Why Insurers Should Not Sue Each Other

Neighbors Who Hate Each Other Are Not Enough to Create a Professional Liability Claim

When neighbors sue each other – especially when one neighbor was the realtor who sold the property to the neighbor under false pretenses – creates multiple lawsuits that are almost impossible to resolve. Insurance companies that insure the parties to these vicious and personal lawsuits find they must pay a great deal of money defending the parties and try to drag in other insurers to reduce the financial pain and drain. Not a bad idea unless there is really no means by which the other insurer has no obligation to defend or indemnify the insured.

In Madison Mutual Insurance Company v. Diamond State Insurance…, United States Court of Appeals, Seventh Circuit — F.3d  —-, 2017 WL 1065557 (March 21, 2017) Madison Mutual Insurance Company (“Madison Mutual”) sued Diamond State Insurance Company (“Diamond State”) seeking an order from the Seventh Circuit requiring it to defend Geraldine Davidson in a state-court action filed by her former neighbors, Dr. William and Wendy Dribben. Diamond State previously provided professional liability errors and omissions coverage to Davidson in her capacity as a real estate broker and supplied a defense to Davidson in a previous suit alleging certain wrongdoing by Davidson as a broker.

Davidson had also conceived of and was one of the developers of Heartland Oaks, and she and her husband owned one of the four parcels in the development. At the center of the development is a 30–acre artificial lake and the dam creating that lake is located on the parcel that the Dribbens purchased.

In a 2006 lawsuit filed by the Dribbens against Davidson and the other original owners in the development, the Dribbens alleged that Davidson had failed to disclose that the original owners/developers had never obtained a permit from the Illinois Department of Natural Resources (“IDNR”) authorizing the dam. The 2006 suit alleged that Davidson’s non-disclosure amounted to fraudulent concealment and consumer fraud. Davidson tendered the suit to Diamond State. The Diamond State policy applied to claims made and reported during the policy period and provided coverage for “wrongful acts arising out of the performance of professional services for others.”

In 2011, the Dribbens filed a second suit, this one against both Davidson and her husband, alleging a pattern of harassment, intimidation, and interference with the Dribbens’ property rights by the Davidsons. The wrongful acts attributed to the Davidsons range from commercially farming their own property and the Dribbens’ property (without their consent), in violation of restrictive covenants; polluting the Large Lake with crop runoff; filing lawsuits with the aim of interfering with the Dribbens’ easement rights; spreading rumors that Dr. Dribben was a serial killer; posting offensive signs; and stalking and intimidating the Dribben family and their attorneys. The action asserted claims for enforcement of covenants, trespass, malicious prosecution, interference with the Dribbens’ right to sell their property, intentional and negligent infliction of emotional distress, unjust enrichment, a declaration that there had been no adverse possession of the Dribbens’ property, for an order of protectio, trespass (including criminal trespass), three counts seeking to remove clouds upon and quiet title to the Dribbens’ property, two counts of nuisance, one count of negligence, and one count seeking to enjoin other neighbors in the development vis-à -vis the disputed easements, for a total of 18 counts.

Davidson tendered the 2011 lawsuit to Madison Mutual, which had provided homeowner’s insurance coverage to Davidson and her husband (including personal liability coverage up to $500,000 per occurrence) from July 2004 to July 2011. Madison Mutual had also issued umbrella liability coverage to the Davidsons (with a limit of $1 million per occurrence) from December 2005 to December 2011. Madison Mutual agreed to provide the Davidsons with a defense pursuant to their homeowner’s coverage.

Diamond State did not view either complaint as seeking relief for acts arising out of any professional services Mrs. Davidson had provided to others as a real estate broker. Madison Mutual bears a duty to reimburse Madison Mutual for the costs it has incurred in supplying a defense to her in that litigation

ANALYSIS

An insurer’s duty to defend its insured in litigation depends on both the terms of the insurance policy at issue and the nature of the underlying action. The duty to defend is logically broader than the duty to indemnify. If any portion of the complaint in the underlying litigation potentially falls within the coverage provided by the policy, the insurer must defend the entire suit.

The Diamond State policy is a real estate errors and omissions policy covering claims arising out of the professional services Davidson provided as a real estate broker. Because the policy is a “claims made and reported” policy and Diamond State’s coverage ended in 2007 the claim nominally must be one that was made against Davidson within the policy period and which was reported to Diamond State no later than 60 days after the end of that period.

The 2011 suit, of course, was filed years after Diamond State’s coverage terminated, and so at first glance timely reporting of that suit would appear to be out of the question.

There are, to be sure, factual allegations in the 2011 suit regarding the dam and Davidson’s status as a real estate broker.

Focusing on two allegations regarding a duty of care, Madison Mutual alleges that it is reasonable to infer that said duty includes Mrs. Davidson’s duty of care as a realtor and that the alleged breach of that duty includes her failure, in connection with the sale of the Favres’ property to the Dribbens, to disclose that no permit had been obtained for the dam.

To make the obvious point first, nowhere in either the first or second amended complaints filed in the 2011 litigation is the allegation made that Davidson breached her professional obligations as a real estate broker by failing to disclose to the Dribbens that the dam lacked a permit. There is no allegation, express or implied, that Davidson wronged the Dribbens in her capacity as a realtor by not disclosing that the dam was un-permitted.

The complaint overall is one about Mr. and Mrs. Davidson’s pattern of alleged acts—as neighboring landowners—that have interfered with the Dribbens’ ability to use, enjoy, and sell their own property. The allegations on which Madison Mutual has focused are but a few of the many hundreds of allegations set forth in an effort to establish why and how the Davidsons made living in the Heartland Oaks development a misery for the Dribbens.

The reference to Mrs. Davidson’s status as a realtor appears aimed at suggesting that she, better than anyone, should have understood how her actions as the Dribbens’ neighbor would interfere with the quiet enjoyment of their rights as property owners. Beyond this, there is no allegation that Mrs. Davidson was providing professional services to the Dribbens and breached any duty that she may have owed them in that regard.

The Seventh Circuit was left with a small subset of factual allegations that overlap with the factual underpinnings of the 2006 suit regarding the dam permit, but no allegation of injury resulting from Mrs. Davidson’s failure to disclose the lack of the permit to the Dribbens and no theory of recovery predicated on that failure.

Likewise here, the factual allegations concerning the dam, the lack of a permit, and Davidson’s role in selling the property to the Dribbens, while they may provide explanatory background for the Davidsons’ alleged acts of harassment (including the slander suit), do not point to any theory of recovery against Davidson for breach of her professional obligations as a realtor.

Regardless of the problems with the dam and the claim that the Dribbens claim they would not have purchased the property that does not transform what is otherwise a suit about the Davidsons’ actions as the Dribbens’ neighbors into a suit about Mrs. Davidson’s prior actions as the broker who sold them the property.

The 2011 suit does not assert, nor could they potentially assert, a claim that is plausibly within the professional liability coverage that Diamond State provided to Davidson.

Diamond State has no duty to defend her in the 2011 litigation.

ZALMA OPINION

An E&O insurance policy that is both claims made and reported has no need to defend or indemnify an insured if the claim was not both made against the insured and reported to the insurer during the policy period. Because the plaintiff insurer claimed the new suit related back to the suit filed during the policy period the Seventh Circuit avoided the easy answer and reviewed everything finding no need to defend because nothing alleged in the new suit had to do with the insured’s professional activity. The defendant was mean, treated her neighbors with contempt and made the defendant’s life miserable, but did not suffer from a professional error or omission.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Excess Insurer May Not Unilaterally Refuse Reasonable Settlement

Insured and Primary Policy May Settle When Excess Refuses to Participate

Excess insurers often do not like the decisions of a primary insurer and an insured that would require payment by the excess insurer to effect a settlement. The state of California, by an appellate decision, gives an excess insurer three options if it disagrees with the proposed settlement. National Union, in Teleflex Medical Incorporated v. National Union Fire Insurance Company Of Pittsburgh, PA, United States Court of Appeals, Ninth Circuit. 2017 WL 1055586, No. 14-56366 (March 21, 2017) refused to take any of the three options and claimed a settlement breached a term of the excess policy.

In so doing National Union attempted to do away with the California standard, Diamond Heights Homeowners Association v. National American Insurance Co., 227 Cal. App. 3d 563 (1991), that requires an excess liability insurer must exercise one of three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and the primary insurer. The excess insurer must:

(1)           approve the proposed settlement,

(2)           reject it and take over the defense, or

(3)           reject it, decline to take over the defense, and face a potential lawsuit by the insured seeking contribution toward the settlement.

Under Diamond Heights, the insured is entitled to reimbursement if the excess insurer was given a reasonable opportunity to evaluate the proposed settlement, and the settlement was reasonable and not the product of collusion. The insured, LMA North America, Inc. (LMA), sued its excess insurance carrier, National Union Fire Insurance Company of Pittsburgh, PA (National Union), in connection with National Union’s refusal to either contribute $3.75 million toward the settlement of claims brought by a third party or take over the defense.

THE UNDERLYING AMBU LITIGATION

LMA and its competitor Ambu distribute competing laryngeal mask airway products. In 2007, LMA brought a patent infringement suit in federal district court against Ambu related to certain laryngeal masks. Ambu filed trade disparagement and false advertising counterclaims, demanding $28 million.

The parties held a mediation on January 10–11, 2011. National Union did not attend the mediation, but CNA did. LMA’s counsel, Stephen Marzen, updated National Union each day. On the second day, LMA and Ambu reached a conditional settlement agreement, under which Ambu would pay LMA $8.75 million for the patent claims while LMA would pay Ambu $4.75 million for the disparagement claims. The settlement was conditioned on LMA’s ability to obtain approval and funding from CNA and National Union.

While CNA committed its full $1 million limit, National Union was reluctant to recognize that Ambu’s counterclaims could invade its coverage layer. LMA’s Counsel provided National Union an analysis that concluded that, “considering the risk of a damages award substantially in excess of $10 million, and not counting the substantial defense costs to defend against the product disparagement counterclaims through trial, and possible appeal, $4.75 million is a fair and reasonable settlement of Ambu’s product disparagement counterclaims.”

On March 25, 2011, National Union sent a list of questions and received a response advising National Union of its three options. National Union declined to consent to the proposed settlement without offering to take up the defense.

Having still not heard from National Union regarding taking over the defense, LMA finalized the settlement with Ambu on April 18. LMA promptly notified National Union. .

THE INSURANCE COVERAGE LITIGATION

Following execution of the settlement, LMA sued National Union for breach of contract and bad faith. LMA sought contract damages, interest, attorney’s fees and costs, and punitive damages. After discovery, National Union moved for summary judgment, arguing that it had the absolute right to veto the settlement under the policy’s “no voluntary payments” and “no action” clauses.

The case proceeded to trial and the jury unanimously found for LMA on both the breach of contract and bad faith claims, but decided not to award punitive damages. On April 7, 2014, the district court entered judgment in LMA’s favor for $6,080,568.43, including $3,750,000 in contract damages; $1,216,580.99 in attorney fees, expert fees and costs; and prejudgment interest of $1,113,987.44.

THE DIAMOND HEIGHTS RULE

The Diamond Heights court concluded that consistent with its good faith duty, the excess insurer does not have the absolute right to veto arbitrarily a reasonable settlement and force the primary insurer to proceed to trial, bearing the full costs of defense. A contrary rule would impose the same unnecessary burdens upon the primary insurer and the parties to the action, among others, as does the primary insurer’s breach of its good faith duty to settle.

NATIONAL UNION HAS NOT PRESENTED CONVINCING EVIDENCE THAT THE CALIFORNIA SUPREME COURT WOULD NOT FOLLOW DIAMOND HEIGHTS.

Opposing a contribution action by the insured, the excess insurers may challenge the Plan for fairness, reasonableness and lack of fraud or collusion. An excess insurer does not have an absolute right to withhold its consent to a settlement while at the same time declining to participate in the action. The Ninth Circuit, therefore, refused to conclude that the policies can be read to permit an excess insurer to hover in the background of critical settlement negotiations and thereafter resist all responsibility on the basis of lack of consent.

 Diamond Heights is about how an insurance policy should be read in order to reconcile an excess insurer’s contractual rights under “no action” and “no voluntary payments” clauses with the insured’s rights under the implied covenant of good faith and fair dealing. The covenant of good faith underlying Diamond Heights is grounded on honoring the reasonable expectations created by the autonomous expressions of the contracting parties.

The wisdom of the Diamond Heights rule may not be beyond reasonable debate. But for the implied covenant of good faith and fair dealing, the rule would be contrary to the language of the “no action” and “no voluntary payments” provisions.

The insured is entitled to make a reasonable settlement of the claim in good faith and then sue for reimbursement, even though the policy prohibits settlements without the consent of the insurer.

DIAMOND HEIGHTS IS NOT DISTINGUISHABLE ON ITS FACTS.

CNA committed its policy limit over a month before settlement, which is earlier than the primary insurer in Diamond Heights. The primary insurer funded the defense up until settlement, and the excess insurer did not take over the defense. Regardless of who funds counsel, the insured and the primary insurer owe a duty of good faith that runs not only to each other but also to the excess insurer.  The parties the LMA case and the Diamond Heights cases settled before judgment and the settlements were found to be reasonable assessments of potential liability.

The jury found the settlement to be reasonable. The jury decided in LMA’s favor. In fact, National Union’s foot-dragging may reasonably be seen as more egregious than the excess insurer’s conduct in Diamond Heights. The excess insurer in Diamond Heights had less than two weeks to consider the settlement, whereas National Union had months.

LMA’S BAD FAITH CLAIM

National Union challenges the judgment on the bad faith claim on two related grounds.

The jury could and did rationally conclude based on these facts that National Union acted unreasonably by refusing to take over the defense or approve the reasonable settlement, knowing full well of its obligations under California law.

ZALMA OPINION

This is a breach of the covenant of good faith and fair dealing. National Union – faced with a settlement that was fair, reasonable and in good faith that required it to contribute money. It refused to contribute, refused to take over the defense and decided it was best to await suit from its insured. The suit resulted in a multi-million dollar judgment against National Union. National Union asked the Ninth Circuit to change California law and find it had the unquestioned right to require approval of any settlement. Its attempt was a failure because its actions were in bad faith. It could have saved multiple millions by taking over the defense or contribute to the settlement. It did neither.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Insured Only Allowed One Appraisal

Insured’s Post-Appraisal Estimate Cannot Be Considered

An appraisal is a contractual obligation in a first party property policy that allows the insured and insurer to resolve the amount of loss when the insured and insurer cannot agree.  When an insured did not agree to the award he found a contractor who opined after the appraisal award became final that the roof repair required complete replacement of the roof because of a local statute. The insured demanded a second appraisal five years later. The trial court disagreed and the issue was presented to the Florida Court of Appeal in Orlando Noa, Appellant, v. Florida Insurance Guaranty…, District Court of Appeal of Florida, Third District, — So.3d —-, 2017 WL 1076922 (March 22, 2017).

LOSS AND APPRAISAL

Mr. Noa obtained residential insurance coverage through First Home Insurance Company (“First Home”). In October 2005, with the policy in full force and effect, Hurricane Wilma damaged the residence. Mr. Noa submitted a claim to First Home. In December 2005, First Home advised Mr. Noa that the damages did not exceed the policy deductible of $4,392.00.

Over three years later, in August 2009, Mr. Noa submitted a second claim to First Home relating to the same residence, policy, and windstorm. This claim, detailed in a sworn statement and proof of loss form, was for $71,682.97, exceeding the deductible by $67,290.47. First Home rejected the claim and invoked the appraisal clause in the policy.

Mr. Noa’s appraiser, the insurer’s appraiser, and an umpire selected by the party appraisers, each evaluated the loss. The umpire and the insurer’s appraiser agreed on an actual cash value of the claim in April 2010, of $17,602.10. That computation allowed $3,780.00 for the replacement of 120 roof tiles, $1,200.00 for repair of the underlayment beneath the affected area, and $4,360.00 for treatment of the entire roof after installation of the new tiles to provide a color match. The 120 tiles comprised approximately 3% of the 3,200 square foot roof.

Less than a month after the appraisal award was entered and First Home paid the award amount (less the deductible) to Mr. Noa, a roofing contractor selected by Mr. Noa submitted a permit application to repair 30% of the roof with “current leaking,” reflecting a price of $8,700.00. The permit application was rejected by the building and zoning authority, as Miami-Dade County’s building code requires that not more than 25% of the total roof area can be repaired, replaced, or recovered in any twelve month period unless the entire roofing system or roof section complies with the current code. The contractor then prepared, and Mr. Noa signed, a contract for the full roof for $26,000.00. Mr. Noa submitted the contract to First Home with a request to fund the additional amount required as a result of the ordinance requirement.

First Home denied the full-roof additional claim, and in 2011 Mr. Noa sued in an effort to recover the differential amount of that post-appraisal claim.

ANALYSIS

“Ordinance and Law” coverage provides additional reimbursement to the insured, in amounts and on other terms specified in the insurance policy, to cover costs necessary to meet applicable laws and ordinances regulating the construction, use, or repair of any property or requiring the tearing down of any property, including the costs of removing debris.

Appraisers are charged with determining the amount of the loss when an insurer admits there is a covered loss and there is a disagreement regarding the amount of the loss. In order to perform competently as an appraiser for this purpose, and to be designated by a party or by other appraisers or the court (as an umpire), logic and common sense require that an appraiser must have experience in the estimation of materials and labor costs for the repair and replacement of damaged property. In the case of roof work, appraisers must consider the requirements of the applicable building codes in order to estimate the cost of repair or replacement.

The appraisal provision in the present case sufficed to leave these issues to the appraisal panel, not the court. This explains the notation on the appraisal award that “Law & Ordinance” was not appraised. The notation surely cannot mean that the appraisal is subject to circumvention a month later if the insured can just find a roofing contractor to sign a proposal stating that 30%, not the 3% found by the appraisers, of the roof needs replacement.

To hold otherwise would allow the insured’s post-appraisal roofing contractor to step into the adjustment process as a super-umpire whose opinion supersedes the appraisal and requires a new round of valuation estimates. If the insured intends to offer a roofer’s professional opinion that the applicable building code will require replacement of the entire roof, not just 3% of the area of the roof, the appraisal process must surely be the time to offer that evidence—not as an afterthought on the heels of the appraisal.

ZALMA OPINION

This case is a perfect example of the old Aesop Fable of the sour grapes. Mr. Noa submitted to appraisal and was upset by the result so he found a roofer who was willing to say the damage required more than 25% of the roof needed to be replaced which, by local statute, required full replacement of the roof. The court of appeal correctly found that the evidence needed to be presented to the appraisal panel and the insured does not get a second appraisal because he didn’t like the first award.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Rescission by Default in Bermuda Not Binding

Comity Not Available

Rescission of an insurance policy is appropriate if the policy was acquired by a misrepresentation or concealment of material fact. However, when a plaintiff is damaged by a default judgment of rescission in a foreign jurisdiction without allowing the plaintiffs the right to participate, further litigation will arise to eliminate the foreign jurisdiction.

In Robert D. Ferguson, Kansa International Corporation, Ltd., Bankruptcy Estate, Milo Family Limited Partnership, Imipolex LLC, v. Travelers Indemnity Company and Executive Risk Specialty Insurance Company, Superior Court of New Jersey, Appellate Division, 2017 WL 957732, DOCKET NO. A-0028-15T1, (March 10, 2017) the Appellate Division was asked to reverse a decision that enforced a default judgment rendered by the  Supreme Court of Bermuda.

FACTS

Plaintiffs Robert D. Ferguson, Kansa International Corporation, Ltd., Milo Family Limited Partnership, Imipolex, LLC, and Omphalos, LLC, appealed the trial court’s dismissal of their complaint against defendants Travelers Indemnity Company and Executive Risk Specialty Insurance Company (ERSIC).

Plaintiffs are former shareholders of Lion Holding, Inc., an insurance holding company. Lion’s principal operating companies were Clarendon America Insurance Company and Clarendon National Insurance Company. In 1993, Clarendon engaged Bermuda-based Raydon Underwriting Management Company Limited (Raydon) as a managing general agent.

In 1994, Raydon encouraged Clarendon to write reinsurance policies in a program known as LMX. LMX’s reinsurance program involved direct insurance policies that provided personal accident and death benefits to individuals. Raydon’s assessment of the program was fatally flawed, generating significant losses to Clarendon as a reinsurer.

When plaintiffs sold Lion and its subsidiaries, including Clarendon, it indemnified the new owners for up to $50 million in losses related to the LMX program and reduced its sale price by $25 million. Plaintiffs became contractually subrogated to Clarendon, including claims against Raydon. As a result of the reinsurance problems generated by the LMX program, nearly $24 million was withheld from the sale of the Clarendon companies and deposited in escrow. By 2005, Raydon was defunct. Plaintiffs obtained a judgment in the amount of $92.137 million in Bermuda, where Raydon was incorporated and functioned, for damages as a result of reinsurance losses. The judgment obtained by default was uncollectible, as Raydon not only failed to participate in the proceedings, it no longer existed and had no known assets.

Raydon was required by New Jersey law to obtain an “errors and omissions” liability insurance policy.  That policy, purchased in July 1997 through Gulf Insurance Company, ensured Raydon for losses up to $15 million incurred as a result of errors and omissions in rendering professional services. Defendant Travelers Indemnity is the successor company to Gulf Insurance. Defendant ERSIC issued an excess indemnity policy providing coverage of $10 million to Raydon to the extent losses exceeded $25 million.

Neither Travelers nor ERSIC took any action after plaintiffs filed their lawsuit against Raydon in the Supreme Court of Bermuda in December 2005. However, two days before a September 28, 2011 court hearing on plaintiffs’ damage application following the default judgment against Raydon, Travelers informed plaintiffs “that it was refusing to cover [p]laintiffs’ losses under [the Gulf Policy].”  Travelers maintained that it regarded the Gulf Policy as void for breach of warranty and that Travelers, alternatively, “’hereby avoids/rescinds the policy.”’ …. Likewise, ERSIC disputes plaintiffs’ claim that the Bermuda judgment is a covered loss under its Excess Policy.  Travelers commenced a civil action against Raydon in the Bermuda courts, seeking a declaration that the Gulf Policy was obtained by fraud and thus void, and that Travelers therefore possessed no obligation to indemnify Raydon.

Travelers obtained a judgment from a Bermuda court voiding the Raydon errors and omissions policy.

In their first point, plaintiffs challenge the determination that the judgment Travelers obtained against Raydon in Bermuda is binding upon them. That determination was essential to the judge’s analysis of forum non conveniens.

It is undisputed that plaintiffs were not made a party to Travelers’ action in Bermuda. New Jersey courts’ recognition of judgments from foreign countries is not automatic, and requires analysis under the doctrine. Comity is a principle involved in the relationships of nations or states with each other, that, when exercised by a court, leads to the recognition and enforcement of the laws of a foreign state.

In seeking dismissal on the basis of comity, the moving party has the burden of proving: (1) there is a first-filed action in another state [or country]; (2) both cases involve the same parties, the same claims and the same legal issues; and (3) the plaintiff will have the opportunity for adequate relief in the prior jurisdiction.

Plaintiffs were not made a party to Travelers’ action in Bermuda seeking rescission of the insurance contract, although Travelers had known for years that plaintiffs were pursuing substantial claims against its insured. With regard to the second and third factors, that Raydon’s assessment of the quality of the reinsurance risks assumed by plaintiffs may have been grossly inaccurate does not in and of itself constitute a basis for Travelers’ rescission of its errors and omissions policy.

Potential misrepresentations by Raydon to plaintiffs are different, and reviewable by different standards, than potential misrepresentations to Travelers that would rise to the level that the insurance contract should be voided.  If Travelers’ judgment stands, plaintiffs’ judgment becomes completely uncollectible. Therefore, dismissal premised on comity, due to the mere existence of Travelers’ Bermuda judgment, is not warranted.

The issue to be decided in this case is whether Travelers and ERSIC should be compelled to provide coverage and satisfy the judgment. The question of coverage was obviously not litigated in the prior proceeding. Where defendants’ argument clearly fails is that plaintiffs were not a party to the prior proceeding and were certainly not in privity with a party to the prior proceeding.

The only factor the trial judge actually found to be persuasive was the factor concerning “practical problems that make trial of a case easy, expeditious and inexpensive including the enforceability of the ultimate judgment.” It explained that this factor weighed heavily in favor of having the case heard in Bermuda because “we have a judgment from Bermuda already which is enforceable in New Jersey that says that there is no insurance policy.” The judge thus found that plaintiff’s best option would be to “go to Bermuda and get that lifted if they can and litigate their case there where essentially their case here was the answer and counterclaims that they should have filed in Bermuda in the first place.”

Thus the trial court, by assuming that the judgment was binding on plaintiffs because of a mistaken application of the concepts defining privity and of fundamental principles of due process, erred in its application of the doctrine of forum non conveniens. By assuming that the judgement was “enforceable,” his analysis of the factors was fatally flawed.

The Clarendon companies were New Jersey domiciled insurance companies, and compelled their general manager to obtain and maintain errors and omissions coverage pursuant to New Jersey law. Travelers is a Connecticut corporation licensed to do business in New Jersey. ERSIC, a member of the Chubb Insurance Group, is domiciled in New Jersey. The private interest factors thus tip the scale slightly to plaintiffs, because the entities which plaintiff stands in the interest of are New Jersey corporations. The witnesses are scattered around the country, and in Bermuda. Realistically, in weighing the private interest factors, whatever the jurisdiction, it will be relatively difficult to produce the necessary proofs for resolution of the dispute.

The public interest factors are tipped slightly in the balance of defendants as this matter will consume substantial judicial resources. Nonetheless, there simply is no basis for concluding that the choice of New Jersey as the forum for resolution is demonstrably inappropriate.

ZALMA OPINION

Although The insurers had sufficient evidence to convince a Bermuda Court that it could rescind the policy issued to Raydon – the defunct and penniless MGA – that decision could not keep the parties claiming the were entitled to collect their judgment against Raydon from the insurers. The insurers, being New Jersey citizens should have brought their rescission case against the plaintiffs and the default of Raydon.  Comity may have been required but the right of New Jersey citizens overcame the right to give credit to the Bermuda judgment and should, as a result, also give a right to retry the default judgment the plaintiffs obtained against Raydon.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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A Court May Not Make Language of Policy Nugatory

Avoiding Making Worthless Excess Policy Language

Liability insurance can be primary or excess. When multiple policies of insurance apply to a loss disputes over who owes what to the insured and in what proportion brings about litigation that resembles an Abbot & Costello comedy routine than interpretation of an insurance contract.

