals that underlie subrogation. The motion for summary judgment was granted.

ZALMA OPINION

It is time to put to rest the insurance litigation over 9/11. This case clearly allows QBE to keep its subrogation recovery because the plaintiffs have been fully compensated for the loss by insurance and was made whole. There is no reason to take away the contractual right to reduce QBE’s losses by subrogation. Of course, history indicates this decision will be appealed as have all of the others.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Insurance Books by Barry Zalma

Time to Rescind the Tort of Bad Faith

Insurance and the Law of Unintended Consequences Paperback 

Insurance is, and always will be, a business of the utmost good faith. All parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract. Insurance is, and always be, nothing more than a contract.
The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.
The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation. If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.
Only if a true tort occurs can the insured waive the contract action and sue in tort. Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort. The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.

New Books from Full Court Press:

Full Court Press continues to publish expert secondary content. This time it’s a new collection of ew insurance law treatises from consultant, expert witness, arbitrator, and mediator Barry Zalma.

Barry Zalma practiced law in California for more than 44 years as an insurance coverage and claims-handling lawyer, and has spent more than 50 years in the insurance business. We welcome his deskbooks as the first published under our Full Court Press imprint. Three titles are available in ePub and MOBI format, as well as on the Fastcase legal research platform.

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers.

An annual subscription to secondary content on the Fastcase platform includes new editions and updates published by the author as they are rolled out, so you can rest assured that your research is up to date. Go to fastcase.com for more detail and how to use the material on-line as part of your legal or insurance research or as stand-alone e-books.

All available at fastcase.com.

Read about these and other insurance books by Barry Zalma at http://zalma.com/zalma-books/

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Abusing Ex-Wife is Not a Physician’s Service

Obtaining Ex-Wife’s Medical Records to Harass Not a Professional Service

Divorce causes people to act in ways they would never act in normal interaction between a man and a woman. People in a divorce give up common morality and become vicious to the point of additional litigation after the divorce is final.

In Medical Mutual Insurance Company Of Maine v. Douglas Burka, No. 17-1872, United States Court of Appeals For the First Circuit (August 10, 2018) Douglas Burka, a physician, was sued by his ex-wife n state courts in Maine and Maryland. Following Burka’s request for a defense from his professional liability insurer, Medical Mutual Insurance Company of Maine (“MMIC”), MMIC brought a declaratory judgment action seeking to establish that it has no duty to defend Burka in either state proceeding.

THE DISPUTE AND TRIAL COURT FINDING

At the core of the coverage dispute are allegations that Burka improperly accessed his wife’s medical records during their deteriorating, and ultimately failed, marriage. In the state-court complaints, Burka’s now ex-wife, Allison Cayne, claims that Burka used his status as a doctor to obtain her records so he could harass and embarrass her.

The district court granted the declaratory judgment for MMIC, concluding that the claims against Burka in both lawsuits fell outside the professional liability coverage provided by the MMIC policy (“the Policy”).

In Maine, the duty to defend arises if that comparison, with the complaint read broadly in conjunction with the policy reveals the existence of any legal or factual basis that could potentially be developed at trial and result in an award of damages covered by the terms of the policy.

Burka claimed accessing medical records, as he was alleged to have done, constitutes a “professional service” within the scope of the Policy’s coverage.

To set the stage, and explain why lawsuits were filed in two states, the First Circuit noted that Burka and Cayne moved from Tennessee to Maine in 2013 and, in 2015, as their marriage was collapsing, they both relocated independently to Maryland. Cayne’s parents are longtime residents of Maryland.

The Maryland and Maine Lawsuits

Cayne and her parents filed a complaint against Burka and his father, Dr. Steven A. Burka, in Maryland state court. The complaint alleges, in relevant part, that both during his marriage to Cayne and after their separation around April 2015, Douglas Burka engaged in a campaign to access Allison’s medical records to learn about her mental and gynecological health and other confidential medical information. Specifically, the complaint alleges that Burka conspired with his father in the spring of 2015 to improperly access Cayne’s medical records at hospitals in the Washington, D.C. area for the purpose of harassing and embarrassing her and to gain advantage in their pending divorce litigation.

The Maryland complaint refers to allegedly improper actions taken by Burka in Maine.

