Vicarious Liability of an Auto Lessor

Federal Law Always Trumps State Law

Since the U.S. Constitution was first written a principle engraved in the founding document was that federal law preempts state law if the two laws are in conflict.

The Supreme Court of Florida was asked a question by the Florida’s Second District whether the preemptive scope of the federal law known as the Graves Amendment, 49 U.S.C. § 30106 (2006), which provides that the owner of a motor vehicle who leases the vehicle shall not be vicariously liable for harm that results from the use, operation, or possession of the vehicle during the lease. Specifically, the Supreme Court considered whether the Graves Amendment preempts liability under section 324.021(9)(b)(1), Florida Statutes (2002), which defines when a long-term lessor remains the owner of a leased motor vehicle and thereby subject to vicarious liability for damages caused by the vehicle under Florida’s dangerous instrumentality doctrine. In Alejandro Rosado v. Daimlerchrysler Financial Services Trust, Etc., et al, No. SC09-390 (Fla. 04/04/2013) the Florida Supreme Court answered the question.

BACKGROUND

On January 15, 2003, the LaMondue Law Firm, located in Virginia, leased a vehicle from Tysinger Motor Company, who later assigned the lessor’s interest to DaimlerChrysler Financial Services Trust (DaimlerChrysler). The four-year lease required the law firm to insure the car for not less than $100,000 per person and $300,000 per accident in bodily injury coverage and $50,000 in property coverage. The law firm permitted Terrell Parham to drive the vehicle, and on June 29, 2003, Parham crossed the median of a Florida highway and collided with a car driven by Alejandro Rosado. The day before the accident, the insurance policy on the vehicle lapsed for nonpayment.

Rosado, who sustained injuries in the collision, filed suit in Florida against Carl LaMondue, who executed the lease, the law firm, Parham, and DaimlerChrysler. Rosado alleged that because DaimlerChrysler had failed to comply with the insurance requirements of Florida Statutes, DaimlerChrysler was vicariously liable for Parham’s negligent operation of the car under Florida’s dangerous instrumentality doctrine.

DaimlerChrysler moved for summary judgment, contending that its liability, if any, should be based on Virginia tort law and that if Florida law applied, the Florida statute was preempted by the Graves Amendment. The trial court concluded that Florida law applied but that the Graves Amendment did preempt the statute and granted summary judgment in favor of DaimlerChrysler.

The Second District affirmed the trial court’s ruling that the Graves Amendment preempted the statute.

ANALYSIS

Under the Supremacy Clause of the United States Constitution, U.S. Const. art. VI, cl. 2, state laws may be preempted by federal laws in three situations: (1) where express federal statutory language so provides; (2) where federal law has so thoroughly occupied a legislative field as to create a reasonable inference that there is no room for the state to supplement it; or (3) where a state law conflicts with a federal law.

The Graves Amendment, titled “Rented or leased motor vehicle safety and responsibility,” was first enacted in 2005 and provides in part:

(a) IN GENERAL. – An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if –

(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

(b) FINANCIAL RESPONSIBILITY LAWS.–Nothing in this section supersedes the law of any State or political subdivision thereof-

(1) imposing financial responsibility or insurance standards on the owner of a motor vehicle for the privilege of registering and operating a motor vehicle; or

(2) imposing liability on business entities engaged in the trade or business of renting or leasing motor vehicles for failure to meet the financial responsibility or liability insurance requirements under State law.

The Florida statute provides that:

1. The lessor, under an agreement to lease a motor vehicle for 1 year or longer which requires the lessee to obtain insurance acceptable to the lessor which contains limits not less than $100,000/$300,000 bodily injury liability and $50,000 property damage liability or not less than $500,000 combined property damage liability and bodily injury liability, shall not be deemed the owner of said motor vehicle for the purpose of determining financial responsibility for the operation of said motor vehicle or for the acts of the operator in connection therewith; further, this subparagraph shall be applicable so long as the insurance meeting these requirements is in effect. The insurance meeting such requirements may be obtained by the lessor or lessee, provided, if such insurance is obtained by the lessor, the combined coverage for bodily injury liability and property damage liability shall contain limits of not less than $1 million and may be provided by a lessor’s blanket policy.

The statute does not require insurance or its equivalent as a condition of licensing or registration. It also does not require an owner/lessor to meet any financial responsibility or liability insurance requirements under state law, and the liability contemplated – i.e., vicarious liability for damages caused by the negligence of lessees – does not flow from any failure to meet such requirements. Rather, the statute preserves Florida common law vicarious liability by deeming short-term (less than one year) lessors to be “owners” for vicarious liability purposes, while limiting their exposure to damages for such claims. Therefore, it conflicts with and is thus preempted by the Graves Amendment.

The Florida Supreme Court has previously rejected the premise that the definition of “owner” in the statute renders a long-term lessor such as DaimlerChrysler not an owner for purposes of the dangerous instrumentality doctrine. A long-term lessor in Florida is by default the owner of the leased vehicle and, as a result of its status as owner, subject to vicarious liability stemming from the operation of that vehicle by the lessee.

A long-term lessor who chooses not to obtain the insurance outlined by section the statute will not incur any new or additional liability as a result of that decision. The plain language of the statute does not require insurance or its equivalent as a condition of licensing or registration and does not require an owner/lessor to meet any financial responsibility or liability insurance requirements under state law. Rather than requiring a lessor to purchase insurance, the statute creates an option. A long-term lessor who chooses not to obtain the insurance outlined by the statute will not incur a new financial obligation. Such a long-term lessor will continue to face the existing vicarious liability and financial responsibility imposed by Florida’s common law and other statutes. A long-term lessor who does not obtain insurance will be in the same financial position as he or she would have been if the statute had never been enacted.

Section 324.021(9)(b)(1) is not a law that imposes “financial responsibility or insurance standards on the owner of a motor vehicle for the privilege of registering and operating a motor vehicle” or “liability on business entities engaged in the trade or business of renting or leasing motor vehicles for failure to meet the financial responsibility or liability insurance requirements under State law.” Rather than imposing financial responsibility or insurance standards, the statute creates a process by which long-term lessors can avoid the default financial responsibility imposed upon them by Florida’s dangerous instrumentality doctrine. As a result, the Graves Amendment preempts section 324.021(9) (b)(1), Florida Statutes (2002).

ZALMA OPINION

An automobile lease is a form of financing the purchase or use of an automobile. To the lessor and the lessee the possession and use of the vehicle is transferred to the lessee just as the possession and control of a vehicle passes when a conditional sale purchase occurs. The Florida Legislature attempted to hold the lessors of an automobile vicariously liable for the operation of the vehicle by the operator but did not hold the conditional sale seller vicariously liable. The U.S. Congress, by the Graves Amendment, made clear the intent of the U.S. Government that long term lessors should not be held vicariously liable for the actions of the Lessee.

The Florida Supreme Court agreed and appropriately preempted the statute.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Prejudice Presumed

Prejudice Presumption Must Be Rebutted by Insured

Insurers place notice requirements in a policy of insurance to protect it from the obvious prejudice when it is unable to promptly investigate the cause and extent of the claimed damage. Regardless of the size of the deductible or self-insured retention the insurer requires notice of claim. When the policy is acquired the insured promises to fulfill the material conditions of the policy, one of which is the condition requiring prompt notice of loss.

The Florida Court of Appeal, after deciding in favor of the insured, reconsidered its decision after granting a motion for rehearing in 1500 Coral Towers Condominium Association, Inc. v. Citizens Property Insurance Corporation, No. 3D12-132 (Fla.App. 04/03/2013) and replaced its original opinion.

FACTS

1500 Coral Towers Condominium (“Coral Towers”) appealed a final summary judgment in favor of Citizens Property Insurance Corporation (“Citizens”) in a breach of contract action. The court of appeal reviewed, for a second time, the entire record as well as controlling case law.

At the time of Hurricane Wilma, in October 2005, Coral Towers was insured under a commercial-residential property insurance policy with Citizens. Approximately five years after Hurricane Wilma, on June 29, 2010, Coral Towers notified Citizens for the first time that the property had sustained damages as a result of Hurricane Wilma. Pursuant to the terms of the insurance policy, Citizens requested that Coral Towers submit a sworn proof of loss within sixty days. Coral Towers did not submit the proof of loss within sixty days. In October 2010, Coral Towers brought suit for breach of contract alleging that it had properly and timely notified Citizens of the damages it had sustained to the condominium properties as a result of Hurricane Wilma. It also alleged that Citizens had denied its claim. Citizens filed an answer and asserted affirmative defenses alleging that Coral Towers had failed to give prompt notice of the alleged loss and had breached the following policy provisions:

4. You[r] Duties After Loss. In case of a loss to covered property, you must:

a.  Give prompt notice to us, or your producer, who is to give immediate notice to us. . . . .

d.   Send to us, within sixty (60) days after our request, your signed, sworn proof of loss …

Citizens also asserted as an affirmative defense that Coral Towers was barred from recovery because it had failed to comply with conditions precedent to filing the lawsuit under the following policy provision:

15.   Suits Against Us.

No action can be brought unless the policy provisions have been complied with and the action is started within five (5) years from the date the loss occurs.

Three months after filing suit, Coral Towers provided the sworn proof of loss. The first opportunity Citizens had to inspect the property was in early August of 2010.  In discovery, Coral Towers admitted knowledge of the loss in November 2005, and that a roofer had repaired the elevator, roof, and surrounding walls in December 2005. The roof continued to leak and Coral Towers obtained estimates to replace the roof. The latter of the estimates was for $259,269.20. The reason Coral Towers alleged it did not notify Citizens immediately after Hurricane Wilma was because initially there was a question of whether the damages would exceed the policy deductible.

In September 2011, Citizens moved for summary judgment on grounds that Coral Towers was barred from recovery as a result of the failure to give prompt notice and failure to provide a sworn proof of loss within sixty days. Citizens alleged that it was prejudiced by the inability to investigate and evaluate the claim under the policy. Coral Towers maintained that the type of damages it had sustained appeared over time and would not have necessarily evidenced themselves within the first two years after the hurricane. The two issues addressed by the trial court and presented on appeal are whether Coral Towers’ notice of loss was timely and, if not, whether Citizens was prejudiced by the late notice.

ANALYSIS

There was no factual dispute that Coral Towers failed to give timely notice of the loss. When an insurance contract contains a provision which applies to notice of the damage claim, an insured must give notice of the loss that implicates a potential claim without waiting for the full extent of the damages to become apparent.  Prejudice is assumed when the insured does not give notice of a possible claim [Ideal Mut. Ins. Co. v. Waldrep, 400 So. 2d 782 (Fla. 3d DCA 1981)].