In Travelers Property Casualty Company Of America v. Xl Insurance America, Inc., Zurich American Insurance Company, Robert Bosch, LLC, Volkswagen Group Of America, Inc., CBS Radio, Inc., Of Detroit, Volkswagen Of America, Inc., et al, Court of Appeals of Michigan, 2017 WL 1033755, No. 329277, No. 329293 (March 16, 2017) the Michigan Court of Appeals was asked to determine who’s on first.

FACTS

ACE Property & Casualty Insurance Company (“ACE”), and Allianz Global Risks US Insurance Company (“Allianz”) appealed the trial court’s order granting summary disposition to Ironshore Specialty Insurance Company (“Ironshore”).

Insurance companies dispute what portion of two automobile negligence settlements each of them should be required to pay. The underlying negligence actions arose out of a motor vehicle accident.

At the time of the accident, Volkswagen was insured under a primary policy issued by XL Insurance America, Inc. (“XL”), and an excess policy issued by Ironshore. Bosch was insured under a primary policy issued by Zurich American Insurance Company (“Zurich”) and an excess policy issued by Allianz. Finally, CBS Radio was insured by a primary policy issued by The Travelers Property Casualty Company of America (“Travelers”) and an excess policy issued by ACE. On March 31, 2014.  Travelers sued for declaratory judgment action naming as defendants XL, Ironshore, Allianz, Zurich, Bosch, and Volkswagen. Thereafter, a plethora of cross-claims and third-party complaints were filed.

On August 11, 2014, the parties in the underlying negligence actions and several of the insurers in this declaratory action reached a settlement, the terms of which were sealed by the trial court.  Allianz and ACE represent that as a result of the settlement, Zurich, Travelers, XL, Volkswagen, Bosch, CBS Radio, and Prainito were released and dismissed from the declaratory judgment action. There still remained, however, an undisclosed settlement balance to be satisfied by some or all of the three excess insurers, i.e., Allianz, ACE, and Ironshore.

The “other insurance” clause relevant to Ironshore’s coverage is markedly different from the ACE and Allianz policies. Indeed, an “other insurance” clause is not specifically written into the Ironshore policy. Instead, the nature of the “other insurance” clause applicable to the Ironshore coverage is discerned by reading the terms of both the Ironshore policy and the XL (primary) policy.

In their joint motion for summary disposition and in response to Ironshore’s motion, Allianz and ACE argued that because Ironshore’s policy included a pro-rata “other insurance” clause, and ACE’s and Allianz’s policies contained a “true excess” other insurance clause, the excess policies issued by ACE and Allianz provided secondary coverage to that of the Ironshore policy. Allianz and ACE asserted that Ironshore’s policy limits must be exhausted before ACE and Allianz would be required to pay.

By contrast, in its own motion for summary disposition and in response to ACE and Allianz’s joint motion for summary disposition, Ironshore argued that its policy coverage was specifically written to be excess whenever there was other collectible insurance. It further argued that the ACE and Allianz policies both stated that their “other insurance” clauses would not apply when the “other insurance” is written to be excess of their policies. Ironshore then reasoned that by operation of this language, the ACE and Allianz policies ceased to be excess under these circumstances and must be exhausted before Ironshore’s policy was exposed to liability.

After considering the language of the policies, and attempting to reconcile them, the trial court held that the ACE and Allianz policies were higher in priority than the Ironshore policy and, therefore, the coverage provided by those policies must be exhausted before Ironshore’s coverage was triggered. Accordingly, the court denied ACE and Allianz’s joint motion for summary disposition and granted summary disposition in Ironshore’s favor.

ANALYSIS

Insurance-contract language is given its ordinary and plain meaning and courts must give effect to every word, phrase, and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory. If the contractual language is unambiguous, courts must interpret and enforce the contract as written.

The language of the Ironshore policy, clearly and unambiguously evidences an intent that the policy will be “excess” over all other collectible insurance. When carefully examined, the policy language at issue does not even suggest the presence of conflicting provisions within the Ironshore policy. In the present case, the phrase “covers on the same basis” can only reasonably refer to circumstances where the competing coverage is also “excess.” The excess provisions of both of the competing policies are, for all intents and purposes, essentially at the same ‘layer.’ Under such circumstances, liability is to be apportioned on the basis of the policy limits.”

Because it appears that all three policies contain excess “other insurance” clauses, it would be natural to conclude that their obligations, therefore, would simply be proportionately shared. However, the additional language found in the ACE and Allianz “other insurance” clauses required the court to engage in further analysis. Considering the structure of the paragraphs, “this provision” clearly refers to the “this policy will apply excess of” clause. Consequently, based on the plain language of the contract, ACE’s and Allianz’s policies evidence an intent that their coverage would be “excess” to other valid and collectible insurance unless the “other insurance” is written to be excess of their policies.

Reconciling this additional language found in ACE’s and Allianz’s policies with the Ironshore policy the trial court did not err when it held that ACE and Allianz were first in priority. Because the Ironshore/XL policy was written to be excess of all other insurance coverage, and the ACE and Allianz policies provide that their “other insurance” clauses will not apply when the “other insurance” is written to be excess of their policies, it must be concluded that only the Ironshore “other insurance” clause is truly excess.

Accepting the ACE and Allianz interpretation causing Ironshore/XL to pay a pro rata share of the settlement, would render nugatory – worthless – the clear language of the Ironshore policy that its coverage is excess of all other collectible insurance.

Since courts must give effect to every word, clause, and phrase in a contract and must avoid rendering any part surplusage or nugatory the Michigan Court affirmed the trial court judgment.

ZALMA OPINION

The hardest work I ever took on was to rewrite a liability policy to make it clear and unambiguous. The writers of the three policies in this case also did the hard work. The claims people, however, tried to avoid the clear and unambiguous language of the policy and try to make a true excess clause nugatory. They ACE and Allianz policies could have avoided the result by eliminating the “other insurance” language that made it be excess of their policies.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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City Cannot Compel Police Officers to Buy Primary Insurance

Municipality May Not Preempt State Law

Police officers have a difficult and dangerous job. They should be honored for their service not punished by the citizens of the city where they live and work. In an attempt at a wild and nasty variation of the Obamacare statute, in David Bicking, et al., Appellants, v. City of Minneapolis, et al..., Supreme Court of Minnesota, — N.W.2d —- 2017 WL 1017813 (3/15/17) the Minnesota Supreme Court was asked to allow an initiative that requires police officers to buy primary liability insurance to cover defense and indemnity to the officer for his or her wrongful conduct.

FACTS

David Bicking, Michelle Gross, Janet Nye, and Jill Waite (collectively, “Bicking”) are members of a citizen group in Minneapolis that they formed to advocate for measures to improve policing and police accountability in the City. Bicking’s group submitted a petition to the Minneapolis City Council for consideration of a question regarding a proposed amendment to the Minneapolis City Charter to be placed on the ballot for the November 2016 general election.

The amendment, as proposed by Bicking’s group, would require City police officers to obtain and maintain professional liability insurance coverage and would impose other conditions for coverage and indemnification (“proposed insurance amendment”). The Minneapolis City Council directed the City Clerk not to include the proposed insurance amendment question on the ballot for the November 2016 election after concluding that the amendment conflicted with and was preempted by state law. Bicking challenge that decision. The district court agreed with the Minneapolis City Council and dismissed the petition.

ANALYSIS

Minneapolis is a home rule charter city. Bicking’s proposed insurance amendment, submitted to the Minneapolis City Council for consideration would require Minneapolis police officers to carry professional liability insurance as the officer’s “primary” insurance. The proposed law would require each appointed police officer to provide proof of professional liability insurance coverage in the amount consistent with current limits under the statutory immunity provision of state law and must maintain continuous coverage throughout the course of employment as a police officer with the city. The city may not indemnify police officers against liability in any amount greater than required by State Statute unless the officer’s insurance is exhausted.

The City asked the district court to dismiss the petition, asserting that the proposed insurance amendment conflicts with state law.

On August 22, 2016, the district court dismissed the petition. Finding that the proposed insurance amendment conflicts with several statutes that address indemnification and defense of municipal employees, the court concluded that conflict preemption “operates to void the proposed charter amendment.”

On appeal, Bicking asserted that the district court erred in dismissing his petition because the plain language of the proposed insurance amendment reveals a meaning and intent with respect to police liability insurance coverage that are different from, yet consistent with, state law.

The express limits on the initiative rights of Minneapolis residents is different than initiatives in other states. Bicking’s right to place a proposed charter amendment question on the ballot is justiciable consistent with Minnesota’s doctrine of stare decisis, the court’s obligation to promote stability in the law and the integrity of the judicial process, and the court’s reluctance to overrule precedent absent a compelling reason.

Preemption of municipal ordinances by state law is a legal question subject to de novo review as if brought directly to the Supreme Court. Charter provisions must be consistent with state law and state public policy. The adoption of any charter provision contrary to the public policy of the state, as disclosed by general laws or its penal code, is also forbidden. A municipal ordinance will be upheld unless it is inconsistent with the Federal or State Constitution or state statute. This is so because municipalities have no inherent powers and can enact regulations only as expressly conferred by statute or implied as necessary in aid of those powers which have been expressly conferred. In other words, state law may limit the power of a city to act in a particular area as the Supremacy clause of the U.S. Constitution limits the power of the state to act.

A municipality cannot enact a local regulation that conflicts with state law or enact a regulation when state law fully occupies a particular field of legislation. A conflict exists between state law and a municipal regulation when the law and the regulation contain express or implied terms that are irreconcilable with each other, when the ordinance permits what the statute forbids, or when the ordinance forbids what the statute expressly permits.

The district court identified conflicts between state law and the proposed insurance amendment. First, state law requires municipalities to defend and indemnify employees acting in the scope of their job duties, including for punitive damages. The proposed insurance amendment, by making the police officer’s insurance the “primary,” or the first, coverage for purposes of any recovery, would ensure that the claimant looks first to the officer’s primary insurance for any recovery. Second, the district court recognized that municipalities may purchase insurance in excess of the liability limits established by state law, but the proposed insurance amendment would prohibit the City from indemnifying officers in an amount “greater than required by State Statute” unless the officer’s primary insurance is exhausted. Third, the district court concluded that state law requires municipalities to furnish legal counsel to police officers and pay the reasonable costs and expenses of defense, but the proposed insurance amendment, by making the officer’s insurance the primary coverage, would place the burden of defense on the officer.

The proposed insurance amendment would add requirements such as designating the officer’s required coverage as “primary”; would include provisions that permit what state law forbids, such as relieving the City of its liability for torts committed in the scope of the officer’s employment until the officer’s insurance coverage is first “exhausted”; and would include provisions that forbid what state law expressly permits, such as purchasing insurance coverage for acts for which the City would otherwise be immune.

Therefore, the initiative failed because it would preempt state law.

ZALMA OPINION

This initiative is an attempt to punish police officers for doing their jobs by requiring them to purchase, and pay for, primary liability insurance. The obligation, when a person is injured by a police officer, is for the employer to defend and indemnify the officer and purchase insurance to pay for the defense and indemnity. The proposed initiative would turn the law on its head and would probably decimate – by resignation – the police force. Police officers are not enemies of the country they are the protectors of all. The Supreme Court did the right thing. Perhaps other courts will recognize the importance of the supremacy clauses in the U.S. Constitution.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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For Want of a Word In Policy Insurer Loses

Hit and Run Driver Who Forces One Vehicle into Another Allows for UM Coverage

Uninsured motorist (UM) coverage covers injuries caused by a phantom vehicle that causes injury and runs from the scene – a classic hit-and-run accident. Because of widespread fraud insurers have included language in their policies requiring actual, physical contact between the phantom vehicle and the vehicle of the person making an UM claim.

In Ronald Tucker v. John Doe and Metropolitan Group Property And Casualty Insurance Company, Court of Appeals of Michigan, 2017 WL 999513, No. 330199 (3/14/17) a hit-and-run driver struck a van, which then struck plaintiff’s vehicle. Plaintiff had just parked his car when a dark-colored minivan, traveling at a speed of 70 to 80 miles per hour, struck a white van traveling through a nearby intersection. The force of the impact caused the white van to hit plaintiff’s car while plaintiff was still inside. The dark-colored minivan left the scene of the accident.

THE POLICY

At the time of the accident, plaintiff had a no-fault insurance policy with defendant, which included uninsured motorist coverage. The policy provided this uninsured motorist coverage.  The policy defined the phrase “uninsured motor vehicle” defined as “a hit and run motor vehicle which causes bodily injury to a person covered under this section as the result of striking that person or a motor vehicle which that person is occupying at the time of the accident ….”

THE CLAIM

Based on these provisions, plaintiff sought uninsured motorist benefits under the insurance policy. However, the insurer denied the claim, reasoning that plaintiff could not satisfy the “striking” requirement in the policy. Thereafter, plaintiff filed suit against defendant. The insurer moved for summary disposition, which the trial court granted based on the conclusion that plaintiff could not claim uninsured motorist benefits under the policy because the hit-and-run minivan did not “strike” plaintiff or his vehicle.  The insured appealed.

On appeal, plaintiff argues that the trial court erred by granting defendant’s motion for summary disposition because there was a “substantial physical nexus” between the hit-and-run vehicle and the van that struck plaintiff’s vehicle, which satisfied the striking requirement under plaintiff’s automobile insurance policy. In particular, plaintiff maintains that the insurance policy, as written, does not require direct physical contact between plaintiff’s vehicle and that of the hit-and-run vehicle. Instead, plaintiff contends that the striking requirement is satisfied in this case because the hit-and-run vehicle accomplished the striking of plaintiff’s vehicle through the use of an intermediary vehicle.

ANALYSIS

Uninsured motorist insurance permits an injured motorist to obtain coverage from his or her own insurance company to the extent that a third-party claim would be permitted against the uninsured at-fault driver.  Because Michigan’s no-fault act does not require uninsured motorist coverage, the rights and limitations of such coverage are purely contractual and are construed without reference to the no-fault act. The proper interpretation of contracts and the legal effect of contractual provisions are questions of law subject to review. Insurance policies are construed in the same manner as any other species of contract, giving its terms their ordinary and plain meaning if such would be apparent to a reader of the instrument.

A variety of linguistic formulations have been used in providing for uninsured motorist coverage in cases of hit-and-run accidents. Commonly, these policies require some sort of “physical contact” between the injured party’s vehicle and the hit- and-run vehicle. The purpose of this “physical contact” requirement is to reduce the possibility of fraudulent phantom vehicle claims.

The manner of physical contact required—that is, whether the hit-and-run vehicle must have direct physical contact with the injured party’s vehicle, or whether contact can occur through an intermediate object—will depend on the wording of the specific policy. For instance, in one case the court determined that “direct” physical contact was required because the policy at issue required “direct physical contact” with the hit-and-run motor vehicle. In contrast, in the absence of a modifying term, such as “direct,” the Court has repeatedly recognized that a “physical contact” requirement is satisfied by direct or indirect contact. The most common circumstances in which recovery is permitted is when (1) the hit-and-run vehicle strikes a second or intervening vehicle which in turn is propelled into plaintiff’s vehicle and (2) an object is propelled into the plaintiff’s vehicle by another vehicle which does not stop.

Uninsured motorist insurance coverage exists under the policy in the event of a hit-and-run accident when a hit-and-run motor vehicle causes bodily injury to a person covered under this section as the result of striking that person or a motor vehicle which that person is occupying at the time of the accident.

In the absence of a modifying term such as “direct,” use of the term “striking” allows for direct or indirect physical contact.  In this respect, as commonly understood, the term “strike” generally allows that striking may be accomplished through an instrumentality. Instead, striking with an intermediate object will suffice, and the question in this case becomes whether there was a “substantial physical nexus” between the hit-and-run vehicle and the vehicle that struck plaintiff’s car.

Clearly, in this case, there is at least a question of fact with regard to whether the hit-and-run vehicle struck plaintiff’s vehicle within the meaning of the policy. Plaintiff testified, and statements by the driver of the intermediate vehicle confirmed, that the hit-and-run vehicle forced the intermediate vehicle into plaintiff’s vehicle.

Given this evidence, it could reasonably be concluded that there is a substantial physical nexus and that the hit-and-run vehicle accomplished the striking of plaintiff’s car through the use of the intermediate vehicle. Consequently, the trial court erred by granting defendant’s motion for summary disposition and the Court of Appeal reversed and remanded the case to the trial court for trial.

ZALMA  OPINION

People who write insurance policies – a very difficult task – usually choose their words carefully and are guided by court decisions. Metropolitan wrote its policy to only require the striking of the insured’s building and left out the word “direct” that other insurers used. In so doing, if the vehicle is struck in a Rube Goldberg machine fashion, or by striking one vehicle that then strikes the plaintiff, the insurer’s defense fails. Metropolitan’s claim people and the author of the policy failed to work together.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Court Improperly Lets Parties to Change a Battery to Negligence

An Assault or Battery Away from Auto Does Not Arise Out of Use of Auto

Automobile liability coverage requires that for coverage to apply injuries to a third party must result from the use of the automobile. Unlike broad liability coverages like a Commercial General Liability policy or a homeowners policy, the insurance protection of an automobile liability policy requires a nexus to the automobile. Entering into an agreed judgment so that the insurer could be sued, resulted, as it often does, in a coverage dispute that should never have been filed had the parties consulted an insurance coverage lawyer before entering into a stipulated judgment.

In Indiana, the Court of Appeals decided, Estate of Curtis by Brade v. GEICO General Insurance Company, Court of Appeals of Indiana, — N.E.3d —-,  2017 WL 942813 (March 10, 2017) litigation resulted after Drake Matovich and Robert Curtis engaged in a physical altercation in a grocery store parking lot that resulted in Curtis being severely injured and eventually died as a result of the altercation.

Matovich and Curtis’s estate entered into an agreed judgment, pursuant to which Matovich admitted liability and assigned his claims against his automobile insurer, GEICO General Insurance Company (GEICO), to Curtis.

FACTS

During the relevant period of time, Matovich was insured by GEICO under an automobile liability policy (the Policy) covering a 2004 Chevrolet truck. On September 17, 2009, Matovich was sitting in his parked truck in a parking lot. Another vehicle, being driven by Curtis, bumped into Matovich’s parked vehicle but did not stop.

Matovich pursued Curtis’s vehicle, stopped it and Matovich said, “You just hit my truck. I need you to stop.” Curtis exited his vehicle and approached Matovich aggressively, saying, “f*ck you” repeatedly.  Curtis then chest bumped Matovich, who retreated to the rear of his truck, with Curtis following. Curtis made contact with Matovich again, and Matovich told Curtis to take it easy, stay back, and calm down. Curtis made contact with Matovich again. Matovich then put his hand out and said, “You need to stop and stay back.”  Curtis made contact with Matovich, walking into his outstretched hand; Curtis’s eyes rolled up, his arms went limp, and he collapsed. Curtis eventually died and his Estate contends that his death stemmed from the altercation with Matovich.

On May 20, 2011, Curtis’s Estate filed a wrongful death suit against Matovich, alleging that Matovich’s recklessness and negligence had resulted in Curtis’s death. GEICO paid for Matovich’s defense but reserved its rights to later deny coverage. Following mediation, the parties entered into an agreement.

The Agreed Judgment, made the actions of Matovich, a clear and unambiguous battery, into a negligent act. The parties agreed that the stipulated negligence of Matovich caused Curtis’s injury.  Matovich, then, avoiding paying the judgment, assigned any and all claims which he may have against his own automobile insurance company as a result of the matters contained within this litigation.

The trial court entered judgment in favor of Curtis, finding that Matovich owed damages to the Estate in the amount of $357,868.45 plus the costs of the action.

DISCUSSION AND DECISION

Although the parties each raise multiple arguments, the court foud one issue to be dispositive — whether Matovich’s actions were covered under the Policy as a matter of law. The Policy’s liability provision states that GEICO agreed to pay damages for which Matovich became legally obligated to pay because of bodily injury “arising out of the ownership, maintenance, or use of the owned auto….” The primary issue in the case is whether the altercation between Matovich and Curtis arose out of the “use” of Matovich’s vehicle.

An accident arises out of the ownership, maintenance, and use of a vehicle only if such ownership, use, or maintenance is the incident’s “efficient and predominating cause.” Indiana has intentionally adopted a narrower construction of the phrase than that used by courts in other jurisdictions. If a vehicle’s use is only tangentially related to an incident, coverage does not exist under such a clause.

When Matovich exited his vehicle to confront Curtis, engaging in a protracted and physical confrontation with the other man, he no longer had an active relationship with his vehicle. His vehicle no longer played a role in the incident; instead, it was merely an altercation between the two men. The reasonable expectations of the parties at the time they entered into the Policy would never have included coverage for a physical altercation that merely happened to occur near the covered vehicle.

he undisputed facts in this case show that coverage does not exist because the injuries to the Deceased did not arise out of Matovich’s ownership, maintenance or use of the insured motor vehicle within the meaning of the coverage clause of the policy. Matovich and the Deceased had already exited from their motor vehicles when Matovich’s physical contact of the Deceased caused the latter’s injuries.

Even prior to Matovich making physical contact, the Deceased “chest bumped” Matovich three (3) times. Matovich’s actions, therefore, did not arise out of the use or ownership or maintenance of the insured motor vehicle within the meaning of the Policy’s coverage term.

The injury occurred at a time and a distance away from the physical contact of the vehicles and after both Matovich and the Deceased exited their respective vehicles, and after a heated “conversation” between them. Matovich’s physical contact was not causally connected to the use of his motor vehicle and can not be construed to be within the contemplation of Curtis and Matovich to be covered under the Policy.

ZALMA OPINION

A battery – physical touching without right – is always an intentional act and could never be a negligent act regardless of the stipulation of the parties. Since no insurance policy covers intentional acts causing injury the parties attempted – with the cooperation of a trial court – to change an intentional act into a negligent act so that the estate of the deceased can recover from an insurer. They picked an auto insurer and, because the plaintiffs failed to consult insurance experts, lost anyway because the injury occurred away from, and not dealing with the use of the vehicle.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Injuries Resulting from Intentional Acts Not an Occurrence

No Benefits for Deliberate Acts Resulting in Injury

The USCA for the Ninth Circuit – contrary to its often stated court of reversal – wrote a clear, unambiguous, appropriate and proper decision that was even more brief than decisions from the New York appellate courts.

In Metropolitan Property & Casualty Insurance Company v. Kenneth Victor Nieto and Josh Pemberton, United States Court of Appeals, Ninth Circuit, No. 14-35565, 2017 WL 946754 (3/9/17) Josh Pemberton appealed from the entry of summary judgment in favor of Metropolitan Property and Casualty in this insurance coverage dispute.

The Ninth Circuit concluded that the district court correctly determined that Metropolitan had no duty to defend or indemnify Karen and Kenneth Nieto because their liability did not arise from an “occurrence” as defined in the policy.

Pemberton’s injuries did not result from an “accident” because Karen and Kenneth Nieto each engaged in deliberate acts and the injuries were a reasonably foreseeable result of those acts.

Because his injuries did not result from an “accident,” Pemberton cannot establish that the loss falls within the scope of the policy’s insured losses.

Summary judgment was therefore proper.

ZALMA OPINION

Liability insurance is designed to protect the person insured against claims that he or she negligently, accidentally, injured a third person. The insureds deliberately acted in a way to injure Pemberton. No accident, no occurrence, no coverage.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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’s Insurance Fraud Letter – March 15, 2017

Zalma’s Insurance Fraud Letter

Criminal Intent Proved by Circumstantial Evidence

Zalma’s Insurance Fraud Letter, Volume 21, No. 6
Every Insurance Adjuster Must Be Trained About Fraud

In the last 49 years that I have been in the business of insurance I have learned the one thing that is a certainty: the quality of insurance fraud perpetrators is almost non-existent. That means that it is so easy to steal from insurance companies that amateurs with no skills are jumping into the business of defrauding insurers. If the insurance industry learns enough about insurance fraud and defeats the claims of the amateurs the professional fraud perpetrators will go away and work easier crimes. If not, they will continue to bleed the insurance industry. It has been my desire, for the last 20 years Zalma’s Insurance Fraud Letter has been published, to help in the effort to make insurance fraud more difficult for the perpetrators and reduce what fraud takes from the insurance industry.

Because more insurers are training their people to recognize insurance fraud in this issue you may be surprised to see cases where fraud failed and the perpetrator spent time in jail even though the number of convictions seem to be shrinking.


 The Current Issue Contains the Following 

  • Criminal Intent Proved by Circumstantial Evidence
  • Illumeo Continuing Education
  • New From Barry Zalma
  • Barry Zalma Speaks at Your Request
  • E-Books from Barry Zalma
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Lawyers Disbarred for Keeping Settlement Money
  • Good News From the Coalition Against Insurance Fraud
    • AMAZING ARSON DOG EARNS N.Y. FRAUD FIGHTER AWARD
  • Health Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • Other Insurance Fraud Convictions
  • Books from the American Bar Association

 

  • The Legend

Zalma Insurance Consultants; Zalma’s Insurance Fraud Letter; Visit the Zalma Insurance Claims Library

Zalma on Insurance – A 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

 Broker is Not Agent of Insurer

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.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.Some of the 1,022 videos follow: 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.

New Blog:

Insurance Law Commentary

 You can see video commentary and read two serialized novels: “Arson for Profit” and “Murder & Insurance Fraud Don’t Mix”

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Broker is Not Agent of Insurer

Binder is Only Temporary Insurance

Insurance companies issue binders to provide temporary coverage to a potential insured. They are not insurance policies but only evidence that, if certain conditions are met, a policy will be issued. Many contain conditions requiring a full application and full payment of premium for a policy to be issued. Failure to comply results in the binder expiring and no policy is issued.

In Popham v. Landmark American BE-004 Insurance Company, Court of Appeals of Georgia, — S.E.2d —-, 2017 WL 950437 (March 9, 2017) a binder was issued but the premium was not delivered to the insurer as agreed and no policy was issued. Popham claimed he paid an agent timely and that was sufficient to cause a policy to be issued.