In Maine, the operative amended complaint alledged, in relevant part, that Burka had accessed Cayne’s medical records “at Southern Maine Healthcare” without authorization while he was employed as a doctor in that practice during the spring of 2015. Although the complaint does not specifically identify Cayne as a patient of an SMHC doctor or the practice, that status is an inevitable inference from the allegations that Burka accessed her confidential healthcare information maintained there.

The MMIC Policy

The Policy identifies SMHC Physician Services, P.A. (“SMHC”) as the named insured, and it includes a “Slot Policy Endorsement” that extends coverage to “all individual physicians listed on the SCHEDULE OF SLOTS ENDORSEMENT and working as employees or contractors of the NAMED INSURED

The District Court Proceedings

The district court issued two separate rulings on MMIC’s declaratory judgment claim. In its initial ruling, the court held that MMIC had no duty to defend the Maryland action, noting that it could discern no potential for coverage under the Policy. The court observed that the claims in the Maryland action are not based on Burka’s conduct in Maine, and the Policy covers only “professional services” furnished by physicians working within the scope of their duties for SMHC. Although the court acknowledged some ambiguity in the definition of ‘professional services’ in the Policy, it concluded that there is no potential that facts will be developed at trial that would connect Dr. Burka’s provision of ‘professional services’ under the Policy, however that term is defined, with the alleged conspiracy to access Allison’s medical records at Washington, D.C.-area medical facilities seemingly unaffiliated with SMHC at a time when Allison was no longer living in Maine.

The court explained its conclusion, in part, as follows: “Simply put, there is no ambiguity that the provision of professional services is a central component of any covered claim. Further, any common understanding of “professional services” would not encompass a physician maliciously and surreptitiously accessing a patient’s medical records for the sole purpose of harassing, threatening, or embarrassing that patient based on a spousal relationship.”

It is undisputed in this case that coverage — and thus the duty to defend — turns on whether Burka’s alleged access to the Caynes’ medical records could potentially fall within the Policy’s definition of “professional services.” That is so because the Slot Policy Endorsement, which extends the Policy to named physicians, states that coverage is provided for claims arising from incidents that “result from [the covered physicians’] PROFESSIONAL SERVICES rendered within the scope of their duties as a physician employee or contractor of” SMHC. No other Policy provision broadens the coverage beyond “professional services,” and, indeed, the Policy is identified as a “Physicians Comprehensive Professional Liability Insurance Policy.” (Emphasis added.)

The First Circuit found no ambiguity in the scope of coverage for claims based on the “professional service” of “maintain[ing] PATIENT confidentiality in the handling of PATIENT records.” The only reasonable interpretation of the Policy’s provisions is that an insured’s alleged mishandling of patient records is covered only if that behavior occurred “in the direct course” of the insured’s provision of healthcare services to the patient claiming the breach

The coverage question becomes whether the allegations in the complaints present “any potential factual or legal basis” for a finding that Burka improperly accessed or disclosed Cayne’s records at SMHC in the direct course of providing her healthcare services. The question is not whether Cayne was a patient of any doctor at SMHC, but whether Burka’s alleged mishandling of records stemmed from his own provision of healthcare services to her.

Under the affirmative terms of the Policy, coverage depends on whether the allegedly improper access to, and disclosure of, Cayne’s medical records occurred in the course of professional services — specifically, healthcare services — provided by Burka to Cayne. The duty to defend Burka thus requires a relationship of doctor to patient that is emphatically denied by the complaint’s allegations and, hence, could only be “conjure[d] . . . from speculation or supposition.”

The First Circuit will not consider facts extrinsic to the underlying complaint nor will it read allegations into the complaint in determining whether the insurer has a duty to defend.

MMIC is not obligated to defend Burka in the Maine action.

ZALMA OPINION

Since the court was required to apply the four corners rule and could only make its decision on coverage from the allegations of the complaints and the wording of the policy it became clear, that since the ex-wife was not a patient of Dr. Burka, his actions obtaining and publishing her medical records could not possibly be the result of his professional services.  The lesson he learned is it is best to be nice to your ex-wife because an insurer will not help you.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Tenants Criminal Acts Damaging Property Eliminates Coverage

Criminal Act Exclusion Enforced

Landlords must be careful who they allow to rent their property. K.V.G. Properties rented real property to criminals who created a marijuana growing facility in the property and, as part of the work to grow the marijuana, did severe damage to the real property.