Here there is no genuine factual dispute that Coral Towers failed to give timely notice as required by the Citizens policy in question. The reasons given by Coral Towers for the late notice should not excuse Coral Towers’ failure to comply with the policy requirements of prompt notice. Therefore, the court of appeal found the trial court was correct in finding that Citizens was prejudiced by the late notice.

The existence of prejudice itself was not sufficient for the court to reach a decision since it also needed to establish whether Coral Towers can overcome the presumption of prejudice to Citizens caused by the late notice. If not, summary judgment was appropriate. Based on its second extensive review of the record and the case law, the court of appeal concluded that Coral Towers failed to overcome this presumption at the hearing for summary judgment.

An insurer is prejudiced by untimely notice when the underlying purpose of the notice requirement is frustrated by late notice. Failure to give timely notice creates a presumption that the insurer was prejudiced. The insured may rebut the presumption of prejudice by alleging and showing that the late notice did not prejudice the insurer. In other words, once the presumption of prejudice exists, the burden shifts to the insured to show that the insurer was not prejudiced by the insured’s late notice.

Coral Towers was unable to find sufficient facts to overcome the presumption of prejudice resulting from its late notice to the insurer. The closest Coral Towers comes is a conclusory statement by one of its engineers that, in his opinion, the late notice did not prejudice Citizens. A simple conclusory statement is not sufficient evidence required to overcome the presumption of prejudice.

ZALMA OPINION

Insurance is a contract of utmost good faith. In the custom and practice of insurers in the United States an insurer is entitled to determine for itself what risks it will accept and know all the facts relative to the risk the applicant seeks to insure. The insurer has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as the insurer desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks and resolving claims.

Both the insured and the insurer must deal in good faith with each other so as not to deprive the other of the benefits of the contract of insurance. Insurers recognize that they are dependent on the utmost good faith of their insureds viewed as both a legal rule and as a tradition honored by insurers and insureds in their ongoing commercial relationships. Failure to report a loss promptly violates the obligation of the insured to deal with the insurer in good faith.

Every insured, once it has notice of a claim, whether it believes the potential loss is covered or not, whether it is above the deductible or self-insured-retention or not, must be reported promptly so as to not prejudice the rights of the insurer and thereby deprive the insured of the right to recover the benefits of the policy. Silence gains nothing for the insured. Reporting the claim protects the rights of the insured.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Don’t Buy a Stolen Car

Seizure by Police Not Theft or Damage

In every private purchase of an automobile is the risk that the person selling the vehicle did not own it. Ownership documents can be forged. Purchasers can be trusting and take – if they get the vehicle for a “good price” – a purchase on faith rather than reason. The problem with buying a stolen vehicle is that it can be seized by the police and returned to the rightful owners.

State Farm Mutual Automobile Insurance Company (State Farm) issued automobile insurance policies to the defendants. During the term of the insurance policies, the defendants’ automobiles were seized by law enforcement authorities as stolen vehicles. The trial courts in two separate declaratory judgment actions granted summary judgment in favor of State Farm, ruling that its policy provides no comprehensive coverage for the seized vehicles. In State Farm Mutual Automobile Insurance Company v. Heriberto Rodriguez, 2013 IL App 121388 (Ill.App. Dist.1 03/28/2013) the Illinois court of appeal resolved the dispute.

BACKGROUND

State Farm issued automobile insurance policies to each of the defendants: Heriberto Rodriguez; Raul Diaz; Ramiro Victoriano; and Leonel and Josefina Alvarez. Although the facts pertinent to each defendant differ slightly, certain facts are common to all of the defendants. First, there is no dispute that the defendants’ State Farm policies were in force at the time of the events in question. Second, each defendant purchased an automobile from a private individual. Third, following such purchases, all of the automobiles were seized by law enforcement on the grounds that they previously had been stolen. Fourth, the defendants did not steal the automobiles and were not aware that the vehicles were stolen at the time they were purchased.

Following the seizure of their automobiles, each of the defendants made claims for comprehensive coverage on their State Farm policies. With respect to Diaz only, State Farm provided rental car coverage, which was extended twice, while his claim was being investigated, under a reservation of rights. State Farm ultimately denied Diaz’s claim, as well as the claims of the other defendants. After the denials, State Farm filed two declaratory judgment actions in the circuit court of Cook County, seeking declaration that there was no comprehensive coverage available to the defendants.

The trial court granted State Farm’s summary judgment motion and denied the defendants’ summary judgment motion. In its order ruling on the summary judgment motions, the court “declare[d] that the seizure of the insured vehicles by law enforcement authorities on the ground that they were stolen is not a ‘loss’ as defined in the comprehensive coverage” of the defendants’ policies.

ANALYSIS

The policy defines “loss,” in relevant part, as follows:

Loss means:

1. direct, sudden, and accidental damage to; or

2. total or partial theft of a covered vehicle.” (Emphasis in original.)

The defendants contend that they have an insurable interest in the vehicles, given that they were good-faith purchasers. The defendants then argue that because the term “damage” is undefined in the policy, the court must look to its dictionary definition. The defendants urged the trial courts to use the Black’s Law Dictionary definitions of “damage” – “loss or injury to person or property” – and “loss”: “the disappearance or diminution of value, usually in an unexpected or relatively unpredictable way.”

Insurable Interest

The defendants contend that as the good-faith purchasers of automobiles that later were determined to be a stolen vehicle has an insurable interest in the vehicle. Generally speaking, a person has an insurable interest in property whenever he would profit by or gain some advantage by its continued existence and suffer some loss or disadvantage by its destruction.  Since each of the purchasers could be disadvantaged by the loss of the vehicles they had an insurable, if not a legal, interest in the vehicles.

State Farm concedes that the defendants were good-faith purchasers of their vehicles and have insurable interests. However, State Farm argues that this concession is irrelevant to the issue of whether its policy provided coverage for the seizure of the vehicles.

“Loss” Under the Policy

If the insurance policy language is unambiguous, the policy will be applied as written, unless it contravenes public policy. That a term is not defined by the policy does not render it ambiguous, nor is a policy term considered ambiguous merely because the parties can suggest creative possibilities for its meaning.

Confiscation is not the natural and probable result of the good faith purchase of an automobile and the defendants claimed that confiscation constituted an accidental loss under the terms of the policy. The court, however, concluded that there was nothing accidental about the confiscation of the defendants’ automobiles. They were stolen and even though the defendants were good faith purchasers of the vehicles they had been defrauded and had no right to keep the vehicles from their rightful owners.

The Court of Appeal concluded that under the unambiguous language of the policy, the seizure of each defendant’s vehicle did not constitute damage to the vehicle and thus the defendants did not sustain an insurable “loss” under the policy. Although sympathetic to the defendants’ position, the court refused to “‘torture ordinary words until they confess to ambiguity.'”

The policy terms are facially unambiguous. The court of appeal refused to choose to effectively nullify the policy wording in an attempt to find a latent ambiguity in the policy terms.

The claims agent’s extension of rental car coverage to Diaz – regardless of whether such coverage was presented as “provisional” – does not evidence an ambiguity in the policy, and we will not interpret the claims agent’s actions to create an ambiguity where it does not otherwise exist.

In addition, in a concurring opinion, one justice noted that the Diaz policy provided:

THERE IS NO COVERAGE FOR:

9. LOSS TO ANY COVERED VEHICLE THAT RESULTS FROM THE TAKING OF OR SEIZURE OF THAT COVERED VEHICLE BY ANY GOVERNMENTAL AUTHORITY.”

In the case of Diaz, the policy is clear. The vehicle was a covered vehicle, it was seized by a governmental authority, and coverage is excluded.

CONCLUSION

The trial courts correctly concluded that the seizure of the defendants’ stolen vehicles did not constitute “damage to” the vehicles and therefore was not a “loss” for purposes of comprehensive coverage under their State Farm automobile insurance policies.

ZALMA OPINION

Buying property from a private party without clear evidence of ownership is dangerous. It is proof of the axiom that when a sale seems to be too good to be true it is truly too good to be true.  Trying to move the error of the buyers to an automobile insurer is understandable but a total perversion of insurance that the Illinois court refused to honor.

There was no theft since the insureds had no right to keep the vehicles. They were damaged but not by an insured against peril – they were damaged by the thieves who convinced them to buy stolen property.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Barry Zalma on WRIN.tv

World Risk and Insurance News, has decided it is important for the insurance industry to learn more about insurance fraud. They gave me the opportunity to explain. The first of several programs is now on line at WRIN.tv.

Barry Zalma on ways to fight insurance fraud – an $80 -$300 billion industry-wide problem.

Insurance fraud continues to be a major issue for insurers. Over the next few weeks, WRIN.tv will dive into the topic  in some detail with insurance attorney Barry Zalma. Barry is a noted fraud and claims expert, and author of Zalma on Insurance Fraud and Zalma’s Insurance Fraud Letter both of which are available at http://www.zalma.com.

 In the first interview Mr. Zalma discussed:

  • The definition of insurance fraud;

  • How much money is lost to insurance fraud;

  • Who typically commits insurance fraud; and

  • What do insurers need to do to combat this type of fraud.

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He Who Testifies Best

When an Expert is Not an Expert

Insurance claims are often presented to insurers by people working for the insured whose professions will usually be considered expert and would usually require, under federal practice, that they be designated as experts before trial, present a written expert report and submit to discovery by deposition. However, experts, like accountants, are – in a claim presentation situation – also percipient witnesses. Such a situation arose when Indiana Lumbermens Mutual Insurance Company (ILM) was unable to keep accountants from testifying. It appealed from a trial court’s denial of its motion for judgment as a matter of law, or in the alternative, for a new trial following a $2,261,166 jury verdict in favor of Ryan Development Company, L.C., d/b/a Agriboard Industries (Agriboard). Agriboard sued ILM for breach of an insurance contract. In Ryan Development Company, L.C., D/B/A Agriboard Industries v. Indiana Lumbermens Mutual Insurance Company, No. 11-3356 (10th Cir. 03/27/2013) the Tenth Circuit resolved the dispute.

Background

A fire destroyed a Texas manufacturing facility in April 2009.  The owner of the facility, Agriboard, manufactured building panels made of compressed straw.  At the time of the fire, Agriboard was insured under a fire and related losses insurance policy issued by ILM with various coverages including lost income.  By May 2009, ILM had paid $450,000; Agriboard filed suit and thereafter ILM paid $1.8 million.  Agriboard continued to seek recovery under the policy, but ILM refused to pay the amount requested and Agriboard re-filed suit, seeking an additional $2.4 million in unpaid coverages.