FACTS

Popham contacted independent insurance agent Steven Greenberg (“Greenberg”) to obtain a new commercial liability insurance policy for his tree removal business. After contacting several underwriters, Greenberg obtained an insurance quote for Popham from Tapco, an underwriter that had the authority to issue insurance policies on behalf of Landmark. Popham met with Greenberg on November 17, 2010 at which time Popham signed an application for insurance and paid a down payment on the premium to Greenberg. Popham received a certificate of insurance from Greenberg showing a policy effective date of November 17, 2010.

Tapco issued a binder to Popham stating that it would provide temporary insurance coverage until November 29, 2010, provided that Tapco “receive[d] a properly completed application and a premium payment within 12 days.” Per the terms of the binder, Popham’s failure to remit a completed application and the premium payment to Tapco by that date would nullify and void coverage. The language of the binder also provided that the binder “exists on its own terms and expires on its own terms. When a binder expires on its own terms, no coverage exists thereafter. Requirements for notice of cancellation to insureds do not apply to expired binder.”

On November 29, Popham met with Greenberg to make another premium payment, and Greenberg mailed a premium check and Popham’s insurance application to Tapco either that day or the following day. However, it is undisputed that Tapco did not receive the premium payment and the application by November 29, 2010.

On December 7, 2010, Tapco notified Greenberg that it had not received the application and premium check for Popham’s policy and that the binder was null and void. Two days later, on December 9, 2010, Tapco received Greenberg’s mailing containing the application and the premium check and deposited the check that day. The following day, Tapco informed Greenberg that additional application materials were required to issue the insurance policy and that the policy’s effective date would be December 9, 2010. Greenberg faxed the additional materials to Tapco, and Tapco, acting on behalf of Landmark, wrote an insurance policy for Popham with an effective date of December 9, 2010.

While decisions were being made on December 1, 2010, Popham was cutting trees when one man was seriously injured after a tree fell on him. The injured man brought suit against Popham in late 2011 and won a default judgment. Popham later filed an insurance claim with Landmark, which it denied, stating that no policy was in effect on the date of the accident.

As Popham has failed to bring forth sufficient evidence to support his claims, the court affirmed the trial court’s grant of summary judgment.

Popham claims the trial court erred because it did not find that Greenberg was acting as an agent for Tapco and/or Landmark, and that therefore genuine issues of fact exist as to whether an insurance contract between Popham and Tapco and/or Landmark was in effect at the time of the December 1, 2010, accident.

The plaintiff has the burden of bringing forth evidence establishing the existence of the agency relationship. Greenberg indicated in his deposition that he was acting as an agent for Popham in bidding out his request for liability insurance coverage to multiple underwriters, including Tapco.  Greenberg claimed that he did not have the authority to issue a binder or an insurance policy on behalf of Tapco or Landmark. Both Tapco and Landmark repeatedly denied that Greenberg had ever been their agent.

Importantly, the label or characterization of the relationship by the purported agent is not sufficient to show what actual authority the agent had been given by the purported principal. While Popham fixates on the use of the terms “agent” and “subagent” by Greenberg and his counsel, those statements do not speak to any authority on Greenberg’s part to bind Tapco or Landmark to an insurance policy, and the defendants unequivocally deny that Greenberg has this authority elsewhere in the record. Popham failed to bring forward evidence that Greenberg was expressly granted the authority to bind coverage on behalf of Tapco or Landmark. Greenberg acted as a broker, transacting insurance with, but not on behalf of an insurer.

Where the only evidence that a person is an agent of another party is the mere assumption that such agency existed, or an inference drawn from the actions of that person that he was an agent of another party, such evidence has no probative value and is insufficient to authorize a finding that such an agency exists. A certificate of insurance, standing alone, is insufficient to authorize a finding that the agency is the agent of the carrier.

Under Georgia law, an insurance binder is a contract for temporary insurance pending the issuance of a formal insurance policy, and both the binder and any subsequent insurance policy are governed by contract law. Parties to an insurance contract are bound by its plain and unambiguous terms and the court’s job is simply to apply the terms of the contract as written.

The insurance binder issued clearly stated that coverage under the temporary policy would be deemed null and void if payment of the premium was not received by Tapco by November 29, 2010.   As it is undisputed that the payment was not received by the deadline, applying the clear terms of the binder, it expired on its own terms, and there was no coverage under it thereafter.

Popham’s remaining enumerations of error regarding claims against Tapco and Landmark for bad faith, punitive damages, and attorney fees are mooted by the courts rulings that there was no policy in effect at the time of the injury. As we have upheld the trial court’s ruling that neither Tapco nor Landmark had a contract of insurance with Popham in effect on the date of the accident, no bad faith claim can be asserted against either defendant for failure to pay a claim arising from that accident. Similarly, awards of punitive damages and attorney fees are derivative of underlying claims, where those claims fail, claims for punitive damages and attorney fees also fail.

ZALMA OPINION

People tend to throw around the terms “agent” and “broker” when dealing with insurance. An insurance agent transacts insurance with and on behalf of an insurer while an insurance broker only transacts insurance with, but not on behalf of, an insurer. In this case Popham’s agent was unable to place his insurance with a company he represented the “agent” acting as a “broker” placed insurance with a company he does not represent and his actions or non-action had no effect on the insurer.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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If you Don’t Read Policy at Least Read Notice

Pretending to Be Ignorant Does Not Toll Statute of Limitations

In my experience, and in the experience of the Supreme Court of Rhode Island, no one reads insurance policies. Even professionals, whether physicians or lawyers, fail to read the policy. They rely on insurance agents or brokers without obtaining the promise of the agent or broker to act in a fiduciary capacity. In so doing the person  insured refuses to accept blame for their own error and attempt to recover from their ignorance and stupidity by suing the agents and brokers.

In Faber v. McVay, — A.3d —-, Supreme Court of Rhode Island, 2017 WL 924153 (3/8/17) the Rhode Island Supreme Court dealt with a doctor’s claim that the statute of limitations did not apply to him because he failed to read his policy or the summaries provided to him by his insurers and agents.

FACTS

Charles S. Faber, M.D. and Karen M. Faber (collectively, plaintiffs), appealed from a grant of summary judgment in favor of the defendants, his agents and brokers (collectively, defendants), on the plaintiffs’ claims of insurance malpractice. The Superior Court directed the entry of summary judgment on the basis that the plaintiffs’ claims were time-barred by a three-year statute of limitation for insurance malpractice claims.

According to both Dr. Faber and agent McVay, Dr. Faber expressed a desire to obtain the best and maximum insurance coverage. For the October 2002 to October 2003 term, Dr. Faber’s automobile insurance was written by Vigilant Insurance Co.  (Vigilant) and included $5,000,000 of underinsured motorist bodily injury (UM) coverage.

Dr. Faber inquired with McVay as to whether a different carrier could provide the same coverage for a reduced premium; it is further alleged that McVay reported to Dr. Faber that he could obtain the same coverage and lower his premium payments by contracting with Progressive Insurance for $250,000 in UM coverage and with Vigilant for an umbrella policy of $5,000,000 that also included UM coverage. McVay relayed a different version, stating that she informed Dr. Faber that the policies were different and that they would “come back and bite him in the a**.” Nonetheless, Dr. Faber directed McVay to make this change, which reduced his premium by $4,951. The policy changes became effective on December 11, 2002. The umbrella policy with Vigilant provided for $5,000,000 in excess liability only, but it did not include UM protection.

Although Dr. Faber was sent notice of these changes, which included succinct summaries of his coverages, it is undisputed that he failed to read the coverage update. Over the years, he also received notices that detailed his automobile insurance coverage, usually after he added or removed vehicles from his policies. Nonetheless, Dr. Faber testified at his deposition that he did not read these notices but filed them in a drawer because he relied on McVay’s insurance expertise. Doctor Faber maintained that he assumed that his automobile policies provided maximum coverage for UM.

On April 24, 2007, Dr. Faber was injured in a motor vehicle accident that occurred in Scottsdale, Arizona. After he exhausted the tortfeasor’s insurance in the amount of $250,000, he attempted to submit a claim to Vigilant for his excess damages. He was informed that his Vigilant policy did not provide UM coverage, but only excess liability.

Plaintiffs filed an action against defendants, alleging that defendants negligently failed to adequately provide the insurance coverage that he expected.

Summary judgment was granted in favor of all defendants. Dr. Faber appealed.

ANALYSIS

In Rhode Island, a cause of action for insurance malpractice “shall be commenced within three (3) years from the time of the occurrence of the incident which gave rise to the action[.]”   The plaintiffs’ argument is two-fold: First, plaintiffs maintain that the limitation period was tolled until Dr. Faber was injured in an automobile collision and sought UM benefits because he could not reasonably have discovered his claim for damages until he was denied coverage under the Vigilant policy. Second, plaintiffs aver that, to the extent that the discovery date hinges on notice of the wrongful conduct as opposed to the injury, Dr. Faber did not discover, nor should he have discovered, the wrongful conduct because a reasonable person does not read his or her insurance coverage updates.

The Rhode Island Supreme Court decision in Burns v. Connecticut Mutual Life Insurance Co, 743 A.2d 566 (R.I. 2000) is instructive. In Burns, the plaintiff purchased a disability insurance policy from the defendants in 1988, but his application for the policy contained inaccurate information.  The focal point of the inquiry was not on when the plaintiff learned of the extent of his damages, but rather when the plaintiff discovered or should have discovered the liability causing conduct.

Under the interpretation that plaintiffs urge upon the Court, an insured would be free to ignore deficiencies in his or her policies or coverage and be relieved from taking corrective action unless and until there was a denial of coverage. The discovery rule does not toll the limitation period until the point when damages reasonably are discoverable, but when the negligent conduct is or should have been reasonably discovered.

In this case the issue of possible insurance malpractice arose in late 2002, when, in an effort to reduce Dr. Faber’s premiums, McVay changed carriers and failed to obtain additional UM insurance coverage for her client. Doctor Faber received a coverage update of the changes made to his policy, which indicated that the policy was effective on December 11, 2002.  This new coverage is described as “EXCESS LIABILITY ONLY.” This coverage stands out even more because the previous coverage for the two deleted vehicles is listed as “VEHICLE LIABILITY, UMBI, UMPD.” It was clear that the coverages in the policies were not identical.

Dr. Faber neglected to read the coverage update. The second allegation of malpractice occurred in February 2006 when Albright and M & S allegedly failed to obtain adequate UM coverage. Doctor Faber also received notice of this renewal, which included a summary of his coverage, but he failed to read this notice as well.

The plaintiffs urged the Supreme Court to hold, as a matter of law, that a reasonable person exercising reasonable diligence does not read his or her coverage updates. Doctor Faber was not charged with reading every iteration of insurance jargon in his policies. In fact, the Supreme Court recognized that the detailed provisions of insurance contracts are seldom read by the consumer. Doctor Faber was bound to act as a reasonably diligent insured—to at least peruse a personalized summary of the policy’s coverage.

To accept Dr. Faber’s present assertions of assuming the coverage was the same could leave an insurer exposed to whatever risks an insured could later persuade a jury he had been thinking were covered — so long as he had been careful not to read the policy.

The Supreme Court also relied upon the fact that the changes in Dr. Faber’s policies reduced his premium by $4,951, not an insignificant savings. Such a substantial reduction should have likewise alerted this busy and successful professional that something was amiss, such that he would have read the declarations page or contacted his agent. A reasonable person would have, at a minimum, perused the summary pages of the coverage update to ensure that the policy changes were correct and adequate, especially in light of the sizable reduction in the premium.

Because the complaint was filed nearly seven years after the first notice the suit was untimely. As a result, plaintiffs’ claims  were untimely and summary judgment was appropriate.

ZALMA OPINION

I have examined under oath hundreds of people who were making claim on an insurance policy. I always ask if they had read their policy. Most laughed and admitted they had not read their policy. Only two claimed they read the policy and understood it – Both Lied. Dr. Faber told the truth – he did not read the policy nor did he read the advice of his agents of the coverage available. Rather, he wanted his lack of attention to cause the court to allow him to avoid the effect of the statute of limitation.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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No Coverage to Replace Defective Work

Settlement Agreement Contrary to Its Intent Eliminated Coverage

As I have opined in these pages taking an assignment from a tortfeasor to get the right to sue an insurer is not a wise or profitable course of action. Although insurance companies have assets sufficient to pay almost any damages against an insured those assets do not change the facts of the case or the wording of the policy. A plaintiff that is able to get a judgment against a person gives ups its rights to collect from the tortfeasor when it makes such an arrangement. Before taking such a course of action the plaintiff should first establish that the defendant’s only asset is the insurance  policy and that there is some potential for the defendant to have the right to collect under the policy.

In Allied Property & Casualty Insurance Company, et al v. Metro North Condominium Association, United States Court of Appeals, Seventh Circuit, 2017 WL 927789, No. 16-1868 (3/8/17) the parties failed to follow the two basic requirements.

FACTS

Allied Property and Casualty Insurance Company issued a commercial general liability policy insuring a subcontractor who worked on a multi-unit residential property owned by Metro North Condominium Association. In 2006 the Metro North property sustained extensive water damage caused by the subcontractor’s defective window installation. Metro North and the subcontractor reached a settlement in which the subcontractor assigned to Metro North its right to any insurance proceeds covering the damage. The subcontractor’s insurers (Allied and another insurer named AMCO) sued, seeking declaratory judgment that they were not required to cover the losses claimed in the settlement.

Over ten years ago, Metro North Condominium Association hired a developer to build a condominium in Chicago. The developer used two subcontractors, CSC Glass and CSC Construction (collectively called CSC), to install the building’s windows. CSC installed the windows defectively, and as a result the building sustained significant water damage following a rain storm in October 2006. The condominium unit owners also incurred personal-property damage.

In 2009 Metro North sued the developer in Illinois state court for more than $5 million in damages. The developer apparently turned out to be insolvent, and in 2013 Metro North filed a fourth amended complaint that added a claim against CSC for breach of the implied warranty of habitability. Metro North also brought a negligence claim against CSC, but that claim was dismissed with prejudice because it was filed after the statute of limitations had expired.

In 2015 Metro North and CSC reached a settlement in which Metro North dismissed its pending lawsuit. In exchange, CSC assigned to Metro North CSC’s rights to payment, if any, of up to $700,000 of insurance coverage from Allied Property & Casualty Insurance Company (“Allied”). At the time of the settlement, the only pending claim against CSC in the underlying lawsuit was Metro North’s claim for breach of the implied warranty of habitability. The settlement further specified that it was not intended to compensate Metro North for the cost of repairing or replacing CSC’s defectively installed windows, but rather for the resultant damage to the remaining parts of Metro North’s condominium and to the unit owners’ personal property. By so doing the drafters of the contract apparently failed to read the policy wording.

Allied insured CSC under a standard commercial general liability policy (CGL policy. The policy contained a number of exclusions identifying damages for which there was no coverage. Several provisions excluded coverage for damage to the particular part of the relevant property worked on by CSC, or for the cost of repairing or replacing CSC’s own defective work.

When Allied learned of CSC’s settlement, it sued Metro North in federal court, seeking a declaratory judgment that it was not liable for the damages claimed in the settlement.

ANALYSIS

In Illinois, an insurer has a duty to indemnify when the insured becomes legally obligated to pay damages in the underlying action that gives rise to a claim under the policy.

The Seventh Circuit was asked to determine whether Allied’s policy requires it to indemnify CSC (and hence CSC’s assignee, Metro North) for the damages claimed in CSC’s settlement. Allied has a duty to indemnify only if the damages stemming from the underlying claim that resulted in liability actually fall within the policy’s coverage. According to the settlement, Metro North’s claim for breach of the implied warranty of habitability is the only claim giving rise to CSC’s liability. Allied is only liable if the legally recoverable damages stemming from that claim are covered by the policy.

The measure of damages for a breach of the implied warranty of habitability is the cost of repairing the “defective conditions,” the defectively installed windows. Illinois courts have concluded that CGL policies like Allied’s do not cover the cost of repairing the insured’s defectively completed work. Illinois conclude that CGL policies are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products because they are purely economic losses.

What is more, notwithstanding the limited recovery available for breach of the implied warranty of habitability, the settlement indicates to the destruction of the claims of Metro North, was not seeking the cost of repairing CSC’s defectively installed windows.

Breach of the implied warranty of habitability was the only legal theory in play at the time of the settlement. That theory does not allow for the recovery of damages covered by the policy.

Liability for the cost of remedying CSC’s defectively installed windows—which is the only cost for which CSC was liable based on Metro North’s only claim against it—is not covered under Allied’s policy.

Finally, Metro North lacks standing to sue on behalf of the individual unit owners for damage to their personal property. Accordingly, to the extent the damages identified in the settlement are premised on the unit owners’ loss of personal property, Metro North has no duty to indemnify for the additional reason that the damages do not arise from a claim on which Metro North had standing to recover.

The settlement damages for which CSC incurred liability do not fall within the coverage of Allied’s policy. Because CSC did not become legally obligated to pay any sums to which the insurance applied, there is no duty to indemnify.

ZALMA OPINION

The plaintiffs in this case were hoist upon their own petard. They wrote, or agreed to, a settlement agreement that totally destroyed the right to seek indemnity from an insurance company who provided no coverage for the claims they assumed. Lawyers and litigants who do not read and understand an insurance policy before filing suit are doomed to failure.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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FRAUD AND THE TORT OF BAD FAITH

How To Stop Fraud

Insurance fraud is more often than not, successful. No one knows how much is taken by insurance fraud perpetrators from the insurance industry. It has been estimated to take as little as $80 billion to as much as $300 billion or more a year from the insurance buying public.

The Tort of Bad Faith Encourages Fraud

In the 1960’s and 70’s the insurance industry abused some insureds to avoid paying legitimate claims. Without a factual basis, insureds were accused of arson or other variations on insurance fraud. Indemnity payments were refused on the flimsiest of excuses. People were found to have diseases that only horses could catch. Disability payments were refused because an insured was wheeled in her wheelchair to church one day and, therefore, was not totally house-confined. Insureds were driven into bankruptcy when reasonable demands within policy limits were refused.

To stop this abuse, the courts of the state of California invented the tort of bad faith breach of an insurance contract. Many other states have followed the lead. Until the invention of the tort of bad faith all that an insured could collect from an insurer that wrongfully denied a claim were the benefits due under the policy. In the tort of bad faith, the courts allowed the insureds to collect, in addition, the entire panoply of tort damages, including punitive damages.

The tort of bad faith worked as a deterrent. Insurers treated the insureds better. The threat of punitive damages made insurers wary of rejecting any claim. The creation of the tort of bad faith was in many ways a good thing for insurers and insureds. What the courts that created the tort of bad faith did not recognize was that it was also the key to Pandora’s box.

The Law of Unintended Consequences

The “Law of Unintended Consequences” can be defined as the understanding that actions of people — and especially of governments or the courts — always have effects that are unanticipated or unintended. Insurance is controlled by the courts, through appellate decisions, and by governmental agencies through statute and regulation. Compliance with the appellate decisions, statutes and regulations – different in the various states – is exceedingly difficult and expensive.

As Justice Kaus of the California Supreme Court noted:

The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

The logarithmic growth of insurance fraud in the state of California, and other states that have allowed tort damages for bad faith breach of insurance contracts, may be directly traced, in part, to the judicial creation of the tort of bad faith. Before the tort of bad faith, insurers with a reasonable belief that an insured was presenting a fraudulent claim would simply refuse to pay it with a statement to the insured that the claim was fraudulent. Persons perpetrating the fraud did, in most cases, accept the refusal as a cost of doing business and went on to the next fraudulent claim. After the recognition of the tort of bad faith, those who perpetrated fraudulent insurance claims that were denied went to lawyers instead. Suits for bad faith popped up like wild flowers in the desert after a rainstorm.

How the Tort of Bad Faith Helped Fraud Perpetrators

Juries, angered by insurers accusing their insureds of fraud, punished the insurers with multimillion dollar judgments. After each judgment, hundreds of cases settled (even though no monies were owed) for fear of being painted with the same brush. Fraud units that had been instituted in the 70’s were disbanded in the late 80’s because of fear of punitive damage judgments.

The courts, legislatures and the insurance departments of the various states must recognize that an insurer with the best of all possible fraud investigation units will err. A company with the highly trained and motivated fraud investigation unit (compelled to exist by statute statutes) made up of professional investigators and attorneys will eventually err. The public, and those who serve on juries, must understand that an aggressive fraud investigation, even if it reaches an incorrect result, is not malicious.

Today, if a jury believes the insurer was wrong in its decision, it will award punitive damages, regardless of the instructions read to it by the judge. Insurers are not liked. The bad publicity that was given to insurers by the early bad faith cases has poisoned the public image of insurers. Insurers are often prejudged. Some defense lawyers contend that before the first witness is sworn in three jurors are lost and counsel must convince the remaining nine while the plaintiff only needs to convince six of the jurors without anti-insurer prejudice.

As a business necessity, insurers must have the confidence of the public that they are financially sound, secure and have an overabundance of funds available to pay claims. The need to show the security of the company to the public has the effect of convincing juries that a multi-million dollar verdict against the insurer will not hurt it but will merely get its attention. Plaintiffs’ lawyers disingenuously tell juries that they don’t want to harm the insurance company. They argue that a $10 million verdict might cause an itch in the corporate pocketbook sufficient to cause management to scratch away the need to reject claims. The argument is hard for a jury of working people to withstand.

The tort of bad faith, and the punitive damages that seem to go with it, have, in my opinion, served their purpose. Insurers now have professional claims departments. Insureds are almost universally treated with courtesy and respect. Legitimate claims are paid with alacrity. Insurance fraud continues to grow.

The fear of punitive damages has made the fight against fraud almost impossible.

When I actively practiced law in California I had to contend daily with an insurer who wanted to fight fraud aggressively but who needed to decide to pay what appeared to be a fraudulent claim rather than face the exposure of a bad faith or punitive damage judgment.

I can, as my mentors taught me 45 years ago, state my opinion that an insurer should spend millions for defense and not a dime for tribute. However, practical insurance professionals have a need to resolve litigation as inexpensively as possible and will make a business decision to pay the fraud rather than take a chance on an adverse verdict. The decision may be an intelligent business decision but it is morally wrong and violates the reason for the existence of insurance.

ZALMA OPINION

As with all things in insurance, the attitudes of insurers move in cycles. More often than not, I am now called upon to testify in bad faith cases that the insurer insists on taking to trial by jury rather than pay off a scofflaw. I can only hope that this cycle continues and more attempts at fraud are defeated.

In my experience, when an insurer desires to defend a fraudulent claim it must have first completed a thorough investigation and collected sufficient admissible evidence to prove to a trier of fact that its denial of the claim was appropriate in accordance with the policy contract and local law. If not they will see me testifying for the other side.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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What is Insurance?

Easy to Read & Understand

Insurance policies are contracts. To form a contract an insurer must make an offer that is accepted by a potential insured who then pays consideration – premiums – for the promises made by the insurer. In California insurance is defined as: “Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code § 22]

No one has a right to insurance. It is a contract between an insurance company and a person seeking insurance called an insured.

An insurer and an insured agree that the insurer will provide indemnity to the insured as a result of a contingent or unknown event that causes loss to the insured. The language of insurance contracts comes in multiple formats with an almost infinite variety of terms and conditions. It is recognized that an insurance contract can be written to contain nearly any terms that the parties to it choose to incorporate within the contract of insurance. Insurance companies and their insureds are free to agree to any terms in a contract of insurance so long as they do not offend some rule of law or contravene public policy.

Contrary to what the public believes, property insurance, like a homeowners policy, does not insure property. It insures people who have an interest in real or personal property, who face the risk of losing that property to unknown or contingent perils, and who are named as insureds by the policy contract. Standard, old form insurance property insurance policies, only insure against the risk of loss by specified perils like fire, lightning, windstorm, or hail. If the insured suffers a loss to his or her house by one of the specified perils like fire the person insured will be indemnified for the losses incurred. Modern property insurance policies, like homeowners policies, insure against direct risks of physical loss not specifically excluded. Coverage would be available, therefore, unless an excluded loss like flood or earthquake occur.

The risk of the loss is spread among the customers of the insurer so that the cost of insurance is affordable. It is “first party” insurance against risks faced by property in which the insured (the first party to the contract of insurance) has an interest and by the loss of which the insured would be damaged.

First party property insurance is a contract of personal indemnity. It does not follow title to the land. The insurer makes a promise to the first party, the insured, that if there is a loss to property in which the insured has an interest, to pay indemnity for the loss. To obtain that indemnity the insured must fulfill the promises it made to prove its loss and cooperate with the insurer’s investigation.

The insurance policy contract is considered a contract of utmost good faith. That means that neither party to the insurance contract will do anything to deprive the other of the benefits of the contract. Therefore, if your house is damaged by fire or your contents are stolen, you – the insured – are obligated under the terms of the policy to promptly report the loss to the insurer and cooperate in its investigation to determine the extent of the loss. The insurer on the other hand is obligated by the policy, and local law, to treat you fairly and in good faith and indemnify you for every loss you incurred if caused by a peril insured against or not excluded.

The insurer calculates the actual cash value, or fair market value of the loos, and will pay that amount as soon as it is established by inspection of the property and your presentation of evidence concerning the purchase and value of the property. You are required to prove the extent of the loss and will usually be asked to present a sworn statement in proof of loss that is prepared with the assistance of the adjuster representing the insurance company. If you have a modern homeowners policy you are entitled to full replacement cost – new for old on your dwelling and if you pay extra you can have full replacement cost on the contents.

If you don’t have time to prove the loss yourself you can hire a licensed public insurance adjuster who will charge you anywhere from five to fifteen percent of the total amount paid by the insurance company. Of course, when you pay the fee charged by the public adjuster, you will not have enough to replace that lost or damaged.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Private Limitation of Action Enforced in Oregon

Insurer’s Consistent Requirement that Insured Follow Policy Conditions Honored

Insurance contracts – to protect against stale claims – contain a private limitation of action provision that requires filing of suit within a set period of time, usually one or two years.

In Brockway v. Allstate Property and Casualty Insurance Company, Court of Appeals of Oregon, — P.3d —-, 284 Or.App. 83, A155335 (March 1, 2017), after a theft at their home, plaintiffs filed claims with Allstate, their insurer, under two policies. More than two years after the loss, Allstate denied coverage for the loss and plaintiffs sued Allstate relating to that denial seeking, among other things, damages for breach of contract and for breach of the implied covenant of good faith and fair dealing.