In K.V.G. Properties, Inc. v. Westfield Insurance Company, No. 17-2421, United States Court Of Appeals For The Sixth Circuit (August 21, 2018) the Sixth Circuit was faced with an insurance-coverage dispute because some of KVG’s commercial tenants got caught growing marijuana in their rental units. Unfortunately for their landlord, the tenants caused substantial damage to the premises before the police caught up with them.

THE POLICY

This case arises out of a standard first-party commercial insurance contract. The policy provides a broad range of coverage, from general physical damage insurance to a “fine arts floater.” The policy is organized under multiple “Forms,” each with their own insuring agreements, terms, and exclusions. The claim in this case arose under the Building and Personal Property Coverage Form (“BPP Policy”). Under this Form, Westfield agreed to pay for “direct physical loss of or damage to Covered Property . . . caused by or resulting from any Covered Cause of Loss.” For the purposes of KVG’s claims, a “Covered Cause of Loss” is any “Risk[] Of Direct Physical Loss.”

This generous insuring agreement is tempered by a litany of exclusions. One such exclusion states that Westfield “will not pay for loss or damage caused by or resulting from” any “[d]ishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose.”

FACTS

KVG, a commercial landlord, leased several pieces of real property to a group of commercial tenants. KVG authorized the tenants to use the property for general office or light industrial business. On October 29, 2015, the U.S. Drug Enforcement Agency raided the premises and caught the tenants growing lots of marijuana. KVG speedily evicted the tenants, but the damage had already been done: To accommodate their “business,” the tenants removed walls, cut holes in the roof, altered ductwork, and severely damaged the HVAC systems. The total cost of repair appears to be around $500,000.

KVG subsequently filed a claim with Westfield for insurance coverage. Westfield denied the claim, finding that several exclusions applied. The district court found that the loss was excluded by the policy and granted Westfield’s motion for summary judgment.

ANALYSIS

The Michigan courts engage in a two-step analysis when determining coverage under an insurance policy: (1) whether the general insuring agreements cover the loss and, if so, (2) whether an exclusion negates coverage.

The insuring agreements are written broadly to cover all “Risks of Direct Physical Loss.” Indeed, one would struggle to think of damage not covered by this language, and this is not a case that tests its boundaries. It is abundantly clear that the property suffered physical damage, necessarily caused by some risk (or risks) of direct physical loss. The harder question is whether the risks here are not covered because an exclusion takes them off the table.

Westfield argues that KVG’s tenants conduct was criminal under either state or federal law and that these acts were the main cause of KVG’s loss. Coverage under a policy is lost if any exclusion within the policy applies to an insured’s particular claims.

Under this exception, the core issue is whether the tenants committed a “criminal act” within the meaning of the policy. Cultivating marijuana is a crime under federal law but it is protected by Michigan law under certain conditions.

Exercising the Michigan courts’ common-law power to interpret public initiatives, a federal court would hesitate before reading a Michigan insurance policy to bar coverage for a “criminal act” when Michigan law confers criminal and civil immunity for the conduct at issue. However, no reasonable jury could find that KVG’s tenants complied with Michigan law.

Ultimately, the insurer bears the burden of proving facts showing that an exclusion applies. Here, the record contains evidence that KVG itself claimed, in Michigan court, that its tenants violated the law. In its eviction pleadings against each tenant, KVG repeatedly claimed that the “[t]enant illegally grew marijuana” in the unit and stated that the “[i]llegal growing of marijuana” was a “continuing health hazard.” These pleadings were signed by KVG’s lawyer, who sought and obtained immediate possession of the premises under Michigan’s summary eviction statute.

Neither party disputes that federal agents raided the premises as part of a criminal investigation. At the time of the raids, federal officials were operating under guidance from the Deputy Attorney General stating that they should not prioritize individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.

The facts of the raid and arrests of the tenants were sufficient to meet Westfield’s prima facie case of proving a criminal act by the preponderance of the evidence.