Agriboard began as a struggling start-up company in Electra, Texas. In 1998, Ron Ryan, the owner of a successful airline, learned of Agriboard’s operations and decided to invest in the business. Mr. Ryan rebuilt the production process, and in 2005, obtained the necessary certifications. He also solicited two former airline executives to run Agriboard’s operations, and through their efforts, Agriboard constructed several buildings in Wichita, Kansas. On April 9, 2009, however, a fire swept through the property and destroyed the facility.

Agriboard sought recovery under its insurance policy, soliciting help from Mr. Ryan’s long-time accounting firm, Larson & Company, P.A.  Derry Larson, principal of the firm, delegated the work to certified public accountants Stephanie Williams and Karl Rump, both of whom were familiar with Agriboard’s business. Ms. Williams, who had handled Agriboard’s tax returns and books, calculated the claim for lost income, and Mr. Rump calculated all claims relating to tangible personal property. Both accountants timely submitted proofs of loss to ILM.

To calculate lost income, Ms. Williams calculated that Agriboard had $2.4 million in total earnings exposure. The policy limit for lost income was $2.2 million, and at the time of trial, ILM had paid only $400,000. Thus, Agriboard sought the remaining $1.8 million.   He submitted proofs of loss, but again, ILM refused to make complete payment.  Thereafter, Agriboard filed suit. Prior to trial, ILM filed a motion in limine to exclude expert testimony from the accountants because Agriboard had failed to designate any expert witnesses as required under Rule 26.  The trial court agreed the accountants could not provide expert testimony.

However, the three accountants testified at trial. ILM objected on the basis that they offered expert testimony. At the close of Agriboard’s case-in-chief, ILM moved for judgment as a matter of law on the ground that the evidence was insufficient to proceed. ILM renewed its expert testimony objection as well. ILM then called two witnesses to testify – Steven J. Meils, a forensic accountant, and Randall Thompson, ILM’s claims specialist.

At the close of evidence, the trial court conferred with the parties about the proposed jury instructions. as confusing and inappropriate because they went beyond the scope of the evidence. The trial court disagreed, finding sufficient testimony for both instructions.

In closing, counsel for Agriboard referenced the Texas endorsement appended to the insurance policy. The endorsement provided, in part, that “[a] fire insurance policy, in case of a total loss by fire of property insured, shall be held and considered to be a liquidated demand against the company for the full amount of such policy. The provisions of this article shall not apply to personal property.” Counsel explained:

What does that mean? That means that any of our claims that weren’t personal property, such as the loss of income, which is not a personal property claim, immediately, under Texas law, which became a part of this policy, it was considered a liquidated demand for the entire amount of the policy limits.So they didn’t even have to do anything at that point.

All they had to do was make a demand for the entire policy limits on the income coverage, and they didn’t have to do anything at that point. But, of course, there’s a whole notebook full of things they did.

The jury awarded Agriboard $2,261,166 for breach of contract as part of a general verdict.  ILM renewed its motion for judgment as a matter of law, or in the alternative, for a new trial, asserting four grounds for relief: (1) prejudicial remarks in Agriboard’s closing arguments; (2) confusing and inappropriate jury instructions; (3) inadmissible expert testimony; and (4) a verdict unsupported by the evidence. The trial court denied the motion.

Discussion

Before the trial court, ILM moved for judgment as a matter of law, or in the alternative, for a new trial. On appeal, ILM omits its request for judgment as a matter of law. The Tenth Circuit limited its review to the issue of a new trial. The Tenth Circuit would only reverse if the trial court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.

Expert Testimony

ILM first argues that a new trial is warranted because Agriboard’s accountants offered expert testimony after the trial court ruled in limine that such testimony was inadmissible. ILM contends that the accountants’ testimony on Agriboard’s lost income and insurance coverage was expert in nature because the accountants utilized “specialized training.” The trial court admitted the testimony under Rule 701, not 702, of the Federal Rules of Evidence. Under Rule 701, a non-expert witness may offer opinions not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.  The advisory committee notes to Rule 701 explain that “most courts have permitted the owner or officer of a business to testify to the value or projected profits of the business, without the necessity of qualifying the witness as an accountant, appraiser, or similar expert.” [Fed. R. Evid. 701 advisory committee notes.]

Though accountants often testify as expert witnesses, the trial court reasonably concluded that the accountants offered lay testimony given their involvement in preparing Agriboard’s proofs of loss and the like. For example, one explained how she utilized numbers from Agriboard’s records and ILM’s formula to reach a value for lost income.

Closing Arguments

ILM also argued that a new trial is warranted because Agriboard’s counsel made improper remarks during closing arguments. ILM contends Agriboard’s counsel went beyond the scope of evidence and prejudiced the trial by referencing (1) the Texas endorsement on the policy, and (2) ILM’s failure to call Mr. McInteer as a witness. At trial, ILM only objected to counsel’s reference to Mr. McInteer. The trial court sustained the objection.

The decision to grant a new trial based upon counsel’s misconduct is left largely to the discretion of the district court. A new trial is appropriate only if the moving party shows that it was prejudiced by the attorney misconduct. Moreover, when a party fails to object, an appellate court will correct the error only “in rare instances where it appears that a verdict was the result of passion aroused through extreme argument which clearly stirred the resentment and aroused the prejudice of the jury.

Agriboard requested $2.4 million in damages, and the jury awarded $2,261,166, a number well within that range. Ample evidence was introduced at trial for the jury to conclude that ILM breached its contract, and an appellate court, should not, and cannot second guess the jury’s finding.

ZALMA OPINION

Experts in one field are also just plain people. Although the trial court refused to allow the accountants to testify as experts they were perfectly capable of testifying as lay witnesses to explain what they did in presenting the claim to the insurer. Their testimony convinced the jury that ILM breached its contract and awarded damages close to the amount demanded.

Insurers, and all litigants, should never rely on technicalities to resolve a case. By obtaining an order in limine keeping the accountants from testifying as experts ILM though it could keep the plaintiff from proving its case at trial. It was wrong. The percipient testimony of the accountants was enough to carry the day.

Cases should always be evaluated on the merits not technical defeats in pre-trial motions.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

 

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Home Inspection Contract Limitation

Limitation of Liability Enforceable

Home inspection companies are often essential to a fair and reasonable real estate transaction because they often disclose hidden damages not even known to the seller. Home inspectors are seldom big businesses. More often than not they are a single person operation without the financial ability to purchase expensive errors and omissions insurance. Rather, they include in their contract, a limitation of liability equal to the amount the customer paid for the service.

Thomas and Vera Gladden (“Gladden”) sued a home inspection company for failing to discover hidden damages. The trial court dismissed their case and the appealed to the South Carolina Court of Appeal seeking to overturn the trial court’s order granting summary judgment to Palmetto Home Inspection Services (“Palmetto”), alleging the limit of liability provision in a home inspection contract was unenforceable as violative of public policy and as unconscionable under the facts of Thomas W. Gladden and Vera H. Gladden v. Olivia M. Boykin, Elizabeth Beard, Deborah Appleton, Bob Capes Realty, No. 27236 (S.C. 03/27/2013).

FACTS

In the course of purchasing a home, Vera H. Gladden (Mrs. Gladden) entered into a contract with Palmetto, for a home inspection. The contract contained a limit of liability clause, which limited Palmetto’s liability to the home inspection fee paid by the client.  After Mrs. Gladden contacted Palmetto about certain conditions in the home that were not included in the home inspection report, Palmetto returned the inspection fee.

Subsequently, the Gladdens brought this action against the seller, real estate agents, and real estate companies involved in the transaction as well as against Palmetto. As to Palmetto, the Gladdens alleged an action for breach of contract for failing to conduct the inspection in a thorough and workmanlike manner and to report defective conditions in the home.

The Gladdens thereafter moved for summary judgment on the legal issue of the enforceability of the limit of liability clause. Palmetto filed a cross motion for summary judgment on the basis that the limit of liability clause was enforceable and that it was entitled to summary judgment because it had already refunded the inspection fee paid by the Gladdens.

The circuit court denied the Gladdens’ motion and granted Palmetto’s motion and entered summary judgment in favor of Palmetto, finding the limit of liability clause enforceable.

DISCUSSION

Courts must determine public policy by reference to legislative enactments wherever possible. The primary source of the declaration of the public policy of the state is the General Assembly; the courts assume this prerogative only in the absence of legislative declaration. Since the legislature had the opportunity to prohibit or limit exculpatory clauses in home inspection contracts but did not, an appellate court will decline the opportunity to create a public policy where the legislature refused.

The General Assembly has spoken on the issue of home inspections and liability for undisclosed defects in the sale of residential property. Under the statutory scheme crafted by the General Assembly, purchasers are protected from unqualified home inspectors by licensure requirements. However, the General Assembly did not require home inspectors to carry errors and omissions liability insurance.

Although the General Assembly declined to require such coverage, it did not leave residential home buyers without remedy. The Residential Property Condition Disclosure Act ensures that buyers are informed of defects of which the seller has knowledge. The Act imposes liability on a seller if she knowingly withholds such information. Thus, the General Assembly has already provided specific protection for the consumer risks associated with undisclosed defects. The court, therefore, must defer to the judgment of the Legislature.

The Gladdens also contend that the circuit court erred when it found that the limit of liability clause was not unconscionable. In South Carolina, unconscionability is defined as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.

Limitation of liability and exculpation clauses are routinely entered into. Moreover, they are commercially reasonable in at least some cases, since they permit the provider to offer the service at a lower price, in turn making the service available to people who otherwise would be unable to afford it. Finding that a limitation of liability clause in a home inspection contract is not so oppressive that no reasonable person would make it and no fair and honest person would accept it the limitation clause was found to not be unconscionable.

In this case, a self-employed home inspector operating out of his home had no significantly greater bargaining power or cognizably more sophistication than a trained though not practicing real estate agent, and there is no allegation that Mrs. Gladden lacks the education to understand the terms of a contract or protect her own interests. On the contrary, the record demonstrates that Mrs. Gladden directly engaged in sophisticated negotiations throughout the process of buying the home, even urging the seller to forego the use of a real estate agent. In fact, Roberts testified that he had altered the contract for a customer on another occasion, but Mrs. Gladden had sought out this particular inspector’s services, declining to employ a different home inspector who had been described to her as ‘harder but best.’  The evidence in this case fails to support an inference that Mrs. Gladden lacked meaningful choice.

CONCLUSION

Contractual limitation of a home inspector’s liability does not violate South Carolina public policy as expressed by the General Assembly and, as a matter of law, is not so oppressive that no reasonable person would make it and no fair and honest person would accept it. The circuit court’s order granting summary judgment to Palmetto was, therefore, affirmed.