Allstate moved for summary judgment, arguing that the action was untimely in light of a two-year suit-limitation provision contained in the insurance contracts. The trial court agreed and granted the motion.

FACTS

On September 6, 2009, plaintiffs discovered that a hole had been cut in their fence, and that property had been stolen from their backyard. They reported the theft and after their first report discovered that additional property was missing (some from their boat and some from their travel trailer).

On September 17, 2010, Allstate sent a letter to plaintiffs regarding its investigation of their claims. The letter informed plaintiffs that they were required to provide Allstate with a sworn statement in proof of loss, and to include “documentation that supports the ownership and value of any stolen items claimed.”  Allstate also informed plaintiffs that the “statute of limitations on this claim expires 2 years from the date of loss,” insisted on “complete compliance with all of the terms of the [insurance] policy and the laws of Oregon,” reserved all of its rights and defenses in conjunction with the policy, and stated that “[n]o waiver or estoppel of any kind is intended, nor may any be inferred.” Thereafter, Allstate sent plaintiffs a number of letters seeking additional documentation or information and stating that it was continuing to investigate the claimed loss. In September 2011, Allstate requested that plaintiffs participate in examinations under oath. After those examinations, Allstate again sought additional information and documents and continued to investigate the loss until February 2012.

Plaintiffs sued Allstate on September 5, 2012. In its answer, Allstate raised as an affirmative defense the suit-limitation provision of the insurance policies.

ANALYSIS

Plaintiffs raised two assignments of error on appeal. It is undisputed in this case that the insurance contracts contain a clause providing that no one may bring an action against Allstate “related to the existence or amount of coverage or the amount of loss for which coverage is sought” for a claimed loss such as the one at issue in this case unless, among other things “the action is commenced within two years after the date of the loss.” It is also undisputed that plaintiffs’ action was commenced more than two years after the date of loss in this case.

Under the doctrine of equitable estoppel, a person may be precluded by his act or conduct, or silence when it is his duty to speak, from asserting a right which he otherwise would have had. The elements of equitable estoppel are as follows:

  1. There must be a false representation;
  2. it must be made with knowledge of the facts;
  3. the other party must have been ignorant of the truth;
  4. it must have been made with the intention that it should be acted upon by the other party;
  5. the other party must have been induced to act upon it.
  6. Furthermore, there must be justifiable reliance by the party seeking to invoke estoppel, and
  7. that reliance must be reasonable.

There is no evidence that Allstate made a misrepresentation to plaintiffs regarding the suit-limitation provision. Instead, the evidence is that Allstate informed plaintiffs that their time to file an action relating to their claims and that, although the insurer was not required to “remind” the plaintiff of “the suit limitation provision in her policy,” it nonetheless did so.

Allstate’s numerous communications with plaintiffs stated that it was continuing to investigate their claim. Allstate’s investigation of plaintiffs’ claims cannot be used to estop Allstate from asserting the suit limitation. In sum, the appellate court concluded that, on the facts in the summary judgment record, viewed in the light most favorable to plaintiffs, no objectively reasonable factfinder could conclude that Allstate should be estopped from raising the suit-limitation provision as a defense in this case.

In their second assignment of error, plaintiffs argue that, in any event, the trial court erred in granting summary judgment as to their claim for breach of an implied covenant of good faith. They contend that that claim is not covered by the Section I suit-limitation provision and is, instead, governed by a different suit limitation provision in the insurance contracts.

Allstate asserted before the trial court that plaintiffs could not maintain a claim for breach of the duty of good faith and fair dealing. The appellate court began by observing that plaintiffs’ claim for breach of the duty of good faith and fair dealing in this case sounds in contract. The duty of good faith and fair dealing is to be applied in a manner that will effectuate the objectively reasonable expectations of the parties to the contract.

There was no genuine issue of material fact with respect to a breach of the duty of good faith and fair dealing. Allstate was, therefore, entitled to judgment as a matter of law.

Allstate repeatedly informed plaintiffs that it insisted on compliance with all policy terms, reserved its rights and defenses, and that no waiver or estoppel of any kind was intended or should be inferred. In short, none of the conduct plaintiffs assert on Allstate’s part contravened plaintiffs’ reasonable expectations based on the terms of the contracts.

ZALMA OPINION

Oregon applied the contract as written. California, and other states, hold that the private limitation of action is tolled – held in abeyance – from the date the claim was made until it was denied. If this case was brought in California Allstate would have lost. Oregon, refusing to rewrite the policy, properly applied the limitation.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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“Arises Out Of” is Unambiguous

Ninth Circuit Supports Clear and Unambiguous Exclusion

Although the Ninth Circuit has been called the court of reversal it also will often write clear decisions that make logical and legal sense. Therefore, when a contractor sued its insurance company for defense and to pay an amount it settled a construction defect claim, when the facts established that the loss for which coverage was sought arose out of the work of the contractor and fell afoul of  interpretations of the phrases “that particular part” and “arises out of” when applied to a general contractor. Poor workmanship and defective materials are usually considered a commercial risk.

In Archer Western Contractors, Ltd., an Illinois Corporation v. National Union Fire Insurance Company Of Pittsburgh, Pennsylvania, a Pennsylvania Corporation, United States Court of Appeals, Ninth Circuit, 2017 WL 816891, No. 15-55648 (3/2/17) the insurer’s motion for summary judgment was granted.

FACTS

AWC served as the general contractor for the San Diego County Water Authority’s (“Water Authority”) emergency water storage project. After settling a construction defect lawsuit brought against it by the Water Authority, AWC sued one of its insurers, National Union, for failing to indemnify portions of its settlement obligations. The district court determined that two exclusions barred coverage for the underlying construction defect claims, and it granted summary judgment in favor of National Union.

Here, the alleged property damage was to the pump house and turbine generators, discrete portions of the property for which AWC was partially if not fully responsible, and the damage flowed from its allegedly defective work on the property.

ANALYSIS

Under California law, an insurer’s duty to indemnify runs only to claims that are actually covered by the policy, in light of the facts proved. Where, as here, a case settles prior to trial, the duty to indemnify is determined on the basis of the settlement, i.e., the undisputed facts set forth in the underlying complaint and those known to the parties.

The district court properly concluded that exclusions e(5) and e(6) of National Union’s insurance policy precluded coverage of the underlying construction defect claims. The e(5) exclusion precludes coverage for property damage to “that particular part of real property on which [the contractor] … [is] performing operations, if the Property Damage arises out of those operations,” and the e(6) exclusion precludes coverage for property damage to “that particular part of any property that must be restored, repaired, or replaced because [the contractor’s] Work was incorrectly performed on it.” Under California law, exclusionary clauses are interpreted narrowly against the insurer but they are not applied religiously against the insurer. If clear they must be applied.

The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer California courts have consistently adopted broad interpretations of the phrases “that particular part” and “arises out of” when applied to a general contractor.

In light of the California courts’ consistently broad reading of this phrase there is no indication that the exclusionary language is ambiguous.

ZALMA OPINION

Insurance companies have the unquestioned right to write an insurance policy as it desires and to which the insured agrees as long as the language of the contract is not ambiguous. In California the wording phrases “that particular part” and “arises out of” when applied to a general contractor are unambiguous. Insurance is not a guarantor of the workmanship of a contractor.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Criminal Intent Proved by Circumstantial Evidence

36 Months in Jail For Fraudulently Taking $19.9 Million From Medicare

Defrauding the United States of America has become a popular sport and profit center for those health care providers that disposed of their moral and ethical compass. It is so easy to steal from the government that it took six years for the government to discover that fraud was happening when a single doctor represented face to face interviews with 150 patients a week.

In United States Of America v. Janice Troisi, Defendant, USCA, First Circuit, No. 16-1046, February 24, 2017 after a bench trial, Janice Troisi was convicted in 2015 both of conspiracy to commit healthcare fraud and of healthcare fraud, for her role from January 2010 forward in an extensive scheme between 2006 and 2012 to defraud Medicare by billing the program for services provided to patients falsely presented as eligible to receive them. Troisi does not dispute the role that she played in the fraudulent scheme, which involved billing the government for $27.6 million in false claims, $19.9 million of which were paid.

FACTS

On September 18, 2013, Troisi and co-defendant Michael Galatis [See ZIFL, 3/1/17)] were indicted by a grand jury in the District of Massachusetts on one count of conspiracy to commit healthcare fraud and eleven counts of substantive healthcare fraud.  The indictment alleged that Galatis, the owner of At Home VNA (“AHVNA”), a home health-services agency, and Troisi, AHVNA’s Director of Clinical Services since January 2010, had used AHVNA as a vehicle for defrauding Medicare by providing Medicare-reimbursable in-home nursing services to ineligible patients and then billing Medicare for those services based on falsified documents.

Medicare determines whether a beneficiary qualifies for coverage of home health services – and, in turn, whether and to what extent to reimburse the beneficiary’s healthcare provider for the cost of such services – based primarily on information contained in two forms submitted by the healthcare provider. The prosecution charged that the AHVNA scheme proceeded as follows. AHVNA aggressively recruited Medicare-insured individuals for in-home nursing services, for which they could not legally receive Medicare coverage, either because they were not homebound or because they were not in need of such services. Troisi instructed AHVNA’s nurses to fill out those patients’ OASIS Forms to represent, inaccurately, that the patients were incapable of caring for themselves. Troisi then personally prepared a Form 485 for each patient, populating it with whatever false information was required to obtain Medicare coverage for in-home nursing services. And AHVNA’s Medical Director, Dr. Spencer Wilking, signed the as many as 150 forms a day without reviewing their contents or even, in many cases, meeting with the patients.

Troisi and Galatis proceeded jointly to a jury trial on October 27, 2014. The district court declared a mistrial as to Troisi on November 30, 2014, after she became too ill to proceed. Troisi waived her right to a jury on retrial.

In total, the government introduced 217 documentary exhibits, including the transcripts of testimony at the Galatis trial. Its witnesses included patients linked to the substantive fraud counts, nurses who had provided care to those patients, most of those patients’ primary care providers, and Dr. Wilking. At the conclusion of the government’s case, Troisi moved for a judgment of acquittal, which was denied. In her defense, Troisi called no witnesses and introduced five exhibits. The thrust of her defense was that the government had not proved that she possessed the requisite mens rea (criminal intent) to commit the relevant crimes.

On August 5, 2015, the day after the trial ended, the district court delivered its verdict from the bench, finding Troisi guilty on all of the conspiracy and fraud counts. The court concluded that Troisi had participated in a “sophisticated scheme among the senior managers [of AHVNA] ․ to provide inaccurate information” to the government so as to secure payments, “which the [g]overnment was not obligated to make.” While “[h]er knowing and willful participation in this scheme with the intent to defraud [was] largely demonstrated circumstantially,” the court found sufficient evidence that Troisi had “manipulat[ed]. . . the staff and ․ the paperwork” with the purpose of “extracting monies that [AHVNA was] not entitled to ․ through fraud, that is, [the] misrepresentation of material facts.” The court sentenced Troisi to 36 months of imprisonment to be followed by three years of supervised release. This appeal followed.

ANALYSIS

Where the factfinder drew inferences from circumstantial evidence, the court will not second-guess its ensuing conclusions as long as (1) the inferences derive support from a plausible rendition of the record, and (2) the conclusions flow rationally from those inferences. Ultimately, the court asks whether any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.

A defendant violates 18 U.S.C. § 1347 if she knowingly and willfully executes a scheme intended to defraud a government health-care program and she violates 18 U.S.C. § 1349 if she engages in a conspiracy to execute such a scheme. The government may carry its burden of proof as to both offenses wholly through circumstantial evidence.

First, Troisi cannot claim that she was ignorant. She was deeply familiar with the regulatory scheme that she helped contravene. She knew what was permitted and what was not. Troisi demonstrated her familiarity with the relevant regulations in multiple conversations in 2010 and 2011 with Martha Fisk of Holyoke Health Center, who called AHVNA to express concern about the fact that all of the orders prescribing home health services to Holyoke patients had been signed by Dr. Wilking, who had not seen the patients, rather than by the patients’ primary care physicians. Troisi insisted that AHVNA’s paperwork was fine because the new “face-to-face” requirement had not yet taken effect.

Troisi also exercised total control over AHVNA’s preparation of the documentation required for Medicare reimbursement – the aspect of the scheme that directly contravened the regulations she knew so well. In fact, she oversaw AHVNA’s team of nurses, who were hired fresh out of nursing school with no experience in home health services or Medicare regulations.

Further, in exercising her control over the documentation process, Troisi instructed the nurses to put in particular information regardless of whether it was true or not. At oral argument, Troisi tried to put an innocent gloss on this behavior, explaining that she was just an “aggressive” boss and that her rules were aimed at ensuring that the nurses qualified patients for home health services she believed the patients needed. But Troisi’s “insistence” on qualifying patients for Medicare-reimbursable services creates a strong inference that she did not care whether the services served a legitimate medical purpose and that she therefore not only knew of the fraud, but actively played a role in directing it.

This evidence was sufficient to permit a reasonable factfinder to conclude, beyond a reasonable doubt, that Troisi conspired to commit, and indeed committed, healthcare fraud. The circumstances underlying each of the substantive fraud counts share the same badges of fraud that characterize the overall scheme and the First Circuit affirmed the convictions.

ZALMA OPINION

This is a perfect example of how to steal successfully from the U.S. — don’t be greedy. Had Troisi kept her theft small, had Dr. Wilking only signed 10 certificates a week instead of the impossible 150, the crime would have gone on forever. It is time the U.S. government installs software like that which American Express uses to tell me I spent money on line or that I spent more than $1,000, sufficient to advise Medicare that one doctor is submitting certificates in a number physically impossible so that criminals like Troisi and Galatis are caught in the first year of the crime instead of after $20 million stolen over six years.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site 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 and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Insured Can’t Pass Its Mistake to the Broker

Insurance Broker Sued for Doing What the Insured Asked It to Do

The primary duty of an insurance agent or broker is to fulfill the orders presented to the agent or broker by the insured. If it errs in fulfilling the order it can be held liable. If it performs the order as requested it has no responsibility. In Homestretch Logistical Solutions, Inc. v. Johnson Lawrence Walker Insurance Company, Court of Appeals of Kentucky, 2017 WL 729747, NO. 2014-CA-001255-MR (2/24/17) an insurance agent was sued for doing exactly what it was asked to do by the insured that resulted – because of the insured’s error – in an accident where a vehicle was uninsured.

FACTS

Homestretch Logistical Solutions, Inc. (“Homestretch”), appealed the dismissal of its action against Johnson Lawrence Walker Insurance Agency (“JLW”).

Homestretch is a shipping company operating a fleet of semi-trucks, a number of which are leased from Penske Truck Leasing (“Penske”). Pursuant to its leasing agreements, Homestretch was obligated to maintain collision and comprehensive insurance coverage on all trucks leased from Penske. Homestretch engaged JLW to procure insurance coverage to satisfy the lease requirements which JLW performed the request and insured all leased Penske trucks without problem.

On April 23, 2013, a collision caused substantial damages to a 2011 Freightliner truck leased by Homestretch from Penske. Homestretch filed a claim under the insurance policy but National (the Insurer) denied the claim, stating the truck in issue had been specifically removed from the policy coverage on March 13, 2013, pursuant to instructions from JLW. Throughout this time period, Homestretch had paid National monthly premiums for the 2011 Freightliner as if it were covered.

After the accident it was discovered that the 2011 Freightliner was mistakenly removed from the policy because, Homestretch returned a 2012 Freightliner to Penske and sought to have it removed from the insurance policy. However, in an email to JLW, Homestretch erroneously identified the returned vehicle as the 2011 Freightliner which was damaged in the April collision.

Homestretch sued JLW and National accusing both of breach of contract and violation of the Unfair Claims Settlement Practices Act (“UCSPA”). It also asserted claims of negligence against JLW, and bad faith and violations of the timely settlement requirements required by Kentucky statutes.

Rather than answering the complaint, JLW moved to dismiss the action against for failure to state a claim upon which relief could be granted.

Based on these allegations, Homestretch contended the Complaint adequately set forth claims of negligence and breach of contract against JLW. Finally, because discovery had not yet commenced, Homestretch argued the motion to dismiss was premature and a waste of judicial resources. JLW replied, asserting Homestretch failed to address—and thereby conceded—the deficiencies in the bad faith claim. It noted Homestretch had not argued JLW was a party to the insurance policy nor that JLW had a contractual obligation of any kind to pay Homestretch’s claim under the policy issued by National. As it was not a party to the contract, JLW argued it could not be held liable for any breach thereof. Finally, JLW noted Homestretch admitted in its complaint that it sought to remove the 2012 Freightliner from the policy but identified the wrong vehicle in its communications with JLW, thereby negating any potential claims of negligence by JLW for removing the vehicle Homestretch directed to be removed as such action was based on and strictly complied with Homestretch’s express directions to do so.

The trial court agreed with JLW, finding the sole contract at issue was the insurance policy between National and Homestretch, to which JLW was not a party and could not therefore be held liable for any breach thereof. Likewise, because JLW was not an insurer, nor did it manage or control the disposition of Homestretch’s underlying claim, no action could lie against it for bad faith or violation of the UCSPA.

On Homestretch’s negligence claim, the trial court found JLW breached no duty owed to Homestretch and the erroneous removal of the 2011 Freightliner from the insurance coverage was caused solely by Homestretch’s own negligence and mistake, thereby relieving JLW of any potential liability. The trial court also determined Homestretch’s claim for punitive damages failed as a matter of law as no allegations of intentional misconduct or reckless disregard of Homestretch’s rights as an insured had been advanced pertaining to JLW. Having found no possible avenues of relief against JLW, the trial court granted JLW’s motion to dismiss.

Homestretch advances no argument the trial court erred in dismissing its claims for JLW’s alleged violations of the UCSPA or for punitive damages. Accordingly, the trial court’s judgment is affirmed as confessed in those respects.

ANALYSIS

Under Kentucky law, parties may only sue for a breach of contract if privity of contract existed. The proposition that privity of contract is the relationship between parties to a contract that allows them to sue each other but prevents a third party from doing so. In this action, there is no contract between Homestretch and JLW, as the trial court correctly found. The sole contract at issue is the insurance policy issued by National intending to cover Homestretch.  JLW’s name does not appear anywhere on or in the policy. Because JLW is not a party to the contract, no privity exists between it and Homestretch. Thus, Homestretch has no right to recover damages from JLW for any alleged breach of the insurance policy. Dismissal was proper.

Homestretch next argues the trial court erroneously concluded Homestretch’s mistake in identifying the 2011 Freightliner as the vehicle to be removed from the insurance coverage was the only negligent action involved in the instant suit. Homestretch attempts to shift liability to JLW based on a theory that JLW carelessly undertook its duty of ensuring Homestretch’s insurance needs were satisfied. In essence, Homestretch asked the trial court—and now this Court—to save it from its own mistakes.

The only alleged duty owed by JLW to Homestretch was to use reasonable care in procuring insurance coverage for the fleet. Homestretch admits JLW procured insurance through National and all of its vehicles were covered—including the 2011 Freightliner. It contends JLW breached its duty by carelessly removing a vehicle from the policy, subsequently resulting in damages to Homestretch.

As the trial court correctly concluded, JLW did exactly what it was tasked to do. It followed the explicit directions given by Homestretch to inform National to remove the 2011 Freightliner from the insurance policy.

Contrary to Homestretch’s assertion, the court could not say that JLW breached its duty nor that its actions were the legal cause of any injury incurred by Homestretch.

The financial losses sustained following the collision involving the uninsured 2011 Freightliner were occasioned solely because of Homestretch’s own actions and instructions.

ZALMA OPINION

JLW did exactly what it was asked to do. The suit, the trial court decision and the appellate decision made clear that an insured cannot sue its agent for failure to protect it against its own error in asking the wrong truck to be removed from its policy. No court, and certainly not this Kentucky court, will save a plaintiff from its own mistakes.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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’s Insurance Fraud Letter – March 1, 2017

Some Interesting and Important Words

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

  • Some Interesting and Important Words
  • Illumeo Continuing Education
  • California SIU Regulations
  • New from Barry Zalma
    • “Insurance Law”
  • Hard Fraud vs. Soft Fraud
  • Barry Zalma Speaks at Your Request
  • $4.3 Million for Defamation of an Insurance Company
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • Chiropractors Aren’t Authorized Doctors Under Florida PIP Statute
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • Other Insurance Fraud Conviction
  • Books from the American Bar Association
  • Six Years Successfully Stealing from Medicare Comes to an End
  • Zalma’s Insurance Fraud Letter
  • The Insurer’s Absolute and Unquestioned Right
  • The Legend.
  • Legal Disclaimer

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


Zalma’s Insurance 101

I have completed a video blog called Zalma’s Insurance 101 that consists 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.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the 1,022 videos follow: 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.


In the last 49 years that I have been in the business of insurance I have learned the one thing that is a certainty: the quality of insurance fraud perpetrators is almost non-existent. That means that it is so easy to steal from insurance companies that amateurs with no skills are jumping into the business of defrauding insurers. If the insurance industry learns enough about insurance fraud and defeats the claims of the amateurs the professional fraud perpetrators will go away and work easier crimes. If not, they will continue to bleed the insurance industry. It has been my desire, for the last 20 years Zalma’s Insurance Fraud Letter has been published, to help in the effort to make insurance fraud more difficult for the perpetrators and reduce what fraud takes from the insurance industry.

Because more insurers are training their people to recognize insurance fraud in this issue you may be surprised to see cases where fraud failed and the perpetrator spent time in jail even though the number of convictions seem to be shrinking.


New from Barry Zalma

I have started a new blog “Insurance Law Commentary by Barry Zalma” including a serialized novel, “Murder and Insurance  Fraud Don’t Mix” available at  http://zalma.com/insvideo/

Regards,

Barry Zalma

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Prima Facie Evidence of Insurance Needed

Insurer Must Prove Adverse Vehicle is Insured to Avoid UM Arbitration

I often praise the New York Appellate Courts for their ability to resolve a dispute in concise, clear and brief opinions.

Fiduciary Ins. Co. of America v. Greenidge, Supreme Court, Appellate Division, Second Department, New York — N.Y.S.3d —-, 2017 N.Y. Slip Op. 01353, 2017 WL 690924 (2/22/17) is such a perfect example that I have placed the entire opinion below, not only because it is brief but because it states an important rule of law concerning uninsured motorist arbitration.

In a proceeding pursuant to CPLR article 75, inter alia, to permanently stay arbitration of a claim for supplementary uninsured motorist benefits, the appeal is from an order of the Supreme Court, Kings County (Sunshine, Ct.Atty.Ref.), dated November 17, 2014, which, after a framed-issue hearing, granted that branch of the petition which was to permanently stay arbitration.

ORDERED that the order is reversed, on the law, with costs, that branch of the petition which was to permanently stay arbitration is denied, and the proceeding is dismissed.

The petitioner commenced this proceeding to stay arbitration of a claim for supplementary uninsured motorist benefits that was made by its insured, Renny Greenidge. Greenidge’s claim arose out of an automobile accident that occurred when his vehicle was struck by another vehicle. The other vehicle (hereinafter the hit-and-run vehicle) did not stay at the scene of the accident. After a framed-issue hearing, the Supreme Court (trial court) granted that branch of the petition which was to permanently stay arbitration. We reverse.

“An insurance carrier seeking to stay the arbitration of an uninsured motorist claim has the burden of establishing that the offending vehicle was insured at the time of the accident” (Matter of American Home Assur. Co. v. Wai Ip Wong, 249 A.D.2d 301, 301; see Matter of Eagle Ins. Co. v. Pusey, 271 A.D.2d 445, 445–446). “Once such a prima facie case of coverage is established, the burden shifts to the opposing party to come forward with evidence to the contrary” (Matter of American Home Assur. Co. v. Wai Ip Wong, 249 A.D.2d at 301; see Matter of Eagle Ins. Co. v.. Patrik, 233 A.D.2d 327, 328).

Here, the admissible evidence submitted by the petitioner at the framed-issue hearing failed to establish, prima facie, the existence of insurance coverage for the hit-and-run vehicle at the time of the subject accident (see Matter of Eagle Ins. Co. v. Pusey, 271 A.D.2d at 445–446; Matter of American Home Assur. Co. v. Wai Ip Wong, 249 A.D.2d 301; see also 11 NYCRR 60–2.3; cf. Matter of Liberty Mut. Ins. Co. v. McDonald, 6 AD3d 614, 615). Accordingly, the Supreme Court should have denied that branch of the petition which was to permanently stay arbitration and dismissed the proceeding.

ZALMA OPINION

This was a phantom car accident where the car that struck the insured escaped detection. The existence of insurance can’t be assumed. It must be proved. The insurer could not prove that the phantom vehicle was insured and, therefore, the arbitration must go forward.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Six Years Successfully Stealing from Medicare

Convicted after Stealing Almost $20 Million From Medicare

One of the greatest thefts of all time is that by health care providers against Medicare and Medicaid. For six years defendant Michael J. Galatis stole from the U.S. Government with impunity. His thefts were successful and unpunished until, after taking $20 million in payments unearned, the U.S. Attorney finally prosecuted Galatis.

In United States Of America v. Michael J. Galatis, United States Court of Appeals, First Circuit, 2017 WL 727548, — F.3d —-, No. 15-1322 (2/24/17) the First Circuit deal with his appeal of multiple convictions for fraud.

FACTS

Michael Galatis was convicted by a jury of conspiracy to commit healthcare fraud; healthcare fraud, and money laundering. The fraudulent activity took place from about January 1, 2006 to about October 2, 2012 and it involved billing Medicare for $27.6 million in false claims, about $19.9 million of which the government paid out to Galatis’ company, At Home VNA (“AHVNA”).

The government, without shame of paying out $19.9 million, to a criminal because they saved almost $8 million he billed allowing him to continue his criminal activities with impunity. What took them so long was not mentioned in the appellate decision.

Galatis argues that the district court committed reversible error by

  • allowing Galatis’ associate to testify that the associate had pled guilty to one count of healthcare fraud arising from the same scheme, without sua sponte giving a limiting instruction;
  • permitting certain lay and expert witness testimony, which Galatis characterizes as concerning the meaning of terms in the applicable Medicare regulations; and
  • denying Galatis’ preferred jury instruction as to the meaning of a particular certification requirement in the relevant Medicare provisions.