The policy says “criminal act,” not “crime” or “criminal conviction.” A fugitive from justice may properly be deemed a criminal by the person he harms, even though the State cannot prove it beyond a reasonable doubt. The Michigan Supreme Court would not read an onerous “conviction requirement” into a standard commercial insurance contract. The Sixth Circuit declined to do so in the complete absence of state authority providing otherwise.

The policy’s insuring agreements cover the damage here. Westfield, however, has proven that the Dishonest or Criminal Acts Exclusion applies. Therefore, the district court did not err in granting Westfield’s motion for summary judgment.

ZALMA OPINION

The criminal acts exclusion, clearly and unambiguously, excluded coverage for losses due to the acts of a person or persons to whom the insured entrusted the property. In this case the insured entrusted the property to its tenants who damaged the property as part of their illegal marijuana growing operation. The lack of coverage was obvious and criminal.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.

Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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NEW BOOKS

Zalma on Insurance Claims

This series of ten books is the latest addition to Barry Zalma’s insurance claims series of books and articles that will form the most thorough, up-to-date, expert-authored insurance claims guide available today.

Written by nationally-renowned insurance coverage expert Barry Zalma, a semi-retired insurance coverage attorney, consultant, expert witness and blogger, Zalma on Insurance Claims provides in-depth explanations, analysis, examples, and detailed discussion of:

  • Property insurance claims;
  • Third-party liability claims;
  • Casualty claims; and
  • Insurance Fraud

Thorough, yet practical, this series of books form the ideal guide for any professional who works in or frequently interacts with the insurance industry.

Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), and business owners will benefit greatly from the ten volume guide. It is also the perfect resource for insurance educators, trainers, and students whose role requires an understanding of insurance law.

As you read through the various volumes of Zalma on Insurance Claims, you will find comprehensive—yet comprehensible—coverage of key topics, including:

  • What is Insurance?
  • The History of Insurance
  • The covenant of good faith and fair dealing.
  • The tort of Bad faith
  • Conditions,
  • Warranties,
  • Exclusions
  • Declaring a policy void
  • Duties of insured and insurer
  • Evaluation and settlement
  • Identifying insurance fraud
  • Investigation
  • Kinds of insurance policies
  • Other insurance clauses
  • Preparing a case for trial
  • Processing a claim
  • Responses to fraud
  • Subrogation and salvage
  • Underwriting and
  • Many more property and casualty insurance matters.

The author has provided checklists, sample procedures, form letters, tables and information and references to model statutes, state statutes, administrative regulations, and requirements of insurance departments nationwide.

Zalma on Insurance Claims Volume 101

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

In this first volume the book covers:

  • What is insurance?
  • The History of insurance.
  • Lloyd’s of London.
  • Acquisition of the policy.
  • Claims personnel
  • Differences between Property and Liability Policies.
  • Analysis of the policy.
  • The standard mortgage clause.
  • Assignments.
  • The Liability Policy.
  • Additional Insureds.

Zalma on Insurance Claims Part 102

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the second part of Zalma on Insurance Claims and includes materials concerning:

  • Other Insurance Clauses
  • Underwriting
  • Conditions, Warranties and Exclusions

Zalma on Insurance Claims Part 103

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is part 103 of Zalma on Insurance Claims and will deal with:

1.Duties of the Insured and the Insurer
2.Declaring a Policy Void
3.Processing a Claim

When read with Part 101 and Part 102, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 104

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fourth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation of First Party Property Claims
  2. Rescission
  3. The Mortgage Clause
  4. Fortuity & Other Issues
  5. Determine the Amount of the Loss
  6. The Claim File

When read with Part 101, Part 102, and Part 103, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 105

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the fifth volume of Zalma on Insurance Claims and includes materials concerning:

  1. Investigation – Liability
  2. Claims Made and Reported Policies
  3. The Notice Prejudice Rule.
  4. Types of Torts
  5. The Liability Claims File
  6. Discovery of the Insurance Claims File
  7. Tests for Determining Duty to Defend
  8. Appendices – forms for the claims person

When read with Insurance 101, Insurance 102, Insurance 103 and 104, this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 106

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the sixth part of “Zalma on Insurance Claims” and will deal with:

  • Property Insurance & the Tort of Bad Faith
  • Grounds for Finding Bad Faith
  • Avoiding Charges of Bad Faith
  • Punitive Damages
  • Bad Faith & Liability Insurance
  • Defenses to the Tort of Bad Faith
  • California Civil Code Section 3294

When read with Part 101, Part 102, and Part 103, Part 104 and Part 105 this volume works to take the reader to a complete understanding of insurance and insurance claims.