ZALMA OPINION

Home inspection companies are not insurers. They inspect a home and tell the potential buyer what they found by observation. Some are better than others. Some have insurance and some don’t. Some have a limitation of liability in their contract and some don’t. Ms. Gladden was a professional and selected the home inspection company she wanted. She signed the contract with the limitation period although there was available to her home inspection contractors for a higher price who would have conducted the inspection without such a limitation.

The inspector returned the fee and was required by the court to do no more.

The lessons learned are:

  • read a contract before you sign it;
  • inexpensive is not always best;
  • don’t give up your rights to sue unless the savings are sufficient; and
  • don’t sue someone you promised not to sue.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

 

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Sometimes Insurance Fraud Loses

Sometimes Insurance Fraud Loses

Continuing with the seventh issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the April 15, 2013 issue on:

1.    Why a person was sentenced to one to ten years in prison for insurance fraud;
2.    The danger of a plea of no contest enforced by court of appeal and jail ordered;
3.    The reason why insurance fraud is so common – people don’t think it’s wrong to defraud an insurer; and
4.    Good news about the release of a person wrongfully convicted of insurance fraud.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013 in addition to Zalma on Insurance Fraud – 2012. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 18 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

1.    No Harm, No Foul – From: March 29, 2013
2.    Insured Must Prove Disability – From: March 28, 2013
3.    Technicalities Lose – From: March 27, 2013
4.    Medicaid Pre-empts State Law – From: March 26, 2013
5.    Something Borrowed – From: March 25, 2013
6.    Investigation is a Profession – From: March 22, 2013
7.    Insurer Has Right to Select Those It Will Insure – From: March 21, 2013
8.    Rescission Appropriate for Misrepresentation – From: March 20, 2013
9.    Causal Connection Required – From: March 19, 2013
10.    Insurer is Not Insured’s Mommy – From: March 18, 2013
11.    Insurer’s Lawyer’s Advice Not Privileged – From: March 15, 2013
12.    Go Directly To Jail – From: March 14, 2013
13.    Murder, Torture, Kidnapping – From: March 13, 2013
14.    Murder on High Seas – From: March 12, 2013
15.    Contract of Personal Indemnity – From: March 11, 2013
16.    Diminution or Repair Costs – From: March 8, 2013
17.    Don’t Sit on Your Rights – From: March 7, 2013
18.    Surety & Bankruptcy – From: March 6, 2013
19.    Failure to Object Terminal Error – From: March 5, 2013

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

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

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

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

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

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No Harm, No Foul

Insurer Victim of Fraud Not Perpetrator

When a crooked lawyer, acting as trustee, steals from the estate he was required to protect as a fiduciary the victims of the fraud should not be responsible for the theft.

FACTS

Thomas Tessier and his brother Michael Tessier allegedly bilked brothers Frederick and Thaddeus Jakobiec and the estate of their mother, Beatrice Jakobiec, out of millions of dollars. This lawsuit is about only one facet of the Tessiers’ overall scheme, their theft of almost $100,000 in life insurance proceeds due to a trust benefitting Thaddeus. Thaddeus, along with various persons affiliated with the trust and Beatrice’s estate, brought this lawsuit not against those who actually stole the money, but against the company that issued the life insurance policy, Merrill Lynch Life Insurance Co. (“Merrill Lynch”). The plaintiffs claim that Merrill Lynch made out the insurance proceeds check to the wrong trust entity, breaching the insurance contract and thereby allowing the Tessiers to steal the money.

The district court jettisoned the lawsuit on summary judgment. It concluded that even if Merrill Lynch did breach the contract, Merrill Lynch did not cause the plaintiffs’ losses because the Tessiers would have stolen the money even if the check had been made out correctly. In Thaddeus J. Jakobiec; Edmund S. Hibbard, Esq v. Merrill Lynch Life Insurance Co, No. 12-2053 (1st Cir. 03/27/2013) the First Circuit Court of Appeal was called upon to resolve the dispute between the beneficiaries and the insurer.

BACKGROUND

Beatrice’s sister Lillian Smillie, in 1986 executed a will. In it, she bequeathed her entire estate, except for furniture and funeral and administrative costs, to a trust (which later received taxpayer identification number 02-6075880) benefitting her nephew Thaddeus (the “Smillie Trust”). Thaddeus, who has been blind since birth, depended on his family for support. The will named Thaddeus’s brother, Frederick, as trustee of the Smillie Trust. Smillie passed away in 1988.

In 1989, Beatrice applied for the subject life insurance policy with Merrill Lynch. Obviously aware of her sister’s trust, Beatrice indicated on the policy application that the policy beneficiaries would be Frederick and the Smillie Trust, with fifty percent going to each. The exact language was: “50% Frederick A. Jakobiec, son, and 50% Frederick A. Jakobiec, Trustee for Thaddeus J. Jakobiec – IRS ID # 02-6075880.” Beatrice passed away some years later on May 11, 2001.

At Beatrice’s wake, her son Frederick asked Thomas to administer Beatrice’s estate. Thomas probably seemed like a natural choice for the task because not only was he a second cousin to the Jakobiec brothers but he was a licensed attorney that had represented Beatrice in various matters since 1988, including acting as the attorney for the Smillie Trust. But Thomas proved to be a thief. Thomas’ law practice was struggling, and he had developed a drinking problem that was getting progressively worse. For Thomas, who admitted that he was nearing the “tail end” of his career but had failed to build a “nest egg” for his retirement, the Jakobiecs became a source of serious income and funding for his retirement.

And so, with the help of his brother Michael, a retired police captain, Thomas engaged in a campaign of forgery and subterfuge to raid the bank accounts of Frederick and Thaddeus and the estate of Beatrice, allegedly stealing over $2 million. Of course, most pertinent for our purposes, is the Tessiers’ theft of the life insurance proceeds that had been slated to benefit Thaddeus.

Once Thomas learned of the policy’s existence, Thomas and Michael launched a two-front attack. First, they wrestled away control of the Smillie Trust by filing a false ex parte petition to the probate court.  The probate court granted the petition and installed Michael as trustee of the Smillie Trust. Second, a few weeks later, Thomas fraudulently created a second trust for Thaddeus, called the “Thaddeus Jakobiec Irrevocable Inter Vivos Trust.” Michael was named as both trustee and death beneficiary of this second trust. Thaddeus, whose signature on the document was forged by Michael, was unaware of the Fraudulent Trust’s existence.

On or around July 1, 2002, over a year after Beatrice had died, Thomas notified Merrill Lynch of Beatrice’s death. Thomas claimed to be representing Thaddeus, whom he assumed was a beneficiary of the life insurance policy.

After establishing to Merrill Lynch the existence of the fraudulent trust, a short time later, on November 27, 2002, Merrill Lynch finally paid up. It wrote a check for $98,533.76 ($92,788.50 death benefit plus $5,745.26 interest accruing since Beatrice’s death), which represented Thaddeus’s half of the life insurance pay-out. Merrill Lynch made the check payable to “Thaddeus J. Jakobiec Trust C/O 37 Salmon St. Manchester NH 03104″ (the address of Thomas’s law firm, Christy & Tessier).

Within the next week, Michael endorsed the check “Michael Tessier Trustee,” and Thomas added the words “of the Thaddeus J. Jakobiec Trust.” Michael gave the check to Thomas, who deposited it in his personal bank account on December 4. With the loot secure, Thomas gave his brother a fifty percent cut – $49,266.88 – and Michael deposited this money in his wife’s personal account the next day.

DISCUSSION

Merrill Lynch offers three different reasons to affirm the district court, each of which it says would be independently sufficient. It argues that any breach of contract did not actually cause the plaintiffs’ damages; it claims that it should not be held liable because the Tessiers’ theft was not a foreseeable consequence of any alleged breach; and Merrill Lynch avers that it did not breach the contract at all.

Law of Causation

Even if we assume in the plaintiffs’ favor that Merrill Lynch breached the contract1by making the check payable to the “Thaddeus J. Jakobiec Trust,” that alone would not be enough for the plaintiffs to prevail. A defendant who breaches a contract is only liable for the damages caused by its breach.

Thomas admitted in deposition testimony that he intended to steal the money (clearly, a declaration against interest). Within a week of getting control of both the Smillie Trust and the Fraudulent Trust, Thomas contacted Merrill Lynch to begin the process of getting the proceeds. Indeed, the next year, Thomas repeated a similar scheme to steal Frederick’s half of the insurance proceeds. This time line, in the context of the Tessiers’ broader scheme to bamboozle the Jakobiecs out of their assets (a sweeping criminal scheme, the existence of which is clear based on the record), makes transparent that the Tessiers were intent on stealing the insurance money. Simply put, this is not a case where a wrongfully made out check fell into the lap of a well-intentioned trustee who was suddenly induced to commit a crime.

The uncontradicted evidence confirms that the Tessiers had unfettered control of the two trusts that could have potentially received the insurance money. Even though Thomas realized once he started communicating with the insurer that the Smillie Trust was the proper beneficiary of the life insurance policy, Thomas never reported this fact to the probate court, though he should have since the proceeds were assets of the estate. Because he never told, Thomas never had to account to the probate court to dispose of the proceeds, and so the probate court was never in a position to detect the theft.

The record presents overwhelming evidence in Merrill Lynch’s favor and no persuasive evidence in the plaintiffs’ favor on the issue of causation. Unfortunately for plaintiffs, the summary judgment stage is the time when a plaintiff must affirmatively point to specific facts that demonstrate the existence of an authentic dispute. Plaintiffs have not done that here. Because the evidence is so lopsided on the essential element of causation that no reasonable jury could decide for the plaintiffs, Merrill Lynch is entitled to summary judgment.

CONCLUSION

The Jakobiecs have undoubtedly suffered grave injustices but those injustices were caused by the Tessiers, and not by Merrill Lynch. Because of the extensive groundwork laid by the Tessiers for their criminal scheme, they could have and would have stolen the insurance money even if Merrill Lynch did exactly what the plaintiffs think it should have done. The district court correctly granted summary judgment to Merrill Lynch, and denied plaintiffs’ motion for summary judgment.

ZALMA OPINION

In this case two dedicated criminals deceived an insurer into paying them rather than the intended beneficiary by use of court documents and sworn proofs of loss. The two thieves had no compunction and had already taken millions from the estate they were sworn to protect. The insurer, on the other hand, did due diligence and made a payment after receiving proof.

The cause of the loss was the thieves not the insurer. The court made it clear that the theft of the insurance proceeds would have happened even if the insurer made the payment to the stated beneficiary. The thieves should have been sued but probably spent everything they stole and the only chance of recovery was to sue the insurer. It should not have worked, and it didn’t because the plaintiffs could not prove causation.