The statute allows a provider to serve the needy public with home health services if the individual who is the beneficiary of the services is “confined to the home”; “under the care of a physician who establishes the plan of care”; in need of at least one of a number of enumerated “skilled services as certified by a physician”; “under a plan of care” as specified under the relevant regulation; and receiving services “furnished by, or under arrangements made by, a participating [home health agency].”  Forms must be submitted to the US including a Form 485 Health Certification and Plan of Care (“Form 485”), where a physician certifies under pain of “fine, imprisonment, or civil penalty under applicable Federal laws,” that the beneficiary meets the requirements for Medicare coverage of home health services from a physician who certifies in a separate addendum that a “face-to-face patient encounter” has occurred.

Michael Galatis set up and owned MJG Management, a home health agency, which operated under the name At Home VNA. The prosecution presented evidence from AHVNA nurses and AHVNA’s Medical Director that AHVNA had recruited individual patients by sending nurses to host “wellness clinics” at assisted living centers and public housing facilities, where the nurses provided services like flu shots, and in doing so collected insurance information and “convinc[ed residents] to sign on with [AHVNA].” Nurses would also sometimes recruit patients door-to-door.

These nurses also testified that Galatis and/or Janice Troisi, his former colleague and codefendant, instructed the nurses to fill out OASIS Forms inaccurately, telling the nurses never to score a patient as a “zero” in the “activities of daily living” category; and to write their nurses’ notes using words that made the care provided appear like skilled nursing services, even when it was not, and words that emphasized the patients’ need for care.

Dr. Spencer Wilking, AHVNA’s Medical Director, was responsible for signing the Form 485s submitted to HHS. Dr. Wilking testified that in the first year after he joined AHVNA, around 2006, he conducted visits with patients before completing these forms. But beginning in 2007, as the business expanded, Dr. Wilking began signing the forms without conducting the necessary visits or any other review. By 2011, Dr. Wilking was signing approximately one hundred and fifty Form 485 certifications at each weekly AHVNA staff meeting. That it was physically impossible to have face to face meetings with one hundred fifty patients a week, did not raise suspicions in the government entity paying the submitted billing.

Dr. Wilking was paid a monthly consulting fee – Initially $2,500 per month, and then $3,500 per month as AHVNA’s patient population increased – for his services to AHVNA. Dr. Wilking testified he “chose to ignore” his own concerns and continued to sign the Form 485 certifications “because [he] was being paid quite a lot of money to do so.” Before Galatis’ trial, Dr. Wilking was separately indicted and pled guilty to one count of Medicare fraud arising from his conduct at AHVNA.

Galatis did not dispute the sufficiency of the evidence supporting his convictions, but made three claims that the district court committed reversible error at trial. He argues that the district court should have given sua sponte a limiting instruction as to Dr. Wilking’s testimony regarding Dr. Wilking’s guilty plea. He argues that the court wrongly permitted testimony interpreting the legal meaning of the applicable Medicare regulations. And he argued that the district court erroneously rejected his preferred jury charge regarding the face-to-face encounter regulation.

ANALYSIS

Galatis argues that the district court erred by not giving a limiting instruction after admitting evidence of Dr. Wilking’s guilty plea and that this purported error and questions from the government permitted the jury impermissibly to use Dr. Wilking’s plea as substantive evidence of Galatis’ guilt.

The prosecution moved to admit a copy of Dr. Wilking’s plea agreement into evidence. The district court initially stated that it would not admit a copy of the plea agreement itself, but after defense counsel affirmatively stated that he had “no objection” to the document’s admission, the court allowed the plea agreement into evidence.

When asked by the prosecutor about who else was involved in the fraud, Dr. Wilking stated that Galatis and Troisi had participated in the fraud and that Galatis “was the director … and the planner and the executor of the fraud.”

Galatis could not demonstrate that the absence of a limiting instruction affected his substantial rights and seriously impaired the fairness, integrity, or public reputation of judicial proceedings.

The First Circuit concluded that the lack of a limiting instruction as to Dr. Wilking’s guilty plea did not affect the jury’s verdict.

Generally, it is up to the judge to instruct the jury on the meaning of the law, including law set forth in statutes and regulations. The First Circuit also concluded that the trial court did so in the final instructions and limited the witness testimony.

The judge properly allowed lay witnesses – an AHNVA patient, two primary care providers, and three AHVNA nurses – to testify as to their understandings of certain Medicare terms such as “skilled nursing services” and “homebound” in describing what they had done and why, information clearly in the understanding of a lay witness.

Stephanie Fox, a Medicare-fraud investigator, testified as an expert.  Fox never transgressed proper limitations on her testimony set by the trial judge.

Fox never purported to offer an interpretive gloss on the legal meaning of the regulations. Her explanation of “skilled nursing services” hewed closely to the letter of the regulations themselves. Her testimony about the relationship between physicians and patients – and about the hierarchy among the statute, regulations, and policy manual – was based on her professional experience as a Medicare investigator, not on legal expertise. Her testimony aided the jury in understanding the regulatory framework without displacing the district court’s role in instructing the jury as to that framework’s legal significance.

An important theory of the defense was that Galatis had made a good-faith, though unsuccessful, attempt at compliance with the Medicare provisions. Since the evidence established the opposite the argument failed.

ZALMA OPINION

This is a perfect example of how to steal successfully from the U.S. — don’t be greedy. Had Galatis kept his theft small, had Dr. Wilking only signed 10 certificates a week instead of the impossible 150, the crime would have gone on forever. It is time the U.S. government install software like that which American Express uses to tell me I spent money on line or that I spent more than $1,000, to advise Medicare that one doctor is submitting certificates in a number physically impossible so that criminals like Galatis are caught in the first year of the crime instead of after $20 million stolen over six years.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Utah Eliminates Tort Defense by Statute

Statute Requires Insurer to Pay for Injuries Incurred Without Fault of Driver

For a person to be responsible for injuries resulting from the operation of an automobile the persons injured must prove that the driver had a duty to operate the vehicle safely, breached that duty and caused damages. Under the common law a person who, without warning, becomes incapacitated by a stroke, heart attack or other illness without warning and injures someone when the incapacitated person injures someone because he or she is unable to operate a vehicle safely, is not liable for the injuries.

The Utah Legislature, feeling sorry for injured people who have no defendant who they can sue successfully, enacted a statute that requires an insurer, up to the limits of the policy, to pay the injured persons even though the insured did not breach a duty and was not legally liable to the third person.

In Lancer Insurance Company v. Lake Shore Motor Coach Lines, Inc., Supreme Court of Utah — P.3d —- 2017 WL 631854, No. 20160244 (2/15/17) the Utah Supreme Court answered a question posed by the United States District Court for the District of Utah seeking the proper interpretation of Utah Code section 31A–22–303(l), which requires motor vehicle liability insurance policies to “cover damages or injury resulting from a covered driver of a motor vehicle” who suddenly and unforeseeably becomes incapacitated.

FACTS

The personal injury claims at issue in the underlying federal case arise out of a bus accident that happened on October 10, 2009. The bus was driven by Debra Jarvis. Jarvis experienced a sudden and unforeseeable loss of consciousness while driving back to Utah from a high school band competition in Idaho. Her loss of consciousness caused the bus to leave the roadway, hit a ravine, and roll over. Several passengers were injured in the crash.

Each of four individually injured in the roll over filed separate lawsuits in the Fourth Judicial District Court in Utah seeking damages for their injuries. The insureds filed motions for partial summary judgment, asserting that Lancer Insurance Co. (Lake Shore’s insurer) was strictly liable for the passengers’ injuries under the statute. Those motions were denied. In denying the motions, the state district court rejected the strict liability premise attributed by the passengers to the statute. Instead, the court held that the statute preserved the common-law “sudden incapacity” defense, under which Jarvis would not be liable for her sudden loss of consciousness and the injured parties could recover only upon a showing of fault.

Lancer Insurance filed a separate federal case after it succeeded in defending against the motions for summary judgment in state court. In the federal case, Lancer sought a declaratory judgment confirming the conclusion that this provision preserves the common-law “sudden incapacity” defense and thus requires proof of fault to sustain liability in this case.

The federal district court may have recognized the unusual procedural posture of this case—a federal declaratory judgment suit under review while parallel cases involving claims for money damages are still pending in state court (and subject to appeal). That posture presents a risk that a declaratory judgment in federal court could be undermined by an eventual—and conclusive—interpretation of state law by this court. Perhaps with that in mind, the federal district court appropriately certified the following two questions to us:

  1. whether Utah Code section 31A–22–303(1) imposes strict liability on an insured driver for damages to third parties resulting from the driver’s unforeseeable loss of consciousness while driving; and
  2. if so, whether the driver’s liability is limited by the applicable insurance policy or by the applicable minimum statutory limit.

THE STATUTE

The statute requires that “a policy of motor vehicle liability coverage … shall … cover damages or injury resulting from a covered driver of a motor vehicle who is stricken by an unforeseeable paralysis, seizure, or other unconscious condition and who is not reasonably aware that paralysis, seizure, or other unconscious condition is about to occur to the extent that a person of ordinary prudence would not attempt to continue driving.” It further provides that “[t]he driver’s liability under Subsection (1)(a)(v) is limited to the insurance coverage.”

ANALYSIS

The parties offer competing views of these provisions. The injured parties interpret the statute to call for liability of an incapacitated driver without proof of negligence. They view the requirement of coverage and the reference to the “driver’s liability” as a repudiation of the “sudden incapacity” defense recognized in Utah precedent. The insurance company, on the other hand, views the statute much more narrowly. It contends that the statute doesn’t impose liability at all, but simply directs insurance companies to provide a certain kind of coverage.

The Supreme Court embraced the injured parties’ view. It interpreted section 303(1) to override the common-law “sudden incapacity” defense and to impose strict liability (at least in circumstances in which the driver has a liability policy with the coverage mandated by the statute) and concluded that the driver’s liability is capped by the limits set forth in the applicable insurance policy.

Years ago the Supreme Court embraced the so-called “sudden incapacity” defense. That defense precludes liability for “a person driving an automobile” who is suddenly stricken by an illness that makes it impossible for the driver to control the car and that the driver has no reason to anticipate. A conclusion that there is no breach of the duty of care when a sudden illness removes, without warning, the ability to safely operate an automobile.

The statute announces two key premises: a requirement of insurance coverage (for “damages or injury resulting from a covered driver of a motor vehicle who is stricken by an unforeseeable paralysis, seizure, or other unconscious condition,” UTAH CODE § 31A–22–303(1)(a)(v)), and a limitation of liability (confining the “driver’s liability” to the “insurance coverage,” id. § 31A–22–303(1)(b)).

The Supreme Court viewed these provisions as overriding the common-law “sudden incapacity” defense—at least in a case in which the coverage provided by statute is in place — and thus as subjecting a covered driver (and by extension the insurer) to strict liability. Lancer Insurance notes, the statute nowhere refers to a principle of “strict liability.” The principal mandate of the statute is a requirement of insurance coverage, not an express articulation of a duty or standard of liability in tort.

The Supreme Court found that the text calls for strict liability and to override the common-law principle of sudden incapacity.

The legislature enacted a requirement that all motor vehicle liability insurance policies cover damages or injury resulting from a covered driver of a motor vehicle who is stricken by an unforeseeable paralysis, seizure, or other unconscious condition.

The required insurance coverage overlaps precisely with the common-law sudden incapacity defense. So unless the required coverage also implies an imposition of liability, the legislature would have to be understood to have issued a mandate that has no operative effect. The express requirement of insurance coverage is best understood as an implicit repudiation of the common-law doctrine of sudden incapacity (and an imposition of strict liability).

There would be no point in a limitation of liability to the available “insurance coverage” if such liability is foreclosed as a matter of law by the sudden incapacity defense. Therefore, the Supreme Court found that the statute overrules the common-law doctrine of sudden incapacity in a manner imposing strict liability on a driver (and by extension, the driver’s insurer when the coverage is present and an injured party has a claim for strict liability under the terms of the statute.

By statute the driver’s liability under Subsection (1)(a)(v) is limited to the insurance coverage. The incapacitated driver will owe nothing. If the incapacitated driver was uninsured the defense would apply.

The Supreme Court concluded, therefore, that the statute means what it says: A driver (and by extension her insurer) is subject to liability only up to the amount of the insurance coverage available under an applicable policy and that the statute overrules the common-law doctrine of sudden incapacity to only a limited extent—to the extent of available insurance coverage.

ZALMA OPINION

Tort liability is usually subject to the three elements of negligence: duty, breach, damage. Since, in this accident, the driver did not breach a duty and had no liability to the injured parties. By statute, the Legislature, imposed on an insurer the obligation to indemnify anyone injured by an incapacitated person creating by statute strict liability by the insurer.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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To Find Actual Cash Value Labor as well as Components Must be Depreciated

No Component of a Property Exists Without the Labor to Make It

The definition of the term “Actual Cash Value” (ACV) has been difficult for insurers over the last few decades. States and insurers define it differently. Some insurers, attempting to avoid the diverse state decisions define ACV in the policy wording.

CAN LABOR BE DEPRECIATED TO REACH ACV?

In Rosemary Henn, Individually And On Behalf Of Others Similarly Situated v. American Family Mutual Insurance Company, Supreme Court of Nebraska, 295 Neb. 859, No. S-16-597 (2/17/17) the Nebraska Supreme Court was asked to determine whether, when calculating ACV, the insurer can depreciate the labor part of its determination because the plaintiff argued labor can’t depreciate.

INTRODUCTION

The U.S. District Court for the District of Nebraska has certified the following question to this court: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”

The question arises from a putative class action filed in the U.S. District Court involving a dispute over the interpretation of a homeowner’s insurance policy. Rosemary Henn asserts claims for breach of contract, unjust enrichment, violations of Nebraska’s Consumer Protection Act, fraudulent concealment, and equitable estoppel. Henn argues American Family Mutual Insurance Company (American Family) wrongfully failed to compensate her and others similarly situated by depreciating labor costs in calculation of ACV for loss or damage to a structure or dwelling under its homeowner’s insurance policies.

The parties, contrary to the jurisprudence in Nebraska, agreed that actual cash value is replacement cost minus depreciation, but disagree as to whether the labor component can be depreciated.

BACKGROUND

In September 2011, Henn submitted a homeowner’s claim under her insurance policy issued by American Family. The claim was submitted due to damage that occurred to her home’s roof vent caps, gutters, siding, fascia, screens, deck, and air-conditioning unit during a hailstorm.

The policy provides that “[i]f at the time of loss, … the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.” The insured has two options for recovery following a covered loss: (1) receive “the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building” or (2) receive the full replacement cost value upon completion of the repair or replacement of the damaged property.

Under both options, the insured will first receive an ACV payment. The policy does not define ACV or depreciation, or describe the methods employed to calculate ACV.

American Family provided Henn with a written estimate that ACV was “based on the cost to repair or replace the damaged item with an item of like kind and quality, less depreciation.” The estimate further stated that “replacement cost” was the “cost to repair the damaged item with an item of like kind and quality, without deduction for depreciation.” From the replacement cost of $3,252.60 American Family subtracted $276.67 in depreciation, to arrive at an actual cash value amount of $2,975.93. American Family then subtracted Henn’s $1,000 deductible, leaving her with an actual cash value payment of $1,975.93. The depreciated amount includes both material costs and labor costs.

After Henn filed suit American Family filed a motion for summary judgment, arguing that the policy was unambiguous and that the issues could be resolved as a matter of law. The U.S. District Court certified the question to the Nebraska Supreme Court.

ANALYSIS

Both parties agree that depreciation is an element of actual cash value. But Henn argues that the language in the policy does not unambiguously allow for labor depreciation and that American Family’s depreciation of labor resulted in underindemnification of her loss.

A court interpreting an insurance policy must first determine, as a matter of law, whether the contract is ambiguous. In an appellate review of an insurance policy, the court construes the policy as any other contract to give effect to the parties’ intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning. But when an insurance contract is ambiguous, we will construe the policy in favor of the insured. A contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting meanings.  While an ambiguous insurance policy will be construed in favor of the insured, ambiguity will not be read into policy language which is plain and unambiguous in order to construe against the drafter of the contract.  There is no legal requirement that each word used in an insurance policy must be specifically defined in order to be unambiguous.

The Nebraska Supreme Court has set forth three approaches to determining actual cash value:

  1. where market value is easily determined, actual cash value is market value,
  2. if there is no market value, replacement or reproduction cost may be used,
  3. failing the other two tests, any evidence tending to formulate a correct estimate of value may be used.”

The Nebraska Supreme Court will usually apply the third approach usually referred to as the “broad evidence rule.” Determining the actual cash value of the property involved the insured and insurer may consider every fact and circumstance which would logically tend to the formation of a correct estimate of the building’s value, including the original cost, the economic value of the building, the income derived from the building’s use, the age and condition of the building, its obsolescence, both structural and functional, its market value, and the depreciation and deterioration to which it has been subjected.

Both the market value test and the broad evidence rule consider all the other “facts and circumstances” shown by the evidence that affected or had a tendency to establish the property’s value.

Henn argued that the depreciation of labor is illogical because labor does not depreciate. Actual cash value, as defined by this court, is not a substantive measure of damages, but, rather, a representation of the depreciated value of the property immediately prior to damages. For purposes of indemnification, actual cash value must not equal the amount required to complete the repairs or replacement of the property. Instead, actual cash value is intended only to provide a depreciated amount of the replacement cost to start the repairs.

The Nebraska Supreme Court has employed the market value approach as part of application of the broad evidence rule. Both materials and labor constitute relevant facts to consider when establishing the value of the property immediately prior to the loss. The property is a product of both materials and labor.

The term actual cash value is not ambiguous in the policy. The unambiguous definition of actual cash value is a depreciation of the whole. As such, the insured is not underindemnified by receiving the depreciated amount of both materials and labor. The Supreme Court concluded that: “A payment of actual cash value that included the full cost of labor would amount to a prepayment of unearned benefits.”

Payment of the full amount of labor would amount to a prepayment of benefits to which the insured is not yet entitled. Depreciating the whole is merely one way to arrive at a value that represents the depreciated value of the property to which the insured is entitled. Payment of actual cash value, which depreciates both materials and labor, does not underindemnify the insured.

Under both the market value test and the broad evidence rule, all relevant evidence is considered in determining the value. Both materials and labor are elements that help establish the value of the property immediately prior to the time of loss. Actual cash value applies to the insured property as a whole.

ZALMA OPINION

The term “actual cash value” is unambiguous and depreciation of labor does not lead to underindemnification but, as the Nebraska Supreme Court concluded, failure to depreciate labor would provide the insured more than the policy promised to pay.  No component of a property exists without the labor to make it. If depreciation is used to determine actual cash value the materials and labor used to make the home and its component parts must be depreciated.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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No Premium No Policy

Insurer Cancels Policy for Non Payment of Premium

Many people across the U.S. use debit cards, credit cards and access to checking account to pay ongoing debts automatically. For such a system to work the checking account must have sufficient funds to pay the debt, the debit card must have sufficient funds in its account, and the credit card must be viable and in effect.

When there is insufficient funds to pay an insurance premium the insurer has the right to cancel the policy for non-payment of premium.

In Juanita Hart and Devon Hart-Barron, Plaintiffs, v. Safeco Insurance Co., a subsidiary of Liberty Mutual Insurance Company; and First National Insurance Company of America…, United States District Court, D. South Carolina 2017 WL 603283 (02/14/2017) what appeared to be a frivolous suit was filed by plaintiffs who were upset that their insurers cancelled their policy because the debit card refused to pay the premium.

FACTS

Plaintiffs Juanita Hart and Devon Hart-Barron allege that, in August 2015, Ms. Hart purchased an automobile insurance policy issued by Defendants from American Auto, an independent insurance agent. Effective December 31, 2015, Ms. Hart added a 2015 Nissan Sentra to the Safeco policy and Plaintiff Devon Hart-Barron as a named insured.  The undisputed facts show Ms. Hart setup a monthly debit card payment, with her premiums charged to a Visa card ending in 7047 and expiring in August 2019.

On February 1, 2016, Ms. Hart-Barron was involved in an automobile accident that rendered the 2015 Sentra a total loss. Plaintiffs notified Defendant Safeco and American Auto. On February 4, 2016, Defendants acknowledged coverage for the accident and offered to pay for the vehicle.  That offer was contingent on Plaintiffs executing a power of attorney authorizing Safeco to salvage the vehicle.

Ms. Hart called American Auto to ask for instructions regarding transfer of the vehicle to Defendants. At that time she was informed that the January premium payment was not processed and that her policy may be cancelled.

It was undisputed that the premium due on January 3, 2016 was not paid. Plaintiffs allege Defendants never executed the scheduled automatic draft and provided no notice of nonpayment. Defendants aver that Ms. Hart’s card was declined and that timely notice of nonpayment and cancellation were provided.

Despite the cancellation of coverage, Plaintiffs nonetheless executed the power of attorney and Defendants took possession of the vehicle on February 15, 2016. After Defendants took possession of the vehicle.  Plaintiffs conceded the vehicle was returned on July 8, 2016.

Plaintiffs sued asserting six causes of action: conversion, breach of contract, bad faith denial of insurance, negligent misrepresentation, promissory estoppel, and equitable estoppel. The insurers move for summary judgment on Plaintiffs’ claims of breach of contract and bad faith.

DISCUSSION

The insurer moved for partial summary judgment because there is no genuine dispute that Ms. Hart’s automobile insurance policy was cancelled for nonpayment of premium due January 3, 2016, after she received proper notice of cancellation. Plaintiffs contended that because Safeco set up the automatic premium payment plan using Mrs. Hart’s Wells Fargo routing number and checking account number, drafted the August 2015 through December 2015 payments but never drafted Mrs. Hart’s account in January or February 2016 pursuant to the automatic bill payment system it set up, the responsibility for any failure to pay a premium rests solely with Safeco.

That argument is misguided. Plaintiffs admit that Ms. Hart setup automatic payments to her checking account with her Visa debit card, not “Mrs. Hart’s Wells Fargo routing number and checking account number.” Wells Fargo does not charge fees for declined debit card transactions, so declining Ms. Hart’s January 3, 2016 insurance premium would not produce an NSF charge on her account. Thus, the absence of an NSF charge is not evidence that Defendants did not present Ms. Hart’s January premium for payment.

Further, on January 3, 2016, Ms. Hart’s account was overdrawn by $663.95 and it had been overdrawn for six days. Ms. Hart’s account did not have overdraft protection or a debit card overdraft service. There is no reason to believe that an attempted debit card charge of $379.91 (the amount of the January premium) to Ms. Hart’s account when it was overdrawn by $663.95 would not decline. Defendants submitted substantial evidence that they sought payment through the debit card. Defendants produced an affidavit from a receivables manager, swearing that Ms. Hart’s card declined a payment request for the January premium that Defendants submitted on January 3, 2016. Defendants also produced copies of the cancellation notice for non-payment of premiums sent to Ms. Hart on January 11, 2016, and certificates of mailing of that notice.

The Court found no genuine dispute that Defendants attempted to charge Ms. Hart’s debit card for her January premium and that the charge declined because Ms. Hart’s checking account was overdrawn. Defendants therefore were entitled to cancel Ms. Hart’s insurance coverage, subject to contractual and statutory notice requirements.

The policy plainly states, “We may cancel by mailing notice to the named insured shown in this policy.” There is no requirement to mail additional notices to additional insureds who are not named insured or to supplement mailed notice with email. Nor is proof of receipt of notice required.

Ms. Hart’s policy was cancelled effective January 31, 2016. She had no insurance contract in force with Defendant on February 1, 2016, when her accident occurred. Defendants’ failure to cover her February 1, 2016 accident therefore does not give rise to any claim for breach of contract or bad faith. Defendants therefore are entitled to judgment as a matter of law on Plaintiffs’ second cause of action (breach of contract) and third cause of action (bad faith) and the Court grants Defendants’ motion for summary judgment on those causes of action.

Although Defendants have not moved for summary judgment on Plaintiffs’ sixth cause of action—alleging Defendants are equitably estopped from denying coverage of the February 1, 2016 accident—the Court concludes they are entitled to summary judgment on that claim as well. There is no dispute that Ms. Hart would have had coverage had she paid the premiums, that Defendants did attempt to draft Ms. Hart’s bank account as agreed, and that Defendants did provide the required notice of nonpayment and cancellation.

The only remaining claims in this action concerns the salvage of Ms. Hart’s vehicle. It is undisputed that Defendants induced Ms. Hart transfer the vehicle to them by representing such transfer as a prerequisite for coverage—coverage which, as explained above, Ms. Hart in fact did not have. Plaintiffs admit the wreck was returned to Ms. Hart, but they assert that occurred after a delay of several weeks, and only after this action was filed.

If Plaintiffs’ allegation is true, Plaintiffs possibly could recover on their pleaded theories of conversion, negligent misrepresentation, or promissory estoppel. But those are state law causes of action and the undisputed salvage value of the vehicle was $2,055.

The District Court found a legal certainty that claims regarding a purported three-month conversion of a wrecked Nissan Sentra worth $2,055 cannot satisfy the $75,000 threshold for diversity jurisdiction. When the claims giving rise to federal jurisdiction in a case originally filed in state court are dismissed before trial, any remaining state law claims generally should be remanded back to state court for resolution.

ZALMA OPINION

Although the plaintiff’s lawyers were creative they could not get around the fact that the insured failed to pay her premium, the policy was cancelled because of the failure, and the insured was given statutory notice of cancellation. This suit, because of the obvious grounds for cancellation and a loss after a policy was cancelled, had no basis in fact or law.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Failure to Prove Lack of Insurance Fatal to UM Claim

Incompetent Trial Evidence Loses UM Coverage

When an insured sues its Uninsured/Underinsured (UM) Motorist insurer the insured need only prove that the motorist who damaged the insured in an auto accident it need only prove that the person responsible for the accident and the owner of the vehicle was uninsured.

In Cesar Espinoza and Mayra Moreno, Individually and on Behalf Of Their Minor Children, Jair Espinoza And Jimena Moreno v. Jane Doe, ABC Insurance Company, And Go Auto Insurance Company, Court of Appeal of Louisiana, First Circuit, 2016 CA 0424, 2017 WL 658731 (2/17/17) the insureds under an automobile liability insurance policy challenged a judgment dismissing their UM claim against the insurer.