Zalma on Insurance Claims Part 107:

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This is the seventh part of “Zalma on Insurance Claims” and will deal with:

  • Evaluation and Settlement – Property
  • Evaluation and Settlement – Liability
  • Subrogation
  • Salvage

Zalma on Insurance Claims Part 108

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the eighth part of Zalma on Insurance Claims, includes materials concerning:

1.Preparing a case for trial
2.Interviewing Techniques
3.The art of the Interview
4.Interview General Principles
5.The Interviewer
6.Preparing for the Interview
7.Beginning the Interview
8.Control Of The Interview
9.Dealing with Witness Types
10.Approaches the Work
11.Dealing with the Nervous Person
12.Bluffs
13.The Mutability Of Memory
14.The Examination Under Oath

Zalma on Insurance Claims Part 109   

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims

This, the ninth part of Zalma on Insurance Claims, includes materials concerning:

•Identifying Insurance Fraud
•Professional Conspiracies
•Multiple Types of Insurance Fraud
•How to Join the Fraud Fight
•Case Studies of Successful Fraud Investigations
•Checklist 1 – Types of Insurance Fraud
•Checklist 2 – Training Adjusters
•Checklist 3 – Red Flags of Fraud – Property Insurance
•Checklist 4 – Red Flags of Fraud – Liability Insurance
•Appendix A – Commonly Used Medical Acronyms and Abbreviations
•Appendix B – Glossary of Medical Terms

Zalma on Insurance Claims Part 110

A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability

This, the tenth part of Zalma on Insurance Claims, includes materials concerning:

•Responses to Fraud
•Grounds for Rescission.
•The Fight Against Fraud
•Checklist 1—Responses to Fraud
•Checklist 2 – The Fight Against Fraud

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False Answers on Application Equals Fraud

It’s Not Nice to Lie to Your Insurer

The covenant of good faith and fair dealing applies equally to the insured as it does the insurer. When applying for insurance the covenant requires absolute honesty in the representations made in the application for insurance.

In Joseph Smith v. United States Liability Insurance Company, J-A08019-18, No. 1287 EDA 2017, Superior Court Of Pennsylvania (August 15, 2018) an insured intentionally misrepresented material facts when applying for insurance. His suit against his insurer was lost and Joseph Smith was found by the jury to have acquired the policy by fraud. As a result the trial court ordered the policy void from its inception. Smith appealed from the order, entered in the Court of Common Pleas of Philadelphia County.

FACTS

On June 17, 2015, Smith filed a complaint against the United States Liability Insurance Company (hereinafter “USLI”). Smith alleged that USLI failed to honor and pay on a claim under USLI policy CP1570291 [(“the Policy”)]. The Policy provided coverage for a commercial property owned by Smith on Tacony Street in Philadelphia, PA [(“the Property”)]. Smith filed a claim with USLI after the Property was vandalized in 2013. Adjusters for each party differed significantly on their estimates of the damage. Smith’s adjuster projected the costs to be $444,325.71. USLI’s adjuster projected the cost[s] to be $102,302.45.

As part of the USLI claim investigation, Smith participated in two [e]xaminations [u]nder [o]ath (“EUO”). During the EUO[s], USLI became aware of inconsistencies between Smith’s testimony and his application for insurance coverage with USLI.

USLI answered Smith’s complaint and counterclaimed. The counterclaim alleged that Smith procured the Policy through fraudulent representation during the application process.

Trial ocurred and the jury returned a verdict in favor of USLI on both the claim and the counterclaim.

Pursuant to the jury’s verdict, the Court entered an [o]rder on November 15, 2016, declaring Smith’s policy void ab initio.

CLAIMS ON APPEAL

Smith first claims that the evidence was insufficient to support a finding that he procured the Policy by fraud. Specifically, Smith claims that, while he authorized an agent to sign the Policy application, he himself never saw it, and thus, evidence of his fraudulent intent is purely circumstantial.