 

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Insured Must Prove Disability

Total Disability Required

Disability insurance policies have various definitions of disability. Depending on the definition the ability to obtain the benefits of the policy is easier or more difficult. Because of this litigation over disability benefits are frequent. One such case was brought to the Sixth Circuit Court of Appeal in Thomas Judge v. Metropolitan Life Insurance Company, No. 12-1092 (6th Cir. 03/25/2013).

FACTS

Thomas Judge underwent surgery to repair an aortic valve and a dilated ascending aorta. After the surgery he applied for disability benefits under a group insurance policy (the Plan) issued by Metropolitan Life Insurance Company (MetLife). MetLife denied benefits, however, when it determined that Judge was not totally and permanently disabled under the terms of the Plan. After exhausting MetLife’s internal administrative procedures, Judge sued. The district court granted judgment on the administrative record in favor of MetLife.

Judge argued on appeal that MetLife’s denial of benefits was arbitrary and capricious.

Judge, who has a high-school education, worked as an airline baggage handler and ramp agent for 20 years. As an employee of Delta Airlines, he was covered by Delta’s term life insurance policy. The insurance policy provides for the early payment of benefits of up to $100,000 if an employee becomes totally and permanently disabled. MetLife is both the Plan’s administrator and the payor of benefits. The Plan defines total and permanent disability as follows:

Total and Permanent Disability or Totally and Permanently Disabled means, for purposes of this section, that because of a sickness or an injury . . .You are expected never again to be able to do: Your job; and Any other job for which You are fit by education, training or experience.

In order to claim benefits under the Plan, Judge was required to send MetLife proof that he was totally and permanently disabled and that such total and permanent disability has continued without interruption. “Proof (according to the plan) means written evidence satisfactory to Us that a person has satisfied the conditions and requirements for any benefit described in this certificate. When any claim is made for any benefit described in this certificate, Proof must establish: the nature and extent of the loss or condition; Our obligation to pay the claim; and the claimant’s right to receive payment.”

In January 2011, MetLife denied Judge’s claim. MetLife summarized the reports and concluded that:

  1. Dr. Patel’s letter indicated that Judge “had the capacity to perform at least light duty activities”;
  2. Dr. Deeb’s October 2010 statement “did not provide objective medical documentation” as to why Judge was unable to stand or walk and, “[e]xcluding the severe limits to standing and walking,” it appeared that Judge was able to perform light work; and
  3. Dr. Harber’s statement did not indicate that Judge’s symptoms “continued to be so severe several months after [his] surgery or that [he was] confined to bed as a result of . . . not being able to perform walking or standing activities.”

ANALYSIS

MetLife’s reason for denying Judge’s claim – the lack of medical evidence supporting the conclusion that Judge could not sit, stand, or walk – was consistent throughout the administrative-review process, and the initial letter’s recitation of the wrong standard is merely a harmless error that was rectified upon review.

As a practical matter, even if MetLife were found to have applied an incorrect definition of total and permanent disability, a remand to MetLife for reconsideration under the correct definition would be unavailing. The objective medical evidence shows that Judge is not disabled in the sense that he could never again perform any job for which he is fit by education, training, or experience.

MetLife responded to Judge’s claims by proposing that Judge has not met his burden of producing satisfactory proof of disability.  The ultimate issue in an ERISA denial of benefits case is not whether discrete acts by the plan administrator are arbitrary and capricious but whether its ultimate decision denying benefits was arbitrary and capricious.

After examining Met Life’s decision in light of the administrative record the Sixth Circuit concluded that in light of the consistent assessments by Judge’s physicians that his lifting restrictions were unlikely to improve, one can reasonably conclude that Judge will never again be able to lift heavy objects such as luggage. But all other assessments in the record point to improvement in Judge’s functional capacity. Indeed, all of his doctors either anticipated that he would return to work or stated that he could work for eight hours per day. They expected improvement in all areas except lifting.

No objective medical evidence supported Judge’s argument that he is permanently unable to sit, stand, or walk so as to prevent him from doing some other job for which he is fit by education, training, or experience. It is axiomatic that requiring a claimant to provide objective medical evidence of disability is both rational and reasonable.

MetLife’s initial denial letter concluded that the record lacked “objective medical documentation” explaining why he could not stand or walk. Judge was therefore on notice as to the information that he was required to produce in order for his claim to be approved on administrative appeal. He chose not to ask Dr. Deeb or Dr. Harber to explain their check marks or to submit updated medical evidence, despite the Plan placing the burden on Judge to establish his disability rather than on MetLife to show to the contrary. MetLife made the final determination that the record lacked objective medical evidence to support a finding of disability. MetLife determined that Judge was not “permanently unable to return to work as defined by the plan.” This conclusion is supported by substantial evidence.

Because Dr. Deeb and Dr. Harber failed to provide any reasoning to support their inconsistent assessments of Judge’s functionality on forms that explicitly invited an explanation, and because the record is likewise devoid of detailed clinical or diagnostic evidence supporting their determinations that Judge could not stand or walk, MetLife’s conclusion that no objective evidence supported Dr. Deeb and Dr. Harber’s check-offs was neither arbitrary nor capricious.

Regardless of Judge’s claim, a plan administrator is not required to obtain vocational evidence where the medical evidence contained in the record provides substantial support for a finding that the claimant is not totally and permanently disabled. MetLife, therefore, was not required to obtain vocational evidence to support its denial of Judge’s claim for total and permanent disability. Although Judge is unlikely to ever again be able to perform the kind of heavy lifting that he performed as a baggage handler, this inability to lift heavy items is not such a broad impairment as to preclude Judge from engaging in other suitable occupations.

Conflict of Interest

Judge claims that MetLife’s conflict of interest tainted its decision to deny benefits. When a plan administrator “is both the payor of any . . . benefits and . . . vested with discretion to determine … eligibility for those benefits,” this creates an ” inherent conflict of interest.” Schwalm v. Guardian Life Ins. Co. of Am., 626 F.3d 299, 311 (6th Cir. 2010).

Judge has pointed to nothing more than the general observation that MetLife had a financial incentive to deny the claim. The Sixth Circuit will only give greater weight to the conflict-of-interest factor when the claimant offers more than conclusory allegations of bias.  Since it found no circumstances indicating a need to give the conflict significant weight the Sixth Circuit refused to find a conflict. There is no conflict of interest where the administrator provided a thorough review of the record and there was no indication that the review was improperly influenced by the inherent conflict of interest.  Therefore, the Sixth Circuit affirmed the trial court and refused benefits to Mr. Judge.

ZALMA OPINION

Every policy of insurance requires the insured to prove his, her or its loss to the insurer. In this case Mr. Judge, and his doctors, failed to prove the disability as the policy defines disability. If Judge was truly totally disabled his doctors could have explained the disability. That they did not indicates only that they were not able or willing to establish the disability Mr. Judge claimed. They were not. They did not. He recovered nothing.

 

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Technicalities Lose

Settlement Negotiations Can Avoid Rule

Insurance companies are not popular. The public, and judges who are part of the public, believe that insurance companies will use any tactic to avoid paying a claim. That the facts are otherwise, that more than 95% of all insurance claims are paid quickly, fairly and to the satisfaction of the claimant has made no dent in the impression held by the public. In Sharece Rucker v. Mike Taylor and Sherie Taylor, No. 11-1394 (Iowa 03/22/2013) the standard prejudice helped resolve a dispute in favor of the claimant and against the insurer and its insureds.

In Rucker, the Iowa Supreme Court was asked to decide if good cause existed to excuse untimely service of process when the plaintiff, who failed to negotiate an enforceable agreement with the defendant’s insurance representative to delay service, took no action to institute service of process of a lawsuit on the defendant within the time period required by the Iowa Rules of Civil Procedure. The district court held good cause existed and denied defendant’s motion to dismiss.

Background Facts

Sharece Rucker was involved in an automobile accident with Mike and Sherie Taylor on January 15, 2009. Rucker sought legal assistance from attorney Hugh Field to pursue a claim against the Taylors to recover compensation for injuries she suffered from the accident. Field corresponded with a claims representative for the Taylors’ insurance company for the purpose of settling the claim. The correspondence was primarily directed at updating the claims representative on Rucker’s injuries and treatment status and was exchanged between April 3, 2009, and December 8, 2010.

On December 8, 2010, Field sent a formal settlement demand letter to the insurance company. On December 20, claims representative Brent Kneip responded to the letter with a counteroffer for settlement.

On December 29, Rucker commenced an action against the Taylors. Pursuant to court rules, she was obligated to serve the Taylors with notice of the lawsuit within ninety days. Rucker took no action to satisfy this requirement, also as forecasted in the letter.

Instead, on January 13, 2011, Field sent another letter to Kneip, enclosing some employment and medical records concerning Rucker. Kneip responded to this letter on January 31. He thanked Field for the January 13 letter and requested additional medical records. Field and Kneip continued to negotiate during February and March.

On March 29, the ninety-day period for service elapsed. On April 4, a district court administrator notified Field that no proof of service had been filed. The notice scheduled a conference to determine the status of the action for April 26. Rucker then promptly served the Taylors with original notice and a copy of the petition on April 13 and April 15.

The Taylors subsequently filed a motion in district court to dismiss the petition for failure to accomplish timely service of process. Following a hearing on the motion, the district court denied the motion, stating:

The Taylors argued that no agreement, either express or implied, was formed to justify the failure to accomplish timely service. They asserted Rucker made no offer that could create a contract to delay service of process because there was never an explicit mention of the ninety-day service deadline. In response, Rucker asserted the parties formed an implied agreement by continuing to negotiate after the proposal was made. She also argued good cause existed to extend time for service because the conduct of the insurance claims representative in continuing to negotiate after the December 22 letter misled her attorney into believing the Taylors would not seek a dismissal for failing to accomplish timely service. (emphasis added)

Discussion

On many occasions in the past, the Iowa Supreme Court has interpreted the “good cause” standard for justifying the failure to timely serve the original notice and petition following the filing of a lawsuit. This case presented the court with another opportunity to interpret the rule, which follows the nature of the larger process of judicial interpretation. No rule or statute can be written to clearly direct the outcome of all circumstances to come. The Supreme Court concluded that it is the task of courts to interpret enactments on a case-by-case basis.

The Iowa rules of procedure require, after a suit is commenced, that plaintiff serve the defendant with process within ninety days of filing the petition or risk dismissal either upon motion of the defendant or on the initiative of the court. Prior cases suggest the rule impliedly enables a plaintiff to assert good cause for delay in service in a resistance to a motion to dismiss. Inadvertence, neglect, misunderstanding, ignorance of the rule or its burden, or half-hearted attempts at service have generally ruled to be insufficient to show good cause. Moreover, intentional non-service in order to delay the development of a civil action or to allow time for additional information to be gathered prior to “activating” the lawsuit has been held to fall short of good cause.