FACTUAL BACKGROUND

 On the afternoon of January 6, 2013, Cesar Espinoza was driving a Chevrolet Tahoe and was stopped behind a stalled vehicle on Airline Highway in Gonzales, Louisiana. Mr. Espinoza’s wife, Mayra Moreno, and their minor children, Jair Espinoza and Jimena Moreno, were with him. A white Chevrolet truck was stopped immediately behind the Espinozas’ Tahoe. At some point, the white truck attempted to leave the line of stopped traffic and, in doing so, hit the rear of the Espinozas’ Tahoe. The driver of the truck then left the accident scene before the police arrived, but Mr. Espinoza noted that she was a white female and took a photograph of the truck’s license plate.

Officer Anthony Cantrell of the Gonzales Police Department was dispatched to investigate the accident. After speaking to Mr. Espinoza, Officer Cantrell called in the truck’s license plate number to a dispatcher, who was able to identify William Morris as the truck’s registered owner, but who was unable to provide Office Cantrell with Mr. Morris’ contact information.

Later the same day, while visiting a family member’s home, Mr. Espinoza saw the truck that hit him, and the white female who was driving it, across the street. He called Officer Cantrell, who then drove to meet Mr. Espinoza, and Mr. Espinoza identified the white female and the truck to him. Officer Cantrell confirmed that the truck’s license plate number was the same number Mr. Espinoza had given him at the accident scene and saw that the front of the truck was damaged. He spoke to the female, Selena Morris, and obtained her driver’s license number. Ms. Morris told Officer Cantrell that she did not have insurance. Officer Cantrell did not speak to William Morris, the truck’s registered owner, nor determine whether Mr. Morris had insurance coverage on the truck. The record does not show the relationship, if any, between Selena and William Morris.

The Espinozas sued individually, and on behalf of their children, against Jane Doe, identified as the phantom driver, and against Go Auto Insurance Company, identified as the Espinozas’ UM insurer. Go Auto answered the suit and filed a third party demand against Mr. Morris, Ms. Morris, and ABC Insurance Company.

Ultimately, a bench trial was held, and the trial court signed a judgment: (1) in favor of Jane Doe, ABC Auto Insurance Company, and Go Auto, and dismissing the plaintiffs’ claims with prejudice, and (2) in favor of Go Auto and against Ms. Morris on the third party demand for $17,912.83, plus costs and interest.

The plaintiffs appealed. They claim their Go Auto policy provided UM coverage and that they proved Ms. Morris was uninsured.

DISCUSSION

A plaintiff seeking to recover insurance proceeds has the burden of proving every fact essential to establish that his claim is within the policy coverage. To recover against his UM insurer, an insured must prove that the owner and operator of the vehicle involved in the accident did not have automobile liability insurance in effect on the date of the accident. The effect of the prima facie evidence is to shift the burden of proof from the party alleging the uninsured status of the vehicle to the insured’s UM insurer.

Officer Cantrell’s trial testimony established that Mr. Morris was the registered owner of the offending truck and that Ms. Morris was the operator of the truck on January 6, 2013, the day of the accident. Officer Cantrell’s trial testimony, which was unchallenged, also established that Ms. Morris did not have automobile liability insurance in effect on that date. But, there is no evidence in the record, by affidavit or otherwise, that proves Mr. Morris did not have automobile liability insurance. The fact that Ms. Morris, the operator of the truck, admitted to Officer Cantrell that she did not have insurance is not proof that Mr. Morris, the owner of the truck, likewise had no insurance.

Because plaintiffs failed to prove that Mr. Morris was uninsured, the trial court did not err in rendering judgment in favor of Go Auto and dismissing the plaintiffs’ claims with prejudice.

ZALMA OPINION

Two defendants were involved in the accident, Ms. Morris who was driving and Mr. Morris who owned the allegedly uninsured vehicle. A simple deposition of Mr. Morris or interrogatory asking if he was insured would have resolved the issue in favor of the plaintiffs or in favor of the UM insurer. Failing to prove Mr. Morris had no insurance is unforgivable and the plaintiffs are not without a remedy, they can sue their lawyers.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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No Proof of Loss No Flood Coverage

Flood Insurance Conditions Must Be Strictly Construed

Catastrophes cause as many legal problems as they cause damage to property. Super Storm Sandy is a catastrophe that seems to prove the proposition.

People who acquire a flood insurance policy based upon, and funded by, the National Flood Insurance Program find that the courts deal differently with the policy conditions strictly, unlike courts who deal with private insurers. As a result they must comply with the conditions.

In Herbert Ruth And Danna Ruth v. Selective Insurance Company Of America, United States District Court, D. New Jersey Civil, 2017 WL 592146, Action No. 15-2616 (JBS/JS) (02/14/2017) the Ruths attempted to collect from a write your own National Flood Insurance policy although they did not submit a proof of loss and did not prove damage to certain property was caused by flood.

FACTS

In this declaratory judgment action, Plaintiffs Herbert and Danna Ruth seek a declaration that they are entitled to insurance coverage and compensatory damages arising from Defendant Selective Insurance Company of America’s alleged mishandling of their flood claim stemming from Superstorm Sandy.

Plaintiffs Herbert and Danna Ruth own a home in Oceanport, New Jersey (“the Property”) and hold a Standard Flood Insurance Policy (“SFIP”) covering their home with Selective Insurance Company (“Selective”), an insurer who participates in the Federal Emergency Management Agency’s (“FEMA”) “Write Your Own” (“WYO”) flood insurance program. SFIP includes building coverage of $250,000 with a $1,000 deductible, and contents coverage of $11,600 with a $1,000 deductible. Plaintiffs’ home is a single-family home with an unfinished basement. Plaintiffs allege, and Defendants do not dispute, that Plaintiffs paid all premiums when due while the SFIP was in effect.

Plaintiffs notified Selective of damage to their home caused by flooding from Superstorm Sandy on or about October 29, 2012. The basement flooded with approximately five feet of water during the storm. Selective sent an independent adjuster to inspect the Property on November 23, 2012. That same day, Plaintiffs requested an advance payment from Selective for $5,000 in building damage, which request Selective granted.

The independent adjuster submitted a report to Selective on January 27, 2013, recommending that Selective make a payment of $17,175.83 in covered building damage and $1,344.96 in covered contents damage to Plaintiffs. Selective issued two checks to Plaintiffs for $12,176.83 in covered building damage (the adjuster’s recommendation, less the $5,000 advance payment) and $1,344.96 in covered contents damage on February 7, 2013, “representing payment in full under the policy.”

On April 26, 2014, Plaintiffs submitted to Selective additional documentation claiming covered losses to their property in the amount of $45,780.14, including a sworn proof of loss for covered building damage and an estimate from B.C. Moye Consulting, LLC for repairs to the Property that differed from the estimate provided by Selective’s independent adjuster. On May 22, 2014, Selective sent a letter to Plaintiffs denying their request for additional recovery because Plaintiffs had not submitted adequate supporting documents per the NFIP, including itemized room-by-room contractor’s estimates, a signed contract of repair with a contractor, or paid receipts or invoices for repairs. It appears that Plaintiffs never submitted further proof of loss.

THE SUIT

Plaintiffs filed this case on April 10, 2015, claiming that Selective “unjustifiably failed and/or refused to perform its obligations under the Policy and wrongfully or unfairly limited coverage and payment on Plaintiffs’ claims” and seeking a declaration that they are entitled to insurance coverage and compensatory damages arising from Selective’s mishandling of their flood claim.

The crux of the parties’ dispute was whether Plaintiffs are entitled to coverage under the SFIP for:

(1)   the cost of replacing two compressors to the central air conditioning system located outside the house, and

(2)   damage to personal property in their garage and basement.

Defendant filed a motion for summary judgment arguing that Plaintiffs are not entitled to coverage under the SFIP for either claim because the compressors were not damaged by flood waters and because Plaintiffs did not submit a sworn proof of loss for the personal property.

DISCUSSION

Defendant contends that it is entitled to summary judgment because Plaintiffs cannot recover any additional amounts under the SFIP for two reasons: first, because the compressors to the central air conditioning system did not suffer direct physical damage by or from flood, and second, because Plaintiffs did not submit a proof of loss and documentation in support of their claim for additional contents damage.

The NFIP is a federally supervised and guaranteed insurance program presently administered by the Federal Emergency Management Agency (‘FEMA’) pursuant to the [National Flood Insurance Act] and its corresponding regulations. It is well settled that federal common law governs the interpretation of the SFIP at issue here.

As with other insurance policies issued under federal programs, the terms and conditions of the SFIP must be strictly construed because they are direct claims on the Federal Treasury.

First, Plaintiffs cannot recover under the SFIP for alleged damage to the compressors to their central air conditioning system because the compressors did not suffer direct physical damage by or from flood. The plain language of the SFIP insures only “against direct physical loss by of from flood,” which requires “evidence of physical changes to the property” caused by a flood. Nonetheless, Plaintiffs seek to have Selective pay to replace the compressors because they must replace another component of the central air conditioning system that was damaged by floodwaters in the basement, and the air conditioning system will only work if the entire system is replaced all at once. Despite this representation, Mr. Ruth’s admission makes clear that the compressors are not covered losses under the terms of the SFIP. Therefore, Selective is entitled to summary judgment on this part of Plaintiffs’ claim.

Second, Plaintiffs cannot recover for damage to personal property in the garage and basement caused by the flood because they did not file proof of loss or any other documentation for these losses. The Third Circuit has unambiguously held that strict adherence to SFIP proof of loss provisions is a prerequisite to recovery under the SFIP.

Mr. Ruth conceded at his deposition that he did not “declare” or “report” these losses at the time “because it was insignificant compared to the other items” and that he did not even think to seek recovery for them until this action.

Plaintiffs’ failure to follow the NFIP requirement of submitting a sworn proof of loss for these claims bars recovery under the SFIP. Therefore, Selective is entitled to summary judgment on this part of Plaintiffs’ claim, as well.

ZALMA OPINION

Anyone who has an NFIP policy must understand that the policy will be strictly construed, as it was in this New Jersey case, and that failure to do so will deprive the insured of the right to indemnity under the flood policy. Their initial claims were paid and then they tried for more without fulfilling the the conditions of the policy and lost.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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When a Policy Is Not Illusory

A Crane On a Skyscraper Is an Excluded Tool

No insurance policy covers every eventuality that can damage property. All insurance policies contain exclusions advising the insured of those certain risks of loss the insurer is unwilling to accept. People who are insured are obligated to read and understand the policy they acquired. Failure to do so before a loss can be extremely expensive.

In Lend Lease (US) Const. LMB Inc. v. Zurich American Ins. Co., Court of Appeals of New York 2017 N.Y. Slip Op. 01141 — N.E.3d —- 2017 WL 572478 (2/14/17) the Court of Appeals of New York, the state’s highest court was asked to determine  whether a crane is covered in the first instance under the insurance provided for temporary works and, if so, whether the contractor’s tools exclusion defeats that initial grant of coverage.  Also at issue—and critical to the analysis—is the question whether the contractor’s tools exclusion is ineffective because it would render the coverage granted in the first instance for temporary works illusory.

FACTS

In October 2012, plaintiff Extell West 57th Street LLC (Extell) was constructing a 74–story skyscraper—commonly known as the One57 Building—at 157 West 57th Street in Manhattan. Extell had retained plaintiff Lend Lease (US) Construction LMB Inc. (Lend Lease) to act as the construction manager for that project and, in that capacity, Lend Lease had contracted with nonparty Pinnacle Industries II, LLC (Pinnacle) for certain structural concrete work with respect to that endeavor. Pursuant to its contract with Lend Lease, Pinnacle was to furnish and install, among other things, two diesel fuel tower cranes.

Only one of those cranes is at issue here. That crane was installed on a reinforced slab on the 20th floor of the building and, once all other trade work was completed at the project, it was to be dismantled and removed from the site. Several components of the crane, including beams cast into the slab and materials reinforcing the locations at which the crane was “tied” to the building as it arose next to that edifice, were designed to permanently remain part of the building upon the completion of construction.

By October 29, 2012, the crane had risen approximately 750 feet from its base. On that day, Superstorm Sandy made landfall in the New York City area. One of the most dramatic images of that landfall depicts the damage caused to the crane when the boom of the crane collapsed in high winds and teetered precariously from a height equal to the top of the building. Afterwards, the blocks surrounding the building were evacuated for six days and the crisis became a riveting symbol of the city’s wounded infrastructure.

THE POLICY

At the time of that incident, Extell was the named insured on a program of builder’s risk insurance containing coverage in the amount of $700 million, that is, the total estimated cost of the project. The program is referred to as the “policy,” but it actually is an amalgamation of five separate insurance contracts, each of which was issued by a different defendant-insurer and each of which covers a different percentage of the aggregate risk. Defendant Zurich American Insurance Company assumed half of the aggregate risk and furnished the “lead” policy with respect to that exposure.

At issue in this action is whether the policy covers damages sustained by Extell (the named insured) and Lend Lease (an additional insured) resulting from the weather-related harm to the crane. That determination turns on whether the crane is covered under the policy in the first instance and, if so, whether the policy’s contractor’s tools, machinery, plant and equipment exclusion (generally, contractor’s tools exclusion) defeats that coverage.

Plaintiffs sued seeking, among other things, a declaration that the crane is covered property under the policy, and that coverage for the crane is not subject to any policy exclusion.

The exclusion at issue provides that: “[t]h[e] Policy does not insure against loss or damage to … Contractor’s tools, machinery, plant and equipment including spare parts and accessories, whether owned, loaned, borrowed, hired or leased, and property of a similar nature not destined to become a permanent part of the INSURED PROJECT*, unless specifically endorsed to the Policy.”

TRIAL COURT

Supreme (trial) Court entered an order denying the competing motions and cross motions for summary judgment that eventually were filed with respect to that coverage question, ruling that there is an issue of fact whether the contractor’s tools exclusion defeats coverage for the subject loss. On appeal, the court held that “the … crane was integral, not ‘incidental to the project,’ and therefore does not fall within the [policy’s] definition of Temporary Works”  “Even if the … crane fell within the definition of Temporary Works,” the court added, “the contractor’s tools … exclusion would be applicable and … enforceable”.

ANALYSIS

In determining a dispute over insurance coverage the court must first look to the language of the policy. As with the construction of contracts generally, unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court.

The question whether the policy covers the crane in the first instance turns on the court’s interpretation of language germane to the policy’s insuring agreement. On this point the parties dispute whether the crane is a “temporary … structure” within the meaning of the policy, and whether the crane was “incidental to the project.”

The Court of Appeal concluded that the crane was a “structure” because it is the production or piece of work artificially built up or composed of parts joined together in some definite manner. However, the court also found that the crane was “temporary” in that it was anchored and tied to the building only “during construction” and was to be “removed when … no longer needed.”

The principal purpose of the project was the construction of the building, not the crane, and the installation and disassembly of the crane were merely incidental steps toward the completion of that edifice.

Before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.

Extell, in particular, contends that defendants cannot have met that burden here because the crane is not a “tool” or “equipment” within the meaning of the contractor’s tools exclusion. The subject exclusion, however, also defeats coverage for “machinery,” and the crane falls squarely within this definition of that term. “Machinery” means, among other things, “machines in general or as a functioning unit,” and “machine” is defined as “a mechanically, electrically, or electronically operated device for performing a task” (Merriam–Webster’s Collegiate Dictionary 744 [11th ed 2003] ).

Plaintiffs’ effort to avoid application of the exclusion on the ground that it is so broad as to render coverage afforded under the temporary works provision of the policy illusory. An agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation unenforceable. However, an insurance policy is not illusory if it provides coverage for some acts subject to a potentially wide exclusion.

Indeed, the contractor’s tools exclusion does not defeat all of the coverage afforded under the policy’s temporary works provision. That exclusion would not defeat coverage initially granted for such things as the cost of erecting scaffolding, for “temporary buildings,” and for such other things as “formwork, falsework, shoring,[and] fences,” which are not “tools” within the meaning of the exclusion. The enforcement of the exclusion does not create a result that would have the exclusion swallow the policy. For the same reason the exclusion does not render the coverage granted under the temporary works provision illusory.

Assuming that the policy contains coverage for the crane in the first instance, the Court of Appeals concluded that the contractor’s tools exclusion defeats that coverage, and that such exclusion does not render the coverage afforded under the temporary works provision of the policy illusory.

ZALMA OPINION

Too much time is spent in insurance litigation trying to get a court to make an insurance policy provide the coverage the insured needed rather than the insurance the insured wanted, ordered and bought. If the insured buying a $700 million policy thought it was illusory it should have dealt with that issue and have the policy wording changed before it paid its premium.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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 When a Policy Is Not Illusory

Contempt Sanctions Not Insurable Damages

Lawyers Held In Contempt Cannot Receive Defense or Indemnity From E&O Insurer

Lawyers acting badly can cause problems for others. When a group of lawyers violated a court order and caused a company to be sued who would never have been sued but for the contumacious action of the lawyers sued to seek coverage from their lawyers malpractice insurer.  In Jones, Foster, Johnston & Stubbs, P.A. v. Prosight-Syndicate 1110 At Lloyd’s, United States Court of Appeals, Eleventh Circuit, No. 15-12399, 2017 WL 586450 (February 14, 2017) the Eleventh Circuit was asked by the lawyers to compel their insurer to provide defense and indemnity for their wrongful conduct.

FACTS

The Elevent Circuit was asked hether professional liability insurer ProSight-Syndicate 1110 at Lloyd’s (“ProSight”) was contractually obligated to defend several attorneys employed by its insured, Jones, Foster, Johnston & Stubbs, P.A. (“Jones Foster”), against a motion for an order to show cause why they should not be held in contempt and sanctioned. After Prosight refused to provide a defense, Jones Foster sued seeking both damages for breach of contract and declaratory relief. The District Court granted Prosight’s motion to dismiss with prejudice.

Prosight issued a Primary Lawyer’s Professional Liability Insurance Certificate (the “Policy”) to Jones Foster. The Policy purported to cover “all sums which the Insured shall become legally obligated to pay as damages for claims … arising out of any act, error, [or] omission … in the rendering of or failure to render Professional Services by any Insured covered under this policy.” Under the Policy, a claim is “a demand for money or services … [but does not] include proceedings seeking injunctive or other non-pecuniary relief.” And, damages are “compensatory judgments, settlements or awards [not including] punitive or exemplary damages, sanctions, fines or penalties assessed directly against any insured.” (emphasis added)

Attorneys employed by Jones Foster were representing Gary Donald Carroll in a defamation suit filed in the Circuit Court of the Fifteenth Judicial Circuit of Florida, in and for Palm Beach County, against TheStreet.com, Inc., an online news source. One issue in that litigation involved whether the Florida statutory journalist’s privilege extended to protect TheStreet.com’s sources, the identities of which the TheStreet.com had inadvertently disclosed to Carroll during discovery. Pertinent to the instant case, the Circuit Court entered an order granting TheStreet.com’s motion for a protective order concerning those disclosures that barred Carroll from any further use of, reference to, or reliance on, the privileged information. Following an extensive investigation, Carroll claimed that he had independently identified Third Point as the source of the defamatory statements, and amended his complaint to add Third Point as a defendant.

Third Point filed a motion that argued that the court should impose sanctions to punish misconduct for, among other things, the filing of an affidavit that Carroll’s lawyers knew to be materially false. The Contempt Motion sought the following remedies for the alleged misconduct of Caroll and his lawyers: (1) removal of all references to Third Point in the lawsuit; (2) dismissal of Carroll’s claims against Third Point with prejudice; and (3) attorneys’ fees and costs incurred by Third Point in the litigation.

Jones Foster filed a claim requesting that ProSight defend its lawyers against the Contempt Motion pursuant to the terms of the Policy. After ProSight investigated it refused to defend.

Jones Foster then sued Prosight alleging breach of contract, breach of the covenant of good faith. Days later, Prosight filed a motion to dismiss for failure to state a claim arguing that the plain terms of the Policy specifically excluded coverage for proceedings seeking sanctions and other non-pecuniary forms of relief. The District Court agreed and granted Prosight’s motion dismissing Jones Foster’s lawsuit with prejudice.

ANALYSIS

In Florida, a liability insurer’s obligation to defend a claim made against its insured must be determined from the allegations in the complaint. The trial court is restricted to the allegations of the complaint, regardless of what the defendant and others say actually happened.

All doubts regarding the insurer’s potential duty to defend must be resolved in the insured’s favor. The insurer’s duty is not unlimited, and the insurance company is not required to defend if it would not be bound to indemnify the insured even though the plaintiff should prevail in the underlying action. Under Florida law, the terms used in an insurance contract are given their ordinary meaning, and the policy must be construed as a whole giving every provision its full meaning and operative effect

The Eleventh Circuit concluded, as was obvious, that there is no ambiguity in the case. There is no question that the plain terms of the Policy relieve Prosight of any duty to defend against proceedings seeking monetary sanctions or non-pecuniary relief.

A review of the underlying Contempt Motion demonstrates that it was not a suit against Jones Foster, or its attorneys, for a compensatory judgment or award. Instead, the underlying Contempt Motion sought an “order to show cause why … attorneys at Jones Foster … should not be held in contempt and sanctioned for their willful violation of [a court order].” The Contempt Motion further requested that the court sanction the involved attorneys by striking all claims against Third Point from the case and requiring they pay the attorney’s fees and costs incurred by Third Point as a consequence of their misconduct.

There is no suggestion that the Contempt Motion underlying this action involved anything other than an attempt to sanction lawyers employed by Jones Foster for “their contumacious and outrageous conduct.” Since the Policy makes crystal clear that only suits seeking “compensatory judgments, settlements, or awards” trigger a duty to defend on the part of Prosight. In the words of the District Court below, “[b]ecause the contempt motion sought sanctions … [rather than compensatory damages], [Prosight] did not have a duty to defend [Jones Foster].”

Jones Foster tried to avoid this conclusion by arguing that the attorney’s fees and costs sought in the Contempt Motion were compensatory in nature and accordingly the claim below was, at least in part, covered by the terms of the Policy. Although sanctions may serve a remedial, the compensatory purpose they retain their essential character as a punishment.

 The assessment of attorney’s fees and costs pursuant to a contempt finding is a paradigmatic example of a sanction serving a compensatory purpose while still functioning as a punishment.  Although attorney’s fees are necessarily a compensatory award, assessing these fees pursuant to a contempt finding effectively penalizes the wrongdoer.

Existing case law discussing compensatory awards made pursuant to a contempt of court judgment also uniformly refers to those awards as sanctions.  Although Florida law makes clear that ambiguities in an insurance contract must be “construed in favor of coverage,” the policy “must actually be ambiguous” to allow for such a construction.

It is evident, based on the terms of the Policy as a whole, that the fraud Exclusion Clause does not fashion new obligations; instead, it acts as a bar to claims that otherwise would be covered pursuant to the Policy—claims seeking “compensatory judgments, settlements or awards.” The exclusion for claims arising out of dishonest or fraudulent conduct becomes relevant only if coverage would exist under the Policy in the first instance. Here, there is no duty to defend, and so the Exclusion Clause never comes into play.

The underlying Contempt Motion asserts no theory of vicarious liability to the law firm.  The Contempt Motion sought sanctions only against the attorneys actually involved in the underlying action, particularly Wilkins and Rothman. The Contempt Motion did not advance any theory that would implicate the firm as an independent entity subject to sanctions for the actions of its individual lawyers.

The Policy at issue in this case unambiguously provides that Prosight’s duty to defend extends only to claims for compensatory damages, not sanctions. It is equally clear that Jones Foster requested a defense to a Contempt Motion that sought only sanctions and other forms of non-pecuniary relief, all expressly disclaimed by the Policy’s plain terms.  Prosight did not breach the terms of the Policy by refusing to defend Jones Foster or its lawyers.

ZALMA OPINION

One would expect lawyers able to read an insurance policy. To bring this case seeking coverage for contumacious conduct by lawyers part of a law firm where all that was being sought by the other party was contempt and sanctions neither of which sought damages insured against by the policy. Their attempts were creative and lawyer-like but were simply and clearly wrong.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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’s Insurance Fraud Letter — February 15, 2017

Lie on Health Insurance Application Is Criminal  

Zalma’s Insurance Fraud Letter, Volume 21, No. 3

Zalma’s Insurance Fraud Letter, Volume 21, No. 4

Every Insurance Adjuster Must Be Trained About Fraud

In the last 49 years that I have been in the business of insurance I have learned the one thing that is a certainty: the quality of insurance fraud perpetrators is almost non-existent. That means that it is so easy to steal from insurance companies that amateurs with no skills are jumping into the business of defrauding insurers. If the insurance industry learns enough about insurance fraud and defeats the claims of the amateurs the professional fraud perpetrators will go away and work easier crimes. If not, they will continue to bleed the insurance industry. It has been my desire, for the last 20 years Zalma’s Insurance Fraud Letter has been published, to help in the effort to make insurance fraud more difficult for the perpetrators and reduce what fraud takes from the insurance industry.

Because more insurers are training their people to recognize insurance fraud in this issue you may be surprised to see cases where fraud failed and the perpetrator spent time in jail even though the number of convictions seem to be shrinking.


The Current Issue Contains the Following

  • Lie on Health Insurance Application Is Criminal
    • Stupidity is No Defense to Insurance Fraud Crime
  • Illumeo Continuing Education
  • Civil Investigation Interview
  • New from Barry Zalma
    • “Insurance Law”
  • RiverSource Life Insurance Company Pays $1.5 Million for Failure to Use Death Master File
  • Barry Zalma Speaks at Your Request
  • Bluffs and a Fraud Investigation
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • More than $1Billion in Liens Linked to Workers’ Comp Fraud Charges
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • The Need to Understand the Mutability of Memory
  • Books from the American Bar Association
    • The Insurance Fraud Deskbook
    • Diminution in Value Damages
  • Zalma’s Insurance Fraud Letter
  • The Legend.
  • Legal Disclaimer

ZALMA INSURANCE CONSULTANTS


Visit the Zalma Insurance Claims Library


Zalma on Insurance – A Blog

The most recent posts to the daily blog, Zalma on Insurance, are available 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.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the 1,022 videos follow: 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.