The burden of proof on a civil fraud claim is one of clear and convincing evidence. Clear and convincing evidence is the highest burden in our civil law and requires that the fact-finder be able to come to clear conviction, without hesitancy, of the truth of the precise fact in issue. To prove a civil fraud claim, USLI was required to prove the following elements:

(1) a representation;

(2) which is material to the transaction at hand;

(3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false;

(4) with the intent of misleading another into relying on it;

(5) justifiable reliance on the misrepresentation; and

(6) the resulting injury was proximately caused by the reliance.

Statutory insurance fraud is established when an entity knowingly and with the intent to defraud any insurer or self-insured, presents or causes to be presented to any insurer or self-insured any statement forming a part of, or in support of, a claim that contains any false, incomplete or misleading information concerning any fact or thing material to the claim.

By its very nature, “fraud can rarely if ever be shown by direct proof.” Rohm & Haas Co. v. Cont’l Cas. Co., 781 A.2d 1172, 1178 (Pa. 2001). It must necessarily be largely inferred from the surrounding circumstances.

ANALYSIS

Here, the record is replete with evidence that Smith, through an agent, knowingly provided USLI false, misleading and incomplete information in his insurance application statement. First, Smith misrepresented his insurance losses in the three-year period prior to applying for the Policy and did not disclose a relevant foreclosure complaint filed against him within five years of applying for the Policy. Additionally, Smith did not disclose that (1) he had any tax judgments against him when he applied for the Policy, and (2) prior to 2011, he incurred a federal conviction in the Eastern District of Pennsylvania for filing false corporate tax returns.

Here, the evidence was sufficient to find Smith liable for civil fraud, and thus, the appellate court agreed with the trial court that it did not err in denying Smith’s motion for a judgment not withstanding the verdict (JNOV).

Evidence is relevant if it has any tendency to make a fact more or less probable than it would be without the evidence; and the fact is of consequence in determining the action. The court may exclude the relevant evidence if its probative value is outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.

Because the USLI insurance application required the identification of any active tax liens within five years preceding the application, evidence of such liens was more probative than prejudicial. The tax liens were relevant and probative of USLI’s fraud counterclaim. Therefore, the trial court did not abuse its discretion in admitting evidence of Smith’s prior tax liens.

Smith claims that it was improper for the trial court to admit evidence of his convictions for corporate tax underpayments because they are irrelevant and prejudicial. The appellate court cautioned that the trial court is not required to sanitize the trial to eliminate all unpleasant facts (e.g., criminal convictions) from the jury’s consideration where those facts are relevant to the issues at hand. Since the criminal convictions were relevant to the issue of fraud in the inception of the policy they were properly admitted.

Instantly, the trial court determined that because the USLI’s fraud claim rested on proving to the jury that Smith intentionally misrepresented his prior convictions on the Policy application, it was not an abuse of discretion for it to allow his prior convictions into evidence. The convictions were more probative than prejudicial.

Furthermore, USLI did not proffer an underwriter, Bethel, to testify as an expert witness. Bethel’s testimony was limited in scope to inquiry regarding USLI’s underwriting criteria at the time Smith obtained his commercial insurance policy. Generally, Bethel testified only that he was exceptionally familiar with USLI’s underwriting criteria and that USLI’s 2011 underwriting criteria, which he generally outlined, was used, then, to determine whether a potential client was eligible for commercial insurance coverage. Had USLI known the true facts it would not have agreed to insure Smith.

ZALMA OPINION

When a person intentionally presents false material information in an application for insurance to cause an insurer to agree to insure a person it would not otherwise insure, that person commits fraud. No insurance contract can exist if it is acquired as a result of fraud and that is why the trial court and appellate court concluded that the USLI policy was void from its inception.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.

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Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.

Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/

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Legal Disclaimer:

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

 

 

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Time to Rescind the Tort of Bad Faith

Insurance and the Law of Unintended Consequences

Insurance is, and always will be, a business of the utmost good faith. All parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract.

Insurance is, and always be, nothing more than a contract.

The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.

The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation.

If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.

Only if a true tort occurs can the insured waive the contract action and sue in tort.

Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort.

The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.

Available only as a Kindle book at here.

 

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