In an earlier case the Iowa Supreme Court held that the defendant’s insurance representative’s knowledge that the petition had been filed and continued settlement negotiations with plaintiff’s counsel did not establish good cause. It found good cause based on these circumstances would undermine the purpose of the rule to move cases along in the court system once they had been filed.

On the other hand the court found good cause, even though the conduct of the parties – the agreement to delay service – undermined the underlying purpose of the service rule to move cases along. The Supreme Court held that good-faith settlement negotiations can satisfy the good-cause standard when accompanied by an agreement between the parties to delay service.

While mere knowledge by the insurance representative of the existence of a lawsuit is not relevant to the good-cause determination knowledge by the insurance representative in this case that Rucker’s attorney did not plan to pursue timely service is relevant under the circumstances. This knowledge would have informed the insurance representative that his continued negotiations would help to reinforce expectations by Rucker’s attorney that he did not need to take action to comply with the service rule.

By engaging in the precise conduct attorney Field requested under his plan, the Taylors insurance representative gave Field an impression the plan was acceptable. Because the substantive rights of a plaintiff can be at stake through the application of a statute of limitations, it is important that the good-cause standard not be applied too narrowly.

The time limit for service was not meant to be enforced harshly and inflexibly. Indeed, it was intended to be a useful tool for docket management, not an instrument of oppression.

The Supreme Court concluded that the district court did not commit legal error by concluding good cause existed for the failure to accomplish timely service of process. The Supreme Court, therefore, affirmed the decision of the court of appeals and the judgment of the district court.

ZALMA OPINION

Insurance is a business of the utmost good faith. An insurance adjuster should know that continuing negotiations while a statute of limitation or a rule of procedure could lose their rights, and should not take advantage of the third party. Attorneys, also, are required to know the rules of procedure and should not place themselves in a position to be taken advantage of by an insurance adjuster without a law degree.

In this case the court took mercy on the incompetence of Rucker’s lawyer and decided that his unstated reliance on the negotiations with an insurance adjuster was good cause for not serving the suit in 90 days.

Lawyers and insurance adjusters should, as the court recommended, enter into a contract to waive the time limits while negotiations continue. That a lawyer did not protect himself and his client is unconscionable.  That an adjuster would attempt to deceive a lawyer, and succeed, is a violation of the covenant of good faith and fair dealing.

As much as the courts are concerned with the timely move cases along the courts are also seriously concerned with encouraging settlement. Since both the lawyer and the adjuster were less than professional the court protected the parties and allowed the case to move forward so no one took untoward advantage of the other.

 

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing. 

 

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Medicaid Pre-empts State Law

Medicaid Recipients Must Allocate Settlement Amounts

States administering the Medicaid programs that provide medical care to those who cannot afford it or do not have insurance protection run into problems when they obtain a tort recovery. The state administering Medicaid programs have the right to recover that portion of a tort recovery that relates to the medical care for which Medicaid paid. The problem arises when a judgment or settlement fails to allocate the settlement or judgment between medical care and pain, suffering, trouble and inconvenience. The problem of how to share a large tort recovery between the recipient and the state came to the U. S. Supreme Court.

Justice Kennedy, writing for the Supreme Court noted that a federal statute prohibits States from attaching a lien on the property of a Medicaid beneficiary to recover benefits paid by the State on the beneficiary’s behalf. [42 U. S. C. §1396p(a)(1).] The anti-lien provision pre-empts a State’s effort to take any portion of a Medicaid beneficiary’s tort judgment or settlement not “designated as payments for medical care.” Arkansas Dept. of Health and Human Servs. v. Ahlborn, 547 U. S. 268, 284 (2006).

North Carolina enacted a statute requiring that up to one-third of any damages recovered by a beneficiary for a tortious injury be paid to the State to reimburse it for payments it made for medical treatment on account of the injury. The Supreme Court of the United States was asked to resolve the question whether the North Carolina statute is compatible with the federal anti-lien provision in Wos v. E.M.A., No. 12-98 (U.S. 03/20/2013).

FACTS

E. M. A. (a minor) and her parents filed a medical malpractice suit against the physician who delivered her and the hospital where she was born. They presented expert testimony estimating their damages to exceed $42 million, but they ultimately settled for $2.8 million, due in large part to insurance policy limits. The settlement did not allocate money among their various medical and non-medical claims. While it approved the settlement, the state court placed one-third of the recovery into escrow pending a judicial determination of the amount of the lien owed by E. M. A. to the State.

When respondent E. M. A. was born in February 2000, she suffered multiple serious birth injuries which left her deaf, blind, and unable to sit, walk, crawl, or talk. The injuries also cause her to suffer from mental retardation and a seizure disorder. She requires between 12 and 18 hours of skilled nursing care per day. She will not be able to work, live independently, or provide for her basic needs. The cost of her ongoing medical care is paid in part by the State of North Carolina’s Medicaid program.

In the tort litigation, by far the largest part of this estimate was for “Skilled Home Care,” totaling more than $37 million over E. M. A.’s lifetime. E.M.A.’s parents also sought damages for her pain and suffering and for her parents’ emotional distress. Their experts did not estimate the damages in these last two categories.

E. M. A. and her parents informed the North Carolina Department of Health and Human Services of settlement negotiations. The department had a statutory right to intervene in the malpractice suit and participate in the settlement negotiations in order to obtain reimbursement for the medical expenses it paid on E. M. A.’s behalf, up to one-third of the total recovery. The state did not intervene.  The state informed E. M. A. and her parents that the State’s Medicaid program had expended $1.9 million for E. M. A.’s medical care, which it would seek to recover from any tort judgment or settlement.

In November 2006, the court approved a $2.8 million settlement. The amount, apparently, was dictated in large part by the policy limits on the defendants’ medical malpractice insurance coverage.  The settlement agreement did not allocate the money among the different claims E. M. A. and her parents had advanced. The court placed one-third of the $2.8 million recovery into an interest-bearing escrow account “until such time as the actual amount of the lien owed by [E. M. A.] to [the State] is conclusively judicially determined.”

The Supreme Court noted there was a conflict between the decision of the North Carolina Supreme Court and the Fourth Circuit Court of Appeal that found pre-emption.

The problem of allocating between damages for medical care and other damages could be avoided either by obtaining the State’s advance agreement to an allocation or, if necessary, by submitting the matter to a court for decision. North Carolina has attempted a different approach. By statute limits its right of subrogation to one third of the gross settlement. North Carolina and the state courts interpreted this statute to allow the State to “recover the costs of medical treatment provided . . . even when the funds received by the [beneficiary] are not reimbursement for medical expenses.” Campbell v. North Carolina Dept. of Human Resources, 153 N. C. App. 305, 307–308, 569 S. E. 2d 670, 672 (2002).

The North Carolina Supreme Court in Andrews accepted a new interpretation of its statute and defined the portion of the settlement that represents payment for medical expenses as the lesser of the State’s past medical expenditures or one-third of the plaintiff ‘s total recovery. In other words, when the State’s Medicaid expenditures on behalf of a beneficiary exceed one-third of the beneficiary’s tort recovery, the statute establishes a conclusive presumption that one-third of the recovery represents compensation for medical expenses.

Under the Constitution’s Supremacy Clause, where state and federal law directly conflict, state law must give way. The Medicaid anti-lien provision prohibits a State from making a claim to any part of a Medicaid beneficiary’s tort recovery not “designated as payments for medical care.” Justice Kennedy concluded that North Carolina’s statute, therefore, is pre-empted if, and insofar as, it would operate that way.

Justice Kennedy, for the majority, concluded that the defect in the statute is that it sets forth no process for determining what portion of a beneficiary’s tort recovery is attributable to medical expenses. Instead, North Carolina has picked an arbitrary number – one-third – and by statutory command labeled that portion of a beneficiary’s tort recovery as representing payment for medical care. Pre-emption is not a matter of semantics. A State may not evade the pre-emptive force of federal law by resorting to creative statutory interpretation or description at odds with the statute’s intended operation and effect.

If a State arbitrarily may designate one-third of any recovery as payment for medical expenses, there is no logical reason why it could not designate half, three-quarters, or all of a tort recovery in the same way. In some instances, no estimate will be necessary or appropriate. When there has been a judicial finding or approval of an allocation between medical and non-medical damages-in the form of either a jury verdict, court decree, or stipulation binding on all parties-that is the end of the matter. With a stipulation or judgment under this procedure, the anti-lien provision protects from state demand the portion of a beneficiary’s tort recovery that the stipulation or judgment does not attribute to medical expenses.

In the instant case the North Carolina trial court approved the settlement only after finding that it constituted “fair and just compensation” to E. M. A. and her parents for her “severe and debilitating injuries”; for “medical and life care expenses” her condition will require; and for “severe emotional distress” from her injuries. What portion of this lump-sum settlement constitutes “fair and just compensation” for each individual claim will depend both on how likely E. M. A. and her parents would have been to prevail on the claims at trial and how much they reasonably could have expected to receive on each claim if successful, in view of damages awarded in comparable tort cases.

The task of dividing a tort settlement is a familiar one. In a variety of settings, state and federal courts are called upon to separate lump-sum settlements or jury awards into categories to satisfy different claims to a portion of the moneys recovered.

The law here at issue, N. C. Gen. Stat. Ann. §108A–57, reflects North Carolina’s effort to comply with federal law and secure reimbursement from third-party tortfeasors for medical expenses paid on behalf of the State’s Medicaid beneficiaries. In some circumstances, however, the statute would permit the State to take a portion of a Medicaid beneficiary’s tort judgment or settlement not designated as payments for medical care. The Medicaid anti-lien provision, 42 U. S. C. §1396p(a)(1), bars that result.

ZALMA OPINION

Medicaid payments are designed to protect those who cannot protect themselves. It is not, however, a program to allow the recipient to profit from the program. It allows the state a right of subrogation to recover that part of any tort recovery that relates to the medical payments actually made by the state.

The error that required this case to go to the Supreme Court was the failure of the state to join in the litigation, the failure of the trial court and the parties to allocate the damages, and the decision of the court to approve the lump sum payment and ask someone else to do the allocation.

The U.S. Supreme Court has now set a bright line — the parties should avoid problems and allocate, either by agreement or court order, the medical benefits from all other portions of the judgment. It should have been an easy task since of the $2.6 million judgment E.M.A. was able to show $37 million in past and future medical care.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing.