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Claim of Estoppel Does Not Create Coverage

Coverage by Estoppel Requires Evidence of Prejudice

Emulating their brother jurists in New York the District Court of Appeal of Florida wrote a succinct, brief and easy to understand an insurance coverage dispute. In Progressive Express Insurance Company v. Anzualda Brothers — So.3d —, Inc., District Court of Appeal of Florida, 2017 WL 535395 (2/10/17) the operator of an uninsured vehicle convinced the trial court to grant the operator coverage by operation of estoppel

THE ISSUES

Progressive Express Insurance Company (Progressive), challenged the trial court’s entry of a declaratory judgment determining that there was insurance coverage in favor of appellee Anzualda Brothers, Inc. (Anzualda) by operation of estoppel.

Progressive argued it should not have to provide coverage for Anzualda’s accident, which resulted in the fatality of one victim and the injury of another victim, because the vehicle Anzualda had been driving was not a listed vehicle on the insurance policy, and because Anzualda failed to prove all three elements of its coverage by estoppel claim.

Anzualda cross-appealed, alleging the trial court erred in its refusal to enforce a settlement agreement and consent judgment that were agreed to by Progressive and entered in the separate, underlying tort case between Anzualda and the victims.

ELEMENTS OF INSURANCE COVERAGE BY ESTOPPEL

The appellate court concluded that Anzualda failed to prove all three elements of its coverage by estoppel claim. In an insurance coverage by estoppel claim, the plaintiff must prove:

(1) the defendant company made a representation of material fact;

(2) the plaintiff reasonably relied on that representation of material fact; and

(3) the plaintiff was prejudiced by its reliance.

Because Anzualda failed to sufficiently prove prejudice, the verdict was reversed, the trial court’s final judgment in favor of Anzualda was vacated, and remanded for the trial court to enter final judgment in favor of appellant Progressive.

Because the court remanded the case to the trial court to enter final judgment in favor of Progressive, Anzualda’s cross-appeal requesting damages from Progressive in the amount outlined in the settlement agreement is moot.

ZALMA OPINION

Estoppel is an equitable concept that changes conclusions of law to be fair because the actions of an insurer did or said something that that an insured relied upon to its damage because it relied on the statements of the  insurer. Since Anzualda did not prove it was prejudiced by Progressive’s conduct it had no right to estoppel. All Anzualda needed to do to have coverage is to list the car.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Sovereign Immunity Statute Causes Coverage Issue

Governmental Insurers and Insured’s Litigate Because of Failure to Deal With State Statutes

A Florida county bought an excess insurance policy from Star Insurance Company with a self insured retention of $350,000 at the same time a state statute waived sovereign immunity for only the first $200,000 and the county could not make a settlement for amounts in excess of the $200,000 limit without first obtaining a state statute approving a settlement more than $200,000.

In Hillsborough County v. Star Insurance Company, United States Court of Appeals, Eleventh Circuit — F.3d —-,  2017 WL 460999 (2/3/17) the insured county and personal representative of deceased accident victim’s estate sued an excess liability insurer, seeking a declaratory judgment that county was allowed to settle personal representative’s underlying wrongful death claim without the insurer’s consent and without a special claims bill by state legislature.

FACTS

Darcia Dominguez died from injuries sustained in an automobile accident with a Hillsborough County employee in February of 2010. Jorge Dominguez, the personal representative of Ms. Dominguez’s estate, filed a wrongful death suit against Hillsborough County in state court, and that action, as far as the Eleventh Circuit knew, is still pending. This federal diversity case involves an insurance dispute between the County, Mr. Dominguez, and Star Insurance, the County’s excess carrier.

The Eleventh Circuit confronted an issue of first impression under Florida law—the interplay between the limited waiver of sovereign immunity and the language of the self-insured retention limit (SIRL) contained in an endorsement to the excess liability policy issued to the County by Star.

The question is whether the County and Mr. Dominguez can settle the estate’s claim for the sum of $2.35 million—with the County paying its SIRL of $350,000 and Star purportedly paying the remaining $2 million (the policy limits)—without Star’s consent but subject to the Florida Legislature approving a special claims bill for the $150,000 “gap” between the $200,000 sovereign immunity cap established by statute and the $350,000 SIRL.

The district court, exercising diversity jurisdiction and ruling on cross-motions for summary judgment that the parties submitted without the benefit of discovery, held that any requirement that the Florida Legislature pass a claims bill for the “gap” amount before coverage is triggered under the policy frustrates the purpose of the County’s contract with Star. But it also ruled that the County cannot unilaterally settle the estate’s claim for an amount within the policy limits without Star’s consent. In granting Mr. Dominguez’s motion for entry of judgment, the district court clarified that, in concluding that the County could not settle without Star’s consent, it necessarily ruled that, should Star consent, the County could satisfy its SIRL without a claims bill by the Legislature.

ANALYSIS

If this sounds like a mess, that is because it is.

In February of 2010, § 768.28(5) read in relevant part as follows: “The state and its agencies and subdivisions shall be liable for tort claims in the same manner and to the same extent as a private individual under like circumstances, but liability shall not include punitive damages or interest for the period before judgment. Neither the state nor its agencies or subdivisions shall be liable to pay a claim or judgment by any one person which exceeds the sum of $100,000 or any claim or judgment, or portions thereof, which, when totaled with all other claims or judgments paid by the state or its agencies and subdivisions arising out of the same incident or occurrence, exceeds the sum of $200,000. However, a judgment or judgments may be claimed and rendered in excess of these amounts and may be settled and paid pursuant to this act up to $100,000 or $200,000, as the case may be; and that portion of the judgment that exceeds these amounts may be reported to the Legislature, but may be paid in part or in whole only by further act of the Legislature. Notwithstanding the limited waiver of sovereign immunity provided herein, the state or an agency or subdivision thereof may agree, within the limits of insurance coverage provided, to settle a claim made or a judgment rendered against it without further action by the Legislature, but the state or agency or subdivision thereof shall not be deemed to have waived any defense of sovereign immunity or to have increased the limits of its liability as a result of obtaining insurance coverage for tortious acts in excess of the $100,000 or $200,000 waiver provided above[.]” (emphasis added).

The the purchase of insurance does not waive the defense of sovereign immunity.

The County purchased an excess liability insurance policy (including excess automobile coverage) from Star for the period spanning from October 1, 2009, to October 1, 2010. The policy, which cost the County $527,360, has a $2 million limit for each accident or occurrence, as well as a $350,000 SIRL.

The policy provides that the County cannot assume any obligation, make any payment, or incur any expense “without [Star’s] consent, except at [the County’s] own cost,” and requires the County to cooperate with Star “in the investigation, settlement or defense of the claim or ‘suit.’ ”

If the County fails to comply with any of the provisions of paragraph 4, Star “shall not be liable for any damages or costs or expenses[.]”

In its reservation of rights letter, which was attached to the amended complaint, Star took the position that it was only obligated to pay those sums that the County “legally must pay,” and that under § 768.28(5) the County had sovereign immunity for any sums over $200,000 absent an act of the Florida Legislature. Because the Florida Legislature had not taken any action (like passing a special claims bill) that would make the County liable for (or allow the County to pay) any claim over $200,000, and because the County had not exhausted (and could not yet exhaust) its $350,000 SIRL, Star asserted that its excess coverage under the policy had not been triggered.

Star’s summary judgment motion, like the County’s, was devoid of evidence. Under Florida law, the frustration of purpose doctrine has limits. Both the County and Star knew (or should have known) that, in 2009 and 2010, § 768.28(5) established a sovereign immunity cap of $200,000 for municipalities and other government entities. And both the County and Star knew that the $350,000 SIRL exceeded the $200,000 sovereign immunity cap. Because the County purchased excess insurance of $2 million, the parties were aware of (or certainly should have foreseen) a scenario where the County could be liable for an amount over $350,000, in which case the $150,000 “gap” amount would have to be accounted for in some way or another (e.g., through the passage of a special claims bill).

The settlement proposal approved by the Board of Commissioners states that it is subject to Star’s consent, and also provides that the $150,000 “gap” amount will be “paid by the County, if approved by the Legislature in a claims bill.” So, whether a special claims bill is or is not statutorily required before the County can pay the “gap” amount to satisfy its SIRL of $350,000, the proposed settlement between the County and Mr. Hernandez anticipates the need for, and passage of, such a bill by the Legislature.

The county understood the policy it bought and put the limits into its agreement to settle. The Eleventh Circuit, applying ancient authorities refused to rewrite the terms of the proposed settlement so that it could address whether, under a certain set of facts, the County can pay the $150,000 “gap” amount (and trigger Star’s excess coverage) without a special claims bill.

Under Florida law, Star, as an excess insurer, has a duty of good faith to evaluate settlement proposals, and it cannot “arbitrarily reject a reasonable settlement offer.” Unfortunately, the Eleventh Circuit could not apply the good faith duty here because a number of material factual issues are not ripe for resolution. The parties, for reasons known only to them, chose not to conduct discovery. As a result, they failed to present critical evidence to the district court with respect to the accident and the proposed settlement. No one knows who (if anyone) was at fault in the accident that resulted in Ms. Dominguez’s death.

The Eleventh Circuit affirmed the portions of the summary judgment order and final judgment which declares that the County cannot unilaterally settle Mr. Dominguez’s claim within policy limits without Star’s consent, and explains that other issues related to the proposed settlement are unripe for resolution on the current record. The Eleventh Circuit vacated the portion of the summary judgment order and the final judgment which declares that the $350,000 SIRL can be satisfied without the passage of a special claims bill.

ZALMA OPINION

Insurers and insureds must read the insurance policy they buy and the statutes that might cause disputes before there is a suit filed. In this case the county should have negotiated an SIRL of $200,000 (even it it cost more) so that it would not need a state law to cover the “gap.” Because they did not consider the sovereign immunity law and how it would be affected by the SIRL it must struggle through interminable litigation over coverage.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Breach of Lease Forfeits Right to Sue Lessor

Lessee Who Does Not Buy Required Liability Insurance for Lessor Loses

Commercial leases, as a matter of course, require the lessee to obtain liability insurance in favor of the lessor. The insurance condition is usually a condition precedent and failure to acquire the insurance is a breach of the lease.

In A.M. Express Freight, Inc. v. Lumer Associates, LLC, and Travelers Property Casualty Company Of America, Mark Beck And Absolute Coverage LLC, Superior Court of New Jersey, Appellate Division Docket No. A-0895-15T3, 2017 WL 510519, (2/8/17) A.M. Express Freight, Inc. appealed from the September 18, 2015 Law Division order, which granted summary judgment to defendant Lumer Associates, LLC and dismissed the complaint with prejudice because the plaintiff was in breach of its obligation to obtain liability insurance for the lessor..

FACTS

Plaintiff is a trucking and logistics company that transports and ships goods for its customers. On June 11, 2012, plaintiff leased Unit 3 in a commercial facility owned by defendant, where it stored non-perishable food products for its customers. Plaintiff stored the goods on pallets that were stacked to the usable height of the premises, and used motorized equipment to unload, store, and load the goods.

The lease contained a provision requiring plaintiff to indemnify and hold defendant harmless “from … any and all claims and liability for … any cause or reason whatsoever arising out of or by reason of the occupancy by [plaintiff] and the conduct of [plaintiff’s] business.” The lease required plaintiff to obtain “[c]omprehensive general liability insurance, including property damage, with a broad form of contractual liability endorsement, protecting and indemnifying … Landlord … against any and all claims for damage to … property, or for loss of … property occurring in or about the Premises or arising out of the ownership, maintenance, use or occupancy thereof of from any of the matters in this Lease against which Tenant is required to indemnify Landlord.”

The lease also contained a “waiver of subrogation rights” clause whereby plaintiff waived all rights of recovery against defendant for “any loss, damages or injury of any nature whatsoever” to property for which plaintiff was insured.

On May 20, 2013, the concrete slab floor of Unit 3 collapsed, allegedly causing plaintiff damages, including the destruction of customers’ goods stored in the unit. Plaintiff filed a complaint, alleging that defendant failed to deliver a secure location for storage of the goods, and failed to properly inspect, maintain, remedy, and repair any defects in the premises.

There was no dispute that plaintiff failed to obtain the required insurance. Defendant filed a motion for summary judgment, arguing, in part, that plaintiff was not entitled to damages because it breached the lease provision requiring it to obtain insurance.

The motion judge granted summary judgment and dismissed the complaint with prejudice, finding, in part, that the lease provision requiring plaintiff to obtain insurance was clear and unambiguous; the provision required plaintiff to obtain insurance for the loss that occurred here; and plaintiff breached the lease by failing to obtain insurance. This appeal followed.

ANALYSIS

If there is no genuine issue of material fact, the court must then decide whether the trial court correctly interpreted the law. The appellate court reviews the motion for summary judgment anew and accords no deference to the trial judge’s conclusions on issues of law.

Under New Jersey law a lease is like any other written contract.  Where the terms of a contract are clear and unambiguous, the courts must enforce those terms as written. A party who fails to perform a lease provision has breached the lease.

Here, plaintiff contracted to provide liability insurance coverage for defendant. Plaintiff conceded before the trial court that the lease provision requiring it to obtain insurance was clear and unambiguous; it breached that provision; its insurance carrier would have paid the damages it sustained; and it had no right of subrogation for the claim.

Because plaintiff breached the lease, it was liable to provide defendant with the benefits defendant would have received had plaintiff obtained liability insurance coverage. That defendant had its own liability insurance policy did not operate to absolve plaintiff from the consequence of failing to comply with its contractual obligations under the lease.

ZALMA OPINION

The breach of the lease controlled what happened. Although the lessor may have been liable for the injuries incurred by the plaintiff there would have been no law suit if the plaintiff had acquired the insurance for the lessor. It did not and therefore there was no insurance to pay the plaintiff for the lessor’s negligence. By breaching the lease the plaintiff lessee hurt itself.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Emotional Decision of Jury Overturned

Two Juries Give Verdict to Church and Ignores Law

Juries are made of humans who wish to provide justice. On a rare occasion a jury will ignore the law to help a plaintiff they feel is more righteous than the defendant, especially when the plaintiff is a church.

In Salem United Methodist Church Of Cedar Rapids, Iowa v. Church Mutual Insurance Company, Court of Appeals of Iowa, 2017 WL 512494, No. 16-0170, (2/8/17) two juries awarded the church more than $700,000 for damages due to flood even though they were instructed that the insurer, Church Mutual, specifically, clearly and unambiguously excluded damage caused by flood.

FACTS

Salem United Methodist Church (hereinafter “Salem”) was damaged during the Cedar Rapids flood of 2008. At issue is whether damage to the church basement was the result of sewage backup and/or flood and consequently whether the loss was covered or excluded. A jury returned a verdict in favor of Salem in the amount of $705,765.07. On appeal, this court vacated the judgment and remanded the matter for new trial. (Salem United Methodist Church v. Church Mut. Ins. Co., No. 13-2086, 2015 WL 1546431, at (Iowa Ct. App. Apr. 8, 2015).

The Iowa Court of Appeal concluded the insurance policy excluded coverage for “damages that are concurrently caused by a covered cause—such as a sewer backup—and an uncovered cause—such as flooding.” It further concluded the district court erred in instructing the jury to the contrary. This court remanded the case for a new trial. Following remand, a jury again returned a verdict in favor of Salem, this time in the amount of $717,000. Church Mutual moved for judgment notwithstanding the verdict, arguing it was undisputed the cause of loss was the flood and consequently the loss was excluded.

The district court granted the motion, and Salem timely filed this appeal.

POLICY EXCLUSION

The policy provides:

“1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. …

  1. Water.

(1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not;

(2) Mudslide or mudflow,

(3) Water which backs up through sewers or drains except as provided under F. Additional Coverage – Back Up Through Sewers and Drains.

(4) Water under the ground surface pressing on or flowing or seeping through:

(a) Foundations, walls, floors, or paved surfaces;

(b) Basements, whether paved or not; or

(c) Doors, windows, or other openings.

The policy also included extra coverage for water that backs up through sewers and drains.

ANALYSIS

When an insured seeks to enforce a provision of an insurance policy, the burden of proof initially is on the insured to prove that both the property and the peril were covered by the terms of the policy. Generally speaking, the insured bears the burden of proving all elements of a prima facie case including the existence of a policy, payment of applicable premiums, compliance with policy conditions, the loss as within policy coverage, and the insurer’s refusal to make payment when required to do so by the terms of the policy.

Once the insured has established a prima facie case, the burden of proving that coverage is excluded by an exclusion or exception in the policy rests upon the insurer. Until a prima facie case of coverage is shown, the insurer has no burden to prove a policy exclusion. The insurer bears the burden of proving the applicability of policy exclusions and limitations or other types of affirmative defenses, in order to avoid an adverse judgment after the insured has sustained its burden and made its prima facie case.

In the prior decision related to this case, the court determined the flood exclusion language was clear and unambiguous.

The court of appeal agreed with the district court that there was no question of fact for the jury because it was undisputed the flood was a direct or indirect cause of damage to the church basement. A member of the church’s building committee even testified the sewer backup was caused by the flood. The Church’s expert testified that where there are not flood conditions, the sewage pipes will not run full and water will flow downstream. But under the conditions of June 11 and 12, the floodwaters altered the way the system was supposed to operate. He testified on cross examination that the “flood was the one and only cause of the backup.”

Notwithstanding the state of the evidence, Salem argues judgment notwithstanding the verdict was not proper because causation is always a question of fact for the jury.

While Salem correctly states causation, generally, is a question of fact for the jury, this presupposes there is evidence from which the jury could make a particular finding of fact. Here, there was no evidence from which the jury could infer the loss was caused by something other than the flood. The policy explicitly excluded flood damage from coverage.

While the policy did provide additional coverage for sewer backup, such coverage was not applicable where the sewer backup occurred as a result of, either before or after, the excluded flood. Here, it was undisputed the flood either directly caused the damage to the basement or indirectly caused the damage by causing the sewer to backup. No reasonable mind could reach a contrary conclusion.

The purpose of judgment notwithstanding the verdict is to allow the district court an opportunity to correct any error in failing to direct a verdict. While it is true even when the facts are not in dispute or contradicted, if reasonable minds might draw different inferences from them, a jury question is engendered.

That was not the situation here.

The evidence is so palpable, flagrant and manifest that reasonable minds may fairly reach no other conclusion than the floodwaters were a direct or indirect cause of all of Salem’s claimed damages.

ZALMA OPINION

When the evidence was so clear that reasonable minds may reach only one conclusion the court is obligated to set aside the jury verdict no matter how much the court – like the jury – would rather an insurer pay for the damages than the insurer. In this case the jury did justice and the court had to apply the law.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Excellence in Claims Handling

It is Time For Insurers to Require Excellence from Their Claims Staff

In search of profit, insurers have decimated their professional claims staff. They laid off experienced personnel and replaced them with young, untrained, unprepared people. A virtual clerk replaced the old professional claims handler. Process and computers replaced hands-on human skill and judgment. Money was saved by paying lower salaries. Within three months of firing the experienced claims people gross profit increased.

PROMISES MUST BE KEPT

The promises made by an insurance policy are kept by the professional claims person. Keeping a professional claims staff dedicated to excellence in claims handling is cost-effective over long periods of time. A professional and experienced adjuster will save the insurer millions by resolving disputes, paying claims owed promptly and fairly, and by so doing avoiding litigation.

The professional claims person is an important part of the insurer’s defense against litigation by insureds against insurers for breach of contract and the tort of bad faith. Claims professionals resolve more claims for less money without the need for either party to involve counsel. A happy claimant satisfied with the results of his or her claim will never sue the insurer.

Incompetent or inadequate claims personnel force insureds and claimants to public insurance adjusters and lawyers. Every study performed on claims establishes that claims with an insured or claimant represented by counsel cost more to resolve than those where counsel is not involved. Prompt, effective, professional claims handling saves money for both the insured and the insurer and fulfills the promises made when the insurer sold the policy.

Insurers who believe they can handle first or third party claims with young, inexpensive, inexperienced and untrained claims handlers should be accosted by angry stockholders whose dividends have plummeted or will plummet as a result. When an insurer compromises on staff, profits, thin as they may have been previously, will move rapidly into negative territory. Tort and punitive damages will deplete reserves. Insurers will quickly question why they are writing insurance. Those who stay in the business of insurance will either adopt a program requiring excellence in claims handling from every member of their claims staff, or they will fail.

Insurance is a business. It must change—this time for the better—if it is to survive. It must rethink the firing of experienced claims staff and reductions in training to save “expense.” Insurers should, if they wish to succeed, adopt a program to promote excellence in claims handling that can help insurers keep the promises made by the insurance policy and avoid charges of breach of contract and the tort  bad faith in both first and third party claims.

Insurers must understand that they cannot adequately fulfill the promises they make to their insureds and their obligations under fair claims practices acts without a professional, well trained and experienced claims staff. An insurer must work vigorously and intelligently to create a professional claims department or recognize it will  lose its market and any hope of profit.

Insurance claims professionals are people who:

  • can read and understand the insurance policies issued by the insurer.
  • understand the promises made by the policy and their obligation, as an insurer’s claims staff, to fulfill the promises made.
  • are competent investigators.
  • have empathy, and recognize the difference between empathy and sympathy.
  • understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals.
  • understand how to repair damage to real and personal property and the value of the repairs or the property.

An insurer whose claims staff is made up of people who are less than professional will find itself the subject of multiple instances of expensive, counterproductive litigation.

A Proposal to Create Claims Professionals

To avoid claims of breach of contract, bad faith, punitive damages, unresolved losses, and to make a profit, insurers must maintain a claims staff dedicated to excellence in claims handling. That means they recognize that they are obligated to assist the policyholder and the insurer to fulfill all the promises made by the insurer in the wording of the policy. An insurer can create a claims staff dedicated to excellence in claims handling by, at least:

  • Hiring insurance claims professionals.
  • If professionals are not available, training all members of the existing claims staff to be insurance claims professionals.
  • Training each member of the claims staff annually on the local fair claims settlement practices regulations.
  • Supervising each claims handler closely to confirm all claims are handled professionally and in good faith.
  • Explaining to each member of the claims staff the meaning of the covenant of good faith and fair dealing.
  • Requiring that staff treat every insured with good faith and fair dealing.
  • Demanding excellence in claims handling from the claims staff.
  • Being ready to dismiss any claims handler who fails to treat every insured with good faith and fair dealing.

If any experienced claims professionals exist on the insurer’s staff, the insurer must cherish and nurture them and use their experience and professionalism to train new claims people. If none are available, the insurer has no option but to train its people from scratch using available materials and professionals who have – for a reasonable fee – the ability to properly and effectively train claims personnel.

When the claims staff is made up of  claims people who treat all insureds and claimants with good faith and fair dealing and provide excellence in claims handling litigation between the insurer and its insureds will be reduced exponentially. To keep the professional claims staff operating efficiently and in good faith they must be honored with increases in earnings and perquisites. Conversely, those who do not treat all insureds and claimants with good faith and fair dealing should be counseled and given detailed training. If they continue with less than professional conduct they must be fired.  The insurer must make clear to all employees that it is committed to immediately eliminating staff members who do not provide excellence in claims handling and must be ready to publicly and quickly fire those who do not provide excellence in claims handling.

An excellence in claims handling program can include a series of lectures supported by text materials. It must be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce the information learned in the lectures. To guarantee that the training and requirement for excellence in claims handling is effective he insurer must also institute a regular program of auditing claims files to establish compliance with the requirement to deal fairly and in good faith to the insured. The insurer’s management must support the training and repeat it regularly and audit claims files to determine the training has taken and is being applied to each claim.

There is no quick and easy solution. The training takes time; learning takes longer. If the insurer does not have the ability to train its staff it should use outside vendors who can do so available from sources like this publication, training from professional organizations, and continuing education providers.

The excellence in claims handling program requires thorough training providing each member of the claims staff with a minimum of the following:

  1. How to read and understand the contract that is the basis of every adjustment, including but not limited to:
    1. The formation of the insurance policy.
    2. The rules of interpretation.
  2. Tort law including negligence, strict liability in tort, and intentional torts.
  3. Contract law including the insurance contract, the commercial or residential lease agreement, the bill of lading, nonwaiver agreements, proofs of loss, releases and other claims related contracts.
    1. The duties and obligations of the insured in a personal injury claim.
    2. The duties and obligations of the insurer in a personal injury claim.
    3. The duties and obligations of the insured in a first party property claim.
    4. The duties and obligations of the insurer in a first party property claim.
  4. The Fair Claims Practices Act and the regulations that enforce it.
  5. The thorough investigation:
    1. Basic investigation of an auto accident claim.
    2. Investigation of a construction defect claim.
    3. Investigation of a nonauto negligence claim.
    4. Investigation of a strict liability claim.
    5. Investigation of the first party property claim.
    6. The recorded statement of the first party property claimant.
    7. The recorded statement or interview of a third party claimant.
    8. The recorded statement of the insured.
    9. The red flags of fraud.
    10. The SIU and the obligation of the claims representative when fraud is suspected.
  6. Claims report writing.
  7. The evaluation and settlement of the personal injury claim.
  8. How to retain coverage counsel to aid when a coverage issue is detected.
    1. How to control coverage counsel.
    2. How to instruct coverage counsel on the issue to be resolved.
  9. Dealing with a plaintiff’s lawyer.
  10. Dealing with personal injury defense counsel.
  11. The evaluation and settlement of the property damage claim.
  12. The Appraisal process.
  13. Arbitration and mediation and the claims representative.

I am working with Illumeo to prepare an excellence in claims handling program that should be available later this year that will allow each professional claims person to become a Certified Expert in Corporate Property Insurance.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Failure to Conduct Real Investigation Supports Bad Faith Judgment

Hiring Counsel Not Investigation

In the last few decades insurance companies, recognizing that their failure to train their new claims staff, failure to keep experienced claims staff, and failure to require a staff that can provide excellence in claims handling, have hired lawyers to take over the work of their adjusters. It is amazing to me that hiring expensive lawyers to do what an experienced and well trained adjuster can do for a small annual salary by comparison to the high hourly rates of a lawyer, is just foolish.

In Millennium Laboratories, Inc., v. Darwin Select Insurance Company, United States Court of Appeals, Ninth Circuit, 2017 WL 382345, No. 15-55227 (January 27, 2017) the USCA for the Ninth Circuit proved how expensive such a system can be.