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Something Borrowed

The Problem with Not Reading The Entire Policy

When people are severely injured in automobile accidents they do everything possible to draw as much insurance coverage into the case as possible. The efforts are often joined in by courts who believe no one is being hurt by a decision that helps the seriously injured since insurance companies are in the business of paying claims. The litigants and trial courts that think that way fail to recognize that insurance is only required to pay for claims resulting from a risk the insurer promises to take, not every risk faced by its insured.

In one such case, Country Mutual Insurance Co. (“CMI”) appealed from the grant of summary judgment in favor of Jeffrey L. Metzger (“Metzger”), on his complaint for a declaratory judgment construing an insurance policy issued by CMI. CMI had filed a cross-motion for summary judgment, which the trial court denied. In Jeffrey L. Metzger v. Country Mutual Insurance) Company, 2013 IL App 120133 (Ill.App. Dist.2 03/21/2013) the Illinois court of appeal resolved a dispute concerning commercial automobile insurance.

GENERAL BACKGROUND

In September 2009, a vehicle driven by Metzger collided with a Ford F-250 driven by Brian McKee. At the time, Brian was vice-president of McKee Custom Masonry (McKee Masonry), a subchapter S corporation whose sole shareholders were Brian and his wife, Tricia McKee. Brian was fatally injured in the accident. Subsequently, Metzger filed a tort lawsuit against both McKee Masonry and Brian’s estate. No pleadings from that lawsuit are in the record. According to Metzger’s complaint in the present action, the underlying complaint alleges “in essence” that on September 21, 2009, Brian, acting individually and as agent of McKee Masonry, was operating his personally owned Ford F-250, Brian failed to stop at the stop sign and to yield to traffic pulling out directly in front of the path of the vehicle being driven by Metzger, causing the vehicles to violently collide. CMI did not contest the facts represented.

The present action was commenced when Metzger filed a complaint for a declaratory judgment that MCI’s policy (the business policy) on which McKee Masonry was the named insured, provided liability coverage for the Ford F-250 with regard to the September 2009 accident. The business policy was in effect at the time of the accident, and it covered any “non-owned” vehicle operated in the business. Metzger sought a declaration that the Ford F-250 was a “non-owned” vehicle.

The trial court granted summary judgment for Metzger. First, the court agreed that any coverage under the business policy would be “secondary or excess,” but nonetheless held that CMI had both a duty to defend and a duty to indemnify. Second, the court held that, as a matter of law, the Ford F-250 was a “non-owned” vehicle under the business policy.

FACTS

Tricia testified that she accompanied Brian when he purchased the Ford F-250 in November 2007. When Tricia was asked if she and Brian discussed whether to place the title in the name of McKee Masonry or in one or both of their names, Tricia replied, “The only discussion was regarding putting it in Brian’s name alone and establishing the loan in Brian’s name alone because his credit score wasn’t as high as mine.”

Brian and Tricia decided that the Ford F-250 would be purchased and titled in Brian’s name. They intended, however, that the Ford F-250 would be used “solely” as “a work truck for the business,” McKee Masonry. According to Tricia, Brian kept his business records and work equipment in the Ford F-250. McKee Masonry was operated from the family home, with some equipment being stored off-site.

All loan payments on the Ford F-250 were made from the business checking account because the truck “was intended to be used by the business.” Repair expenses were also paid from the checking account. Gas for the truck was purchased with the business’s credit or debit cards. The Ford F-250 was designated as a 100% business asset for tax purposes, and Brian and Tricia kept track of business expenses associated with the truck in order to claim tax deductions. Tricia testified that Brian was en route in the F-250 to a masonry job when the accident that claimed his life occurred.

THE POLICY

The named insured is McKee Masonry. The business policy provides coverage for “‘bodily injury’ or ‘property damage’ arising out of the use of any ‘non-owned auto’ in your business by any person.” ‘Non-Owned Auto’ ” is defined as: “any ‘auto’ you do not own, lease, hire or borrow which is used in connection with your business.” (Emphasis added)

ANALYSIS

Duty to Defend/Duty to Indemnify

Although a declaratory judgment action brought to determine an insurer’s duty to defend is ripe upon the filing of a complaint against the insured, a declaratory judgment action brought to determine an insurer’s duty to indemnify an insured is not ripe for adjudication until an insured becomes legally obligated to pay the damages in the underlying action. The duty to defend, therefore, was ripe for adjudication because a complaint had been filed against the insured.

In Illinois, to determine whether an insurer has a duty to defend, the court must compare the allegations in the underlying complaint to the relevant provisions of the insurance policy and liberally construe both in the insured’s favor. If the underlying complaint’s allegations fall within, or potentially within, the policy’s coverage, the insurer is obligated to defend its insured. The duty to indemnify arises only if the insured’s activity and the resulting damage actually fall within the policy’s coverage.

The interpretation of an insurance policy is a question of law that may properly be decided on a motion for summary judgment.  The trial court, in deciding the issue of coverage, considered not only the allegations of the underlying complaint and the business policy, but also the three depositions attached to Metzger’s motion for summary judgment. A court in Illinois may look beyond the allegations of the underlying complaint in determining the existence of a duty to defend.

Finding that the Ford F-250 was not a “non-owned” vehicle under the business policy the trial court failed to read the entire clause dealing with “non-owned autos.” Under that policy, a covered vehicle is neither (1) owned, (2) leased, (3) hired,” nor borrowed by McKee Masonry. The trial court specifically found that the truck was not owned by McKee Masonry but did not consider whether the truck was nonetheless borrowed by McKee Masonry.

While the parties argue at length over whether McKee Masonry effectively owned the Ford F-250 though it was titled in Brian’s name, the court of appeal had no need to address that controversy, because, assuming that Brian, not McKee Masonry, owned the Ford F-250, the undisputed evidence shows that the corporation borrowed it from Brian.

McKee Masonry was a legal entity that existed independently of Tricia and Brian, its sole shareholders. Thus, it was analytically and legally possible for Brian, in his personal capacity as owner of the truck, to convey possession and use of it to McKee Masonry. An item of personal property can be borrowed, however, without a promise of payment. There is no evidence that McKee Masonry paid or promised consideration for its use of the Ford F-250.

Brian retained title to the vehicle, implying that the business was still using it at his pleasure. Once the frequency of use concept is recognized as having nothing to do with the definition of  “borrowed,”  it would follow from the trial court’s theory that the vehicle was borrowed and, therefore, that coverage of the accident was excluded by the endorsement.

The undisputed material facts established that McKee Masonry borrowed the truck from Brian. Therefore, the Ford F-250 was not a “non-owned” vehicle, and the exclusion of coverage applies. The court of appeal concluded, therefore, as a matter of law, there is not even potential coverage under the business policy for the Ford F-250.

ZALMA OPINION

Insurance is not an entitlement, insurers are not charities, insurance is a contract where the insurer agrees, for payment of a premium, to take on certain defined risks of loss by a contingent or unknown event. The insurer has no obligation to pay for a risk of loss it did not promise to pay. In this case MCI agreed to defend and indemnify its insured while operating a non-owned auto. It specifically defined what a non-owned auto was and the use of the word “borrowed” to eliminate some non-owned autos from the coverage, MCI excluded the Ford F-250 from its coverage. The plaintiff will, therefore, only have one of Brian’s insurer’s to contribute to his defense and indemnity.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing. 

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Investigation is a Profession

SIU Investigators are Special

When an insurer forms a Special Investigation Unit (“SIU”) it hires highly qualified, trained and experienced investigators to help it avoid paying fraudulent claims. The job of a fraud investigator is different from a factory worker or clerk typist. They are skilled professionals on whose skill and expertise the insurer relies. Traditionally, SIU investigators are well paid and relied upon by the employer and not subject to mandatory overtime requirements.

In Frank Foster, On Behalf of Himself and All Others Similarly Situated v. Nationwide Mutual Insurance Company, No. 12-3107 (6th Cir. 03/21/2013) ninety-one current and former special investigators (SIs) employed by Nationwide Mutual Insurance Company, appealed from the judgment entered against them with respect to their collective claims that Nationwide improperly classified SIs as administrative employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) (29 U.S.C. §§ 207 and 213(a)(1)) and analogous provisions of New York and California law.

The SIU operates alongside the claims-adjusting units, which are likewise led by a director who oversees claims managers and claims adjusters. As Nationwide’s internal document described it, the SIU “‘exists to service its corporate partners by providing the highest quality and expedient investigative, informational and consulting services to detect and deter fraud and to support other objectives of Nationwide.'” The SIU’s work is aimed at reducing the number of non- meritorious claims that are paid in order to keep Nationwide’s insurance products competitively priced.

SIs are well compensated with an average annual salary of $75,000; are generally experienced investigators with prior background in law enforcement or insurance claims; and, as the evidence established at trial, “spend the majority, if not an overwhelming majority, of their time carrying out investigations of suspicious claims.”

The FLSA requires overtime pay for each hour worked in excess of forty hours per week, but exempts any employee employed in a bona fide executive, administrative, or professional capacity.  The regulations provide:

  1. Compensated . . . at a rate of not less than $455 per week . . . ;
  2. Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  3. Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The exemption is to be narrowly construed against the employer, and the employer bears the burden of proving each element by a preponderance of the evidence.

Plaintiffs waived their right to jury trial and the district court presided over a bench trial that included considerable focus on the work performed by Nationwide’s SIs. Based on the evidence heard, the district court made the factual determination that the primary duty of Nationwide’s SIs is to conduct investigations into suspicious claims with the purpose or goal of resolving indicators of fraud present in those claims.  The SIs uniformly described the tasks of their investigations as including: “resolving the indicators of fraud, gathering information, taking statements, interviewing witnesses, making referrals to law enforcement and the [National Insurance Crime Bureau (NICB)], recommending the retention of outside vendors [such as accident reconstruction or fire origin experts], supervising outside vendors, and recommending and [sometimes] conducting [Examinations Under Oath (EUOs)].”

FLSA’s Administrative Employee Exemption

At the outset, plaintiffs argue that the DOL’s general regulations broadly provide that “investigators” do not qualify for the administrative employee exemption. In fact, the general regulations caution that a job title alone is not determinative of an employee’s exempt or non-exempt status.

General Business Operations

Plaintiffs contend that the district court erred as a matter of law in finding that the SIs’ primary duty includes the performance of work “directly related” to Nationwide’s “general business operations.”  To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

Plaintiffs argued that SIs are engaged in day-to-day production work because Nationwide’s “business” is actually selling the promise of asset protection. The record supports the district court’s rejection of that characterization and its determination that Nationwide is in the business of creating and marketing insurance policies to the public.

Insurance claims adjusters generally meet the duties requirements [elements two and three] for the administrative exemption, whether they work for an insurance company or other type of company, if their duties include activities such as interviewing insureds, witnesses, and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.