FACTS

In this insurance coverage dispute, Millennium Laboratories, Inc. alleged that its liability insurer, Darwin Select Insurance Company, had a duty to defend it against two third-party lawsuits (Ameritox and Calloway) and that Darwin denied coverage in bad faith. The district court denied Darwin’s cross-motion for summary judgment on its duty to defend, and it denied both parties’ motions for summary judgment on Millennium’s claim that Darwin breached its implied duty of good faith and fair dealing by denying coverage unreasonably. The case went to trial, and the jury found in favor of Millennium.

DARWIN’S DUTY TO DEFEND

The claims against Millennium potentially fell within the policy’s coverage for personal and advertising injury, which included coverage for claims of disparagement. Darwin knew that Millennium had been involved in several similar legal disputes and that its sales team had allegedly told customers that competitors’ businesses were illegal, among other things. Darwin indeed knew that such allegations against Millennium had been made in Calloway itself, at least with respect to events prior to Darwin’s policy. When Darwin learned that Millennium’s general counsel had allegedly made aggressive and insulting statements about competitors in a presentation to sales employees during the Darwin coverage period, it should have realized that Millennium faced potential disparagement claims.

The policy’s prior noticed claims exclusion did not bar coverage, despite the fact that Millennium had reported other claims in the Ameritox and Calloway cases to its previous insurer. Millennium could not have reported the events underlying the potential disparagement claims to a previous insurer because those events occurred during the Darwin policy period. In addition, Darwin points to no precedent for applying a prior noticed claims exclusion in the context of occurrence-based coverage. Because exclusions must be interpreted narrowly the exclusion here did not relieve Darwin of its duty to defend.

BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING; JURY INSTRUCTIONS

Darwin appeals the order denying its motion for summary judgment of Millennium’s claims for breach of the implied covenant of good faith and fair dealing. The Ninth Circuit had no jurisdiction to review that order.

Darwin’s good or bad faith was, however, the subject of the district court’s order denying Darwin’s motion for judgment as a matter of law. Millennium’s evidence, when considered in a favorable light, showed that Darwin anticipated denying the claims from the outset: it assigned the claims to an inexperienced employee who at first recommended further investigation, but Darwin conducted no real investigation and instead hired outside counsel in anticipation of a lawsuit.

Although the district court told the jury that it had already “been determined” that Darwin wrongly denied coverage, jurors heard repeatedly from the parties and the district court that their job was to decide whether Darwin had acted unreasonably or in bad faith, not whether Darwin should have defended Millennium.

TERMINATION OF DARWIN’S DUTY TO DEFEND IN AMERITOX

An insurer’s duty to defend may extend to an appeal on reasonable grounds, if a potentially covered claim remains. Similarly, an insurer may have a duty to pay for post-trial motions. Here, however, by the time Millennium appealed and moved for a new trial, it was plain that the case contained no potentially covered claims. Ameritox did not press a disparagement claim, the jury never awarded damages for disparagement, and Ameritox did not appeal or move for a new trial.

There was no evidence that an amendment to add a disparagement claim was likely. If the Ameritox litigation is ever reinitiated and Millennium again faces a potentially covered claim, it could then request a defense. Darwin’s duty to defend therefore terminated with the June 16, 2014 judgment in Ameritox. The Ninth Circuit, therefore, reversed this one aspect of the district court’s decisions.

SUMMARY

The district court’s order granting partial summary judgment was affirmed, as were its orders denying judgment as a matter of law, jury instructions, and statements in voir dire.

The order denying Darwin’s motion to terminate its duty to defend in Ameritox is reversed, and the case is remanded with instructions that Darwin’s duty to defend be terminated as of June 16, 2014.

ZALMA OPINION

The lack of an investigation resulted in a verdict that the insurer acted in bad faith and was subject to damages as a result. If it had conducted an investigation it would have found, as the USCA reported, there were unreported claims by the insured before the policy was issued and a constant course of wrongful conduct. Lack of a proper and thorough investigation Darwin hired lawyers who apparently did no investigation either.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Pollution Exclusion Unambiguous

After Insurer Proves Exclusion Applies Burden Shifts to Insured to Prove Otherwise

Pollution exclusions have been rewritten over the last few decades until courts now agree that the absolute pollution exclusion is not ambiguous. In Hiland Partners GP Holdings, LLC v. National Union Fire…, United States Court of Appeals, Eighth Circuit — F.3d —-, 2017 WL 405645 (January 31, 2017) the Eighth Circuit was faced with a claim asking it to reverse a trial court decision that the exclusion was ambiguous and did not apply to an injury suit.

FACTS

Hiland Partners GP Holdings, LLC, Hiland Partners, LP, and Hiland Operating, LLC (collectively, Hiland) sued National Union Fire Insurance Company of Pittsburgh, PA (National Union). Hiland alleged that National Union had a duty to defend and indemnify it in connection with a lawsuit arising from an explosion at its natural gas processing facility. The district court granted National Union summary judgment after concluding that an exclusion to the insurance policy barred coverage.

Hiland owns and operates a natural gas processing facility in Watford City, North Dakota. The processing facility receives gas and hydrocarbon products and processes them into byproducts for sale. Hiland entered into a master service contract with Missouri Basin Well Service (Missouri Basin). That contract provided that Missouri Basin would “from time to time, be requested by Hiland … to perform certain work or furnish certain services to Hiland.” The contract also required Missouri Basin to obtain insurance policies which named it as the primary insured and Hiland as an additional insured.

THE POLICY

Missouri Basin also procured a commercial general liability insurance policy through National Union in April 2011, which was effective through April 2012.  The policy required National Union to pay all “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ ” which the policy covered. The policy also required National Union “to defend the insured against any ‘suit’ seeking those damages.”

The policy included an endorsement which excluded coverage for: “(1) ‘Bodily Injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants…”

The endorsement defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The endorsement provided that subparagraphs (1)(a) and (1)(d) do not apply if the pollution “commences during the term of the policy,” the insured discovers the pollution within seven days “after it commences,” and the insured reports the pollution to the insurer within twentyone business days following its discovery.

THE LOSS

In October 2011, Hiland requested that Missouri Basin remove water from its hydrocarbon condensate tanks at its Watford City processing facility. Condensate is one of the marketable byproducts derived from the facility’s processing of gas and hydrocarbon products. It is a flammable, volatile, and explosive product. Missouri Basin asked B&B Heavy Haul, LLC (B&B), a subcontractor, to haul the water. After B&B employee Lenny Chapman arrived at the facility he positioned his truck in front of one of the condensate tanks. Before Chapman began removing the water, one of the tanks overflowed. The condensate then caused an explosion which seriously injured Chapman.

Chapman and his wife filed sued Hiland, alleging negligence and loss of consortium. The Chapmans later settled their claims against Hiland. National Union refused to defend and indemnify Hiland as an additional insured under its insurance policy with Missouri Basin. Hiland then sued for declaratory judgment action against National Union, arguing it was an additional insured under the insurance policy and that National Union had breached the policy by refusing to defend or indemnify it.  The trial court concluded that although Hiland was an additional insured under the policy, the Chapmans’ action fell within the pollution exclusion.

ANALYSIS

Hiland first argued that the pollution exclusion in the National Union insurance policy is ambiguous. National Union argued that Hiland waived any argument that the pollution exclusion was ambiguous because Hiland did not raise any such argument before the district court.

In its memorandum in support of summary judgment, National Union argued that the pollution exclusion in its policy “is clear and unambiguous.” Hiland chose not to contest this point in its response in opposition to summary judgment. Hiland instead argued that hydrocarbon condensate is not a pollutant under the unambiguous terms of the policy. Because Hiland did not directly dispute the ambiguity issue, it is waived.

Regardless, North Dakota has not addressed whether pollution exclusions like the one in this case are ambiguous. However, the “majority of state and federal jurisdictions have held that absolute pollution exclusions are unambiguous as a matter of law.” Church Mut. Ins. Co. v. Clay Ctr. Christian Church, 746 F.3d 375, 380 (8th Cir. 2014

Hiland next argued that the district court erred by concluding that condensate is a pollutant. National Union’s insurance policy excluded from coverage bodily injuries or property damage “arising out of the … discharge, dispersal, seepage, migration, release or escape of pollutants.” The policy defined pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The policy did not define irritant or contaminant, however. North Dakota applies “the plain, ordinary meaning” to an undefined term in an insurance policy so long as the term is not subject to strict technical usage.

According to Chapman’s complaint, condensate is a saleable byproduct that results from the processing of gas and hydrocarbon products. The complaint described condensate as “flammable, volatile, and explosive.” Condensate is therefore a contaminant because flammable, volatile, and explosive liquid and gas has the ability to soil, stain, corrupt, or infect the environment.

The conclusion that condensate is a pollutant is further supported by Noble Energy, Inc. v. Bituminous Cas. Co., 529 F.3d 642 (5th Cir. 2008). In that case Noble Energy contracted with a water hauler “to collect and dispose of Basic Sediment and Water (‘BS&W’) from Noble’s storage tanks” at an oilfield recycling facility. The water hauler was covered by an insurance policy that contained a pollution exclusion that is identical in all relevant parts to the exclusion here. While an employee of the water hauler was unloading the BS&W from a truck, condensate vapors dispersed and caused the truck’s engine to explode. The court concluded that condensate “indisputably [met] the policy’s definition of ‘pollutant’ ” and the explosion “indisputably arose out of the discharge, dispersal, release, or escape of the BS&W and its vapors.” The Eighth Circuit found Noble Energy, Inc. persuasive and indistinguishable from the current action and found that the trial court did not err.

BURDEN OF PROOF

In North Dakota the insurer has the burden to prove the applicability of a policy exclusion.”  The insured, however, carries the burden to prove the applicability of an exception to the exclusion in order to benefit from coverage. National Union met its summary judgment burden by proving the applicability of the pollution exclusion. The district court then properly placed the burden of proving the applicability of an exception to this exclusion on Hiland. Because Hiland did not offer specific facts showing that it reported the pollution to National Union within twentyone days, the district court did not err by concluding that the exception to the exclusion did not apply.

ZALMA OPINION

Insurance companies do not want to cover pollution related injuries for the standard premium charged for a Commercial General Liability insurance policy. For years courts fought over the meaning of pollution exclusions until the insurers wrote the absolute pollution exclusion that left no space to argue ambiguity. Insurers who deal with pollutants, like Highland, should be care about the coverages they acquire and make sure that the exclusion is removed and pay the extra costs.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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 Jersey Eliminates Stink Over Assignments of Claims

Non-Assignment Clauses Only Prevent Assignment of Policy Not a Perfected Loss and Claim

Every third party liability insurance policy contains an anti-assignment condition that prevents an insured from assigning the policy to a third party without the permission of the insurer. The clauses do not prohibit assignment of claims that resulted from a covered occurrence during the policy period of the insurer.

When a perfume maker was sued for environmental pollution its insurers refused to defend or indemnify because they were not named as insureds in the policy and that they did not approve an assignment of policies from various predecessors of the plaintiff, Fragrances.

Insurers, faced with an avalanche of case law across the country, allowing assignment of the claim – a chose in action – and refuse to apply the anti-assignment clause to claims, continue to try to convince courts to make the condition include rights not mentioned in the policy wording. They tried again in New Jersey this year in Givaudan Fragrances Corporation v. Aetna Casualty & Surety..., Supreme Court of New Jersey, — A.3d —-, 2017 WL 429476 (2/1/2017) when the Supreme Court of New Jersey was asked to settle whether New Jersey adheres to the rule that an anti-assignment clause in an insurance policy may not bar the assignment of a post-loss claim even though the claim has not been reduced to a money judgment.

FACTS

Plaintiff Givaudan Fragrances Corporation (Fragrances) faces liability as a result of environmental contamination from a manufacturing site that a related corporate entity operated in a facility in Clifton, New Jersey, in relevant part, from the 1960s through 1990. The crux of this appeal involves Fragrances’s effort to obtain insurance coverage for environmental claims.

Defendants are insurance companies that wrote primary, excess, or umbrella policies of insurance for predecessors of Fragrances. Collectively, defendants refuse to honor Fragrances’s right to bring insurance contract claims against them.

THE ISSUES

Fragrances asserts that it has the right via an assignment of rights to claim coverage under the policies. That right, Fragrances asserts, may not be defeated by a clause, common to the policies at issue, that makes any assignment subject to the insurer’s consent (the “anti-assignment clause”). The language of that clause, as it appears in one representative policy, provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon…”

The dispute between Fragrances and defendants began in earnest when Fragrances was sued. Fragrances notified defendants of the environmental claims, but, generally stated, all defendants declined to provide coverage because Fragrances was not the named insured under the policies. Fragrances sued and while the declaratory judgment action was pending, Fragrances notified defendants that Flavors intended to assign its post-loss rights under the insurance policies to Fragrances. Defendants refused to consent to the assignment. Nevertheless, Flavors executed the assignment to Fragrances, which Fragrances maintains transferred its rights with respect to coverage for claims related to the fragrances operations that had been transferred pursuant to the 1998 restructuring.

After the assignment was executed, Fragrances filed a motion for summary judgment, asserting (1) that Fragrances has the rights of an insured under the policies because of the post-loss assignment of the claims.

Defendants countered that the 2010 assignment from Flavors to Fragrances was a policy assignment because it aimed to grant all rights under the policies to Fragrances. Defendants stated that insurance policies are personal contracts specific to the insured party that may not be assigned without the insurer’s consent.

The Appellate Division reversed and remanded. The panel explained that the policies were occurrence policies, where “the peril insured is the occurrence itself.” Although the anti-assignment clauses in the occurrence policies at issue would prevent an insured from transferring a policy without the consent of the insurer, once a loss occurs, an insured’s claim under a policy may be assigned without the insurer’s consent.

Defendants assert that Flavors’s assignment was invalid as it added a second insured to the policy, increasing their liability. More specifically, they contend that Flavors’s assignment was a proscribed policy assignment, not an allowable transfer of a claim under the policy. Fragrances argues that Flavors validly made a claim assignment—not a policy assignment—to Fragrances.

ANALYSIS

In Elat, Inc. v. Aetna Casualty & Surety Co., 280 N.J. Super. 62 (App. Div. 1995), the appellate court concluded that a post-loss insurance policy claim may be assigned. In Elat, the Appellate Division concluded that an anti-assignment condition in an insurance policy cannot restrict a policyholder’s ability to assign a post-loss claim.

The reason for the distinction between a transfer of a contractual relationship and a transfer of a money claim is critical. The purpose behind a no-assignment clause in a casualty or liability policy which is to protect the insurer from insuring a different risk than intended. The assignment only changes the identity of the entity enforcing the insurer’s obligation to insure the same risk. Thus, the purpose behind the no-assignment clause is not inhibited by allowing claim, as opposed to policy, assignment.

The reasoning in Elat aligns with the overwhelming majority of jurisdictions that have, over the decades, spoken on the issue presented in the instant matter.

The majority rule in the United States is that a provision that prohibits the assignment of an insurance policy, or that requires the insurer’s consent to such an assignment, is void as applied to an assignment made after a loss covered by the policy has occurred. Once the loss has triggered the liability provisions of the insurance policy, an assignment is no longer regarded as a transfer of the actual policy. Instead, it is a transfer of a chose in action under the policy.

The majority rule is an exception to the general principle that parties to a contract may freely limit assignment of their contractual rights. The principle underlying the rule is a deeply rooted public policy against allowing restraints on alienation of choses in action. The rule also embodies a recognition that “once a loss occurs, an assignment of the policyholder’s rights regarding that loss in no way materially increases the risk to the insurer.” 17 Williston on Contracts § 49:126 (4th ed. 2016).

The key issue is whether claims based on injuries that occurred during the policy period, but that had not been reduced to money judgments, were assignable without the insurer’s consent.

With respect to the core argument about the enforceability of insurance policy anti-assignment provisions concerning post-loss claims, the Supreme Court found no reason to hesitate to adopt the position that an anti-assignment clause is not a barrier to the post-loss assignment of a claim. The better rule is the generally recognized majority rule on that issue.

Simply stated, that general rule recognizes that anti-assignment clauses in insurance contracts apply only to assignments before loss, and do not prevent an assignment after loss. Post-loss assignments do not further the purpose of the anti-assignment clause, which is to protect the insurer from increased liability, because, after the events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.

Having adopted the majority rule, the Supreme Court turned to its application to the case at hand. In doing so, it considered first whether Flavors’s assignment to Fragrances was a post-loss claim assignment, or, as the insurers argue, an attempt to assign the insurance policies themselves. The court concluded that it was a post-loss claim assignment and therefore that the rule adopted voiding application of anti-assignment clauses to such assignments applies.

Here, the right to insurance coverage for the “occurrence” of environmental contamination was assigned to Fragrances after the policies had expired. The loss event occurred during the policy periods.  Nothing in the form of the assignment from Flavors to Fragrances alters the conclusion that only post-loss claims were assigned.

The Supreme Court concluded that the assignment does not increase the risk undertaken by the insurers for the policy periods for which they wrote coverage, in specified amounts, for occurrence-based claims pertaining to the Givaudan site in Clifton.

Where a valid post-loss claim assignment is made as to a given claim, an insurer has a duty to defend the assignee as the holder of that claim.

ZALMA OPINION

Environmental claims are expensive. Insurers would prefer not to pay them. However, the need to avoid payment, doesn’t work when insurers go against the majority rule on assignments and ask that the Supreme Court of New Jersey to rewrite the policy to provide language not there – something insurers argue against when clear language is modified or made ambiguous by courts – and were doomed to fail. They could have written the policy to avoid assignments of choses in action but did not. The insurers arguments against Fragrances raised a stink rather than the sweet smell of insurers providing defense and indemnity to their insured.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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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Judge Gorsuch on Insurance

Entire Policy Must Be Read – Not Just Selected Parts

Since Tenth Circuit Judge Gorsuch has been submitted to the U.S. Senate to be confirmed to sit on the U.S. Supreme Court I thought it would be interesting to review one of his insurance decisions. In Western World Ins. Co. v. Markel American Ins. Co., Tenth Circuit, 677 F.3d 1266 (2012) Judge Gorsuch recognized and applied, with humor and skill, one of the most important rules of insurance interpretation: read the entire policy. I look forward to his opinions from the Supreme Court.

Haunted houses may be full of ghosts, goblins, and guillotines, but it’s their more prosaic features that pose the real danger. Tyler Hodges found that out when an evening shift working the ticket booth ended with him plummeting down an elevator shaft. But as these things go, this case no longer involves Mr. Hodges. Years ago he recovered from his injuries, received a settlement, and moved on. This lingering specter of a lawsuit concerns only two insurance companies and who must foot the bill.

FACTS

The problems began at the front door of the Bricktown Haunted House in Oklahoma City. There Mr. Hodges was working the twilight hours checking tickets as guests entered. When his flashlight failed Hodges was aiming for the freight elevator, where (imprudently, it turns out) spare flashlights were stored. When he reached the elevator, Mr. Hodges lifted the wooden gate across the entrance and stepped in. But because of the brooding darkness, Mr. Hodges couldn’t see that the elevator was on a floor above him and he crashed 20 feet down the empty elevator shaft.

It is here the insurance companies enter the picture. Mr. Hodges sued Brewer Entertainment, the haunted house’s operator, for various torts. But no doubt wary of liability arising from its occult operation, Brewer had attended well to its insurance needs. It held two separate insurance policies, one with Western World Insurance Company and another with Markel American Insurance Company. Western World had thought far enough in advance to exclude from its haunted house coverage “any claim arising from chutes, ladders, … naked hangman nooses, … trap doors … [or] electric shocks.” But it hadn’t thought to exclude blind falls down elevator shafts, so it admitted coverage and proceeded to defend Mr. Hodges’s suit. Markel, however, balked, refusing to defend or pay any claim.

Western World wants Markel to fork over half the cost it incurred in defending—and eventually settling—Mr. Hodges’s claim. Markel directed the court to an “escape clause” that, it said, allowed it to elude the liability that would otherwise arise from the terms of its policy. Ultimately, the district court agreed with Markel, found the escape clause a viable escape hatch, and entered summary judgment in Markel’s favor—a decision, naturally enough, Western World now appeals.

The Oklahoma doctrine of equitable contribution, which “apportion[s] a loss between two or more insurers who cover the same risk so that each pays his fair share of a common obligation, and one co-insurer does not profit at the expense of the others. The only issue in this appeal, the parties agree, is whether the escape clause lets Markel escape liability.

Viewed in isolation, the clause seems to suggest as much. It provides that “[t]his insurance shall not apply to any entity that is already an insured under any other insurance provided by any company….” This seems a clear statement (or as clear a statement as one is likely to find in a densely drafted commercial insurance contract) disclaiming liability in the very circumstances we face.

But like so much else about this case, things are not always as they first appear. However appealing in isolation, Markel’s argument faces serious problems when viewed in context. The escape clause does not appear in Markel’s general commercial liability policy. Instead, the clause was added by a later endorsement.

ANALYSIS

If the immediate context casts a shadow over Markel’s reading of the escape clause, surrounding context darkens it. In Section IV of Markel’s policy there is a provision conspicuously titled “Other insurance,” addressing exactly the subject its heading suggests. The provision states (subject to various exceptions not relevant here) that Markel’s insurance provides “primary” coverage. And it adds that, if another insurance policy is also “primary” (as Western World’s is), the two carriers will share the cost of coverage according to a specified formula—either in equal shares or pro rata based on policy limits, all depending on the contents of the other policy.

This poses a problem for Markel because its reading of the escape clause renders its own “Other Insurance” provision a dead letter. Under Western World’s interpretation of the contract, Section IV’s “Other Insurance” provision states the general rule that Markel will provide co-insurance and the escape clause provides a limited exception for entities insured under Section II paragraph 2—certainly a plausible (if not metaphysically compelled) reading, one that at least gives some effect to every provision in the policy. Yet under Markel’s interpretation of the contract, the escape clause absolves it of all liability when another insurer is lurking about—an interpretation rendering Section IV’s “Other Insurance” provision more apparitional than corporeal. And that has to be a serious strike against Markel’s interpretation given contract law’s abhorrence of words without meaning and other superfluities. The whole of a contract is to be taken so as to give effect to every part, if reasonably practicable.

Even viewed in its best light, the applicability of the escape clause to an entity, like Brewer, insured under Paragraph 1 is far from clear. And in these circumstances, Oklahoma contract law tells us the tie must go to the insured. If (as here) the relevant limiting policy provisions are “unclear or obscure,” then the objectively reasonable expectations of a person “in the position of the insured” control. Put differently, when a policy’s escape hatch is less a clearly marked exit than it is a hidden trap door, the reasonable expectations of an insured who has read and become familiar with the policy language supplies the rule of decision. The plain terms of the contract are always the best evidence of the parties’ intentions and always control. But when the terms of the contract are unclear, or when the contract is susceptible to two reasonable interpretations, it is the expectations of the insured that control.

Applying the reasonable expectations doctrine to this case, we have no doubt a reasonable insured in Brewer Entertainment’s shoes would have expected coverage from Markel. Expected coverage in light of Markel’s general policy language promising Brewer coverage for accidents just like this one. Expected coverage in light of Section IV’s promise that Markel will shoulder the burden of co-insurance. Markel’s five page letter to Brewer explaining its decision to deny coverage rehearsed many other arguments—arguments it gave up the ghost on long ago—but the letter never once mentioned the escape clause. In fact, based upon the record the parties have presented to us it appears the first time Markel itself unearthed the escape clause from the depths of the contract and invoked it as a potential basis for evading liability was only after this litigation began.

Of course, few rules lack exceptions. And it’s at least conceivable Oklahoma might someday choose to create an exception to the reasonable expectations doctrine for cases where (arguably as here) both parties to the insurance contract are sophisticated and able to vindicate their interests without any extra help. But no such exception yet exists. When sophisticated insurers (like Markel) can much more easily and inexpensively avoid the sting of the reasonable expectations doctrine by the expedient of drafting clear and plain escape clauses that courts can enforce those that are not clear and plaint cannot be enforced.

ZALMA OPINION

Circuit Judge Gorsuch applied a rule of insurance contract interpretation carefully, correctly and with good humor. He placed light upon the haunted house and the policies insuring the risks of loss at the haunted house he made clear the need for an insurer to draft clear and unambiguous language and be careful when adding an endorsement that changes a contract and make some terms in other parts of the policy useless and inapplicable. Writing an insurance policy is hard and changes by endorsement, as did Markel, must be done carefully and avoid ambiguities or superfluities.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

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

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

Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  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’s Insurance Fraud Letter – February 1, 2017

Lie on Health Insurance Application Is Criminal  

Zalma’s Insurance Fraud Letter, Volume 21, No. 3

In the last 49 years that I have been in the business of insurance I have learned the one thing that is a certainty: the quality of insurance fraud perpetrators is almost non-existent. That means that it is so easy to steal from insurance companies that amateurs with no skills are jumping into the business of defrauding insurers. If the insurance industry learns enough about insurance fraud and defeats the claims of the amateurs the professional fraud perpetrators will go away and work easier crimes. If not, they will continue to bleed the insurance industry. It has been my desire, for the last 20 years Zalma’s Insurance Fraud Letter has been published, to help in the effort to make insurance fraud more difficult for the perpetrators and reduce what fraud takes from

the insurance industry.

Because more insurers are training their people to recognize insurance fraud in this issue you may be surprised to see cases where fraud failed and the perpetrator spent time in jail even though the number of convictions seem to be shrinking.

  • Lie on Health Insurance Application Is Criminal
    • Stupidity is No Defense to Insurance Fraud Crime
  • Illumeo Continuing Education
  • Civil Investigation Interview
  • New from Barry Zalma
    • “Insurance Law”
  • RiverSource Life Insurance Company Pays $1.5 Million for Failure to Use Death Master File
  • Barry Zalma Speaks at Your Request
  • Bluffs and a Fraud Investigation
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • More than $1Billion in Liens Linked to Workers’ Comp Fraud Charges
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • The Need to Understand the Mutability of Memory
  • Books from the American Bar Association
    • The Insurance Fraud Deskbook
    • Diminution in Value Damages
  • Zalma’s Insurance Fraud Letter
  • The Legend.
  • Legal Disclaimer

Visit the Zalma Insurance Claims Library

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

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.
The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the 1,022 videos follow: 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.

 

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