This supports the conclusion that claims adjusting work performed for an insurance company is ancillary to an insurance company’s primary production activity.  Although Nationwide severed some of these activities from the investigative work of the SIs, the SIs’ work remains integral to the claims adjusting function, is performed in partnership with the CAs, and involves making findings that bear directly on the CAs decisions to pay or deny a claim.

Just as claims adjusting is ancillary to Nationwide’s general business operations, the SIs’ investigative work that drives the claims adjusting decisions with respect to suspicious claims is also directly related to assisting with the servicing of Nationwide’s business.

Discretion and Independent Judgment on Matters of Significance

The regulations explain that “discretion and independent judgment involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered,” 29 C.F.R. § 541.202(a), and requires “more than the use of skill in applying well-established techniques, procedures or specific standards in manuals or other sources,” 29 C.F.R. § 541.202(e).

It is left to the Special Investigator to decide things such as who to interview, what documents to review, what leads to pursue, and similar tactical matters. Though some direction is provided by the Special Investigator’s action plan – which defines the scope of the investigation and to which adherence is required – Special Investigators are integrally involved in developing such action plans for their respective investigations.

Turning to the resolution of fraud indicators in the claims investigated by SIs, Plaintiffs argue that Nationwide is attempting to both comply with state laws that prevent unlicensed individuals from adjusting insurance claims and avoiding bad faith litigation, while at the same time asserting that the SIs jobs involve providing recommendations and opinions to management, an activity conceivable encroaching upon that which may only be done by licensed adjusters.  In the Court’s view, terms such as “factual findings,” “relevant,” “pertinent,” and “resolve” connote a degree of discretion and judgment inherent in the investigatory process undertaken by the SIs.

Nearly all of the testifying SIs characterized their investigations as searches for truth or attempts to determine that the subject claims are either legitimate or not legitimate. A doctorate in philosophy is not required to realize that “truth” is not an entirely objective concept. Determining truth requires “factual findings,” a process that necessarily requires judgment and discretion. Nationwide’s SIs use their experience and knowledge of fraud to distinguish the relevant from the irrelevant, fact from untruth, to resolve competing versions of events. Accordingly, the Sixth Circuit Court concluded that through the resolution of indicators of fraud, the SIs exercise discretion and independent judgment. It further concluded that the discretion exercised by the SIs impacts matters of significance. The facts developed by the SIs during their investigations have an undisputed influence on Nationwide’s decisions to pay or deny insurance claims. Paying insurance claims is central to Nationwide’s business, and payment of fraudulent claims would threaten to make the company less competitive in its industry.

The DOLs’ regulations only require that the primary duty of an administrative employee “include” the exercise of discretion and independent judgment. The discretion and independent judgment exercised in determining and communicating (albeit informally) the legitimacy or illegitimacy of suspicious claims referred for investigation is a matter of significance to Nationwide. That being the case, the Sixth Circuit concluded it did not need to address the novel question of whether the discretion and independent judgment exercised in deciding whether to refer claims to law enforcement or the NICB would also be related to “matters of significance” since the SI’s efforts dealt with matters of significance.

ZALMA OPINION

It is amazing to me that an SI would defeat his or her own professionalism by claiming that “SIs are engaged in day-to-day production work” just like the person who puts a single transistor on a production line making digital alarm clocks. SI’s are professionals, have organized into the International Association of Special Investigative Units (“IASIU”) and conduct regular training sessions to prove their professionalism. Rather than bringing suit against their employer for overtime to which they are not entitled the SI should, rather, prove his or her professionalism and demand an increase in wage as a result of their good work.

The work of an investigator is not 9 to 5 mindless work. It takes a great deal of skill and experience. No SIU investigator should be willing to lower their reputation in the eyes of their employer by claiming what the do is nothing more than production work. If true, they should be fired because they are not doing what is required of an SI.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Zalma on California SIU Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

Insurer Has Right to Select Those It Will Insure

Insurer May Rely on Him Who Would Be Insured For Accurate Information

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

When an insurer rescinds a policy of insurance because it was deceived by the insured the beneficiary of the policy will do almost anything to obtain the benefits of the policy. In Ronald Smith, Successor Trustee Under the James W. Coops Trust v. Pruco Life Insurance Company of New Jersey, No. 12-3071-cv (2d Cir. 03/19/2013) the Second Circuit Court of Appeal was asked to overturn the rescission of a life insurance policy.

FACTS

Ronald Smith appealed the district court’s entry of judgment, following a bench trial, in favor of defendant-appellant Pruco Life Insurance Company of New Jersey (“Pruco”). Smith sought to recover benefits as the beneficiary of a term life insurance policy upon the death of the insured, Michael Coops. Relying on an application for benefits attached to Coops’s policy at the time of delivery, the district court concluded that the policy never became effective because of Coops’s failure to disclose a cancer diagnosis, and that Smith was therefore not entitled to a benefit.  Smith conceded that the application contained information Coops knew to be untrue when the policy was delivered, and that Pruco would not have issued the policy had the information been correct.

Smith alleged that he was the beneficiary of a $1 million insurance policy issued by Pruco on the life of Michael Coops; that Michael Coops had died; and that Smith was therefore entitled to a payment from Pruco of $1 million plus interest from the date of Coops’s death. Following a bench trial, the district court entered judgment in favor of Pruco, holding that it was entitled to rescind the policy because of a material misrepresentation made by Coops in securing the policy, and that Smith was therefore not entitled to a benefit. Smith now appeals the district court judgment.

The material facts were not disputed. Coops applied by telephone for a term life insurance policy from Pruco in July of 2007; a Pruco employee recorded the information Coops provided. On or before September 7, 2007, Coops was diagnosed with Stage IV colon cancer. Subsequently, on September 29, 2007, Pruco delivered the life insurance policy to him. The policy contained the following statement: “This policy and any attached copy of an application, including an application requesting a change, form the entire contract.”

Coops was presented with two copies of the application when the policy was delivered to him on September 29, 2007. The first was physically attached to the policy; the second was not. Coops made two changes to the latter copy, first correcting an error in his billing address, and second, signing and dating the application, thereby attesting that: (1) “[t]o the best of [his] knowledge and belief, the statements in [the] application [were] complete, true and correctly recorded,” and (2) he would “inform the Company of any changes in [his] health, mental or physical condition, or of any changes to any answers on [the] application, prior to or upon delivery of [the] policy. A representative of Pruco also signed that copy of the application. Pruco retained the signed and amended version of the application, while Coops retained the version that was attached to his policy.

Coops never informed Pruco of his cancer diagnosis or treatment or attempted to amend or supplement the information in the application, which indicated that he had not been diagnosed with cancer. The parties agreed that Pruco issued the policy only because it did not know of the diagnosis prior to, or at the time of, delivery on September 29, 2007. Coops paid premiums until he died on April 28, 2009. Following his death, Pruco learned for the first time that Coops had been diagnosed with colon cancer before the policy was delivered. Pruco rescinded the policy, relying on New York law that permits an insurer to rescind an insurance policy ab initio (from its inception) if the insured made a material misrepresentation when he or she secured the policy. It denied Smith’s claim for a death benefit and returned Coops’s premium payments.

The district court held a bench trial at which the primary disputed issue was whether the court could consider the application attached to the policy in determining whether Coops had made a misrepresentation to Pruco.

ANALYSIS

Smith focuses on the term “true copy” of the application used in the New York statute. He presumes that the application for insurance sought to be introduced in evidence is the one that bears Coops’s signature, and argues that a “true copy” of that application was not attached to the policy, as the version that was attached was unsigned and did not reflect Coops’s correction of his billing address.

Under the statute insurance companies are obligated to set forth in each policy issued the entire agreement, as well as every statement or representation which induced its making, and upon which the company relied, if it is to be available as a defense. The statute was created to protect  the insured or his or her beneficiary by providing the insured with the opportunity to examine those writings, including applications, that may be relevant to the policy and, particularly in the case of applications, affording an opportunity to correct any incorrect statements. By allowing the insured to review, understand and correct at the time of delivery any information that the insurance company might raise as a defense to coverage is to ensure that interested persons may avoid either being misled as to the insurance protection obtained or paying premiums for years in ignorance of facts nullifying the supposed protection.

In this case, it is undisputed that the unsigned copy of the application was attached to the policy at the time of delivery. Coops had an opportunity to review and correct the terms, conditions and other information contained therein, and that information therefore could be, and indeed was, incorporated into the contract between Pruco and Coops. The precise document that was attached to the policy makes clear that the policy would not become effective unless and until it was delivered and accepted, Coops’s health remained as stated in the application, and the first premium was paid.

Because the representations, terms and conditions on which Pruco seeks to rely were expressly incorporated into the policy and were attached to that policy at the time of delivery, they may be considered in evidence.

Because the Second Circuit concluded that the application was properly admitted as evidence at the bench trial, Pruco could rely on it to establish that the contract could not come into effect unless and until those conditions were satisfied. [Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928)] where the U.S. Supreme Court held that both by the terms of the application and familiar rules governing the formation of contracts no contract came into existence until the delivery of the policy, and at that time the insured had learned of conditions gravely affecting his health, unknown at the time of making his application. In Stipcich the Supreme Court observed that “[i]nsurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.” Insurance companies seek a wealth of health history information from applicants because that information is extremely important to the underwriting decision.

ZALMA OPINION

I agree, also, with the Third Circuit’s decision in New York Life Ins. Co. v. Johnson, 923 F.2d 279 (3d Cir. 01/15/1991), where it explained why an innocent beneficiary could receive no benefits if grounds for rescission exist that may have effected the Second Circuit’s decision in this case. It said:

While a court might sympathize with a beneficiary who does not receive the proceeds of a policy obtained by the insured’s fraud, there are strong reasons of public policy supporting the rule … If the lie is undetected during the two year contestability period, the insured will have obtained excessive coverage for which he has not paid. If the lie is detected during the two year period, the insured will still obtain what he could have had if he had told the truth. In essence, the applicant has everything to gain and nothing to lose by lying. The victims will be the honest applicants who tell the truth and whose premiums will rise over the long run to pay for the excessive insurance proceeds paid out as a result of undetected misrepresentations in fraudulent applications Emphasis added.)

Misrepresentation of material facts in an application for insurance known to the insured before the policy’s inception is fraud and since the insurer was deceived in the inception the policy must be voided.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Zalma on California SIU Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Rescission Appropriate for Misrepresentation

Lies on Application Defeat Suit Against Insurer

Insurance is a contract requiring the utmost good faith from both parties to the policy. Insurers rely on he or she who would be insured to provide the information needed to make a wise decision whether to insure or not insure against any particular risk. When a putative insured misrepresents material facts in the application for insurance, the ancient remedy of rescission is always available to an insurer in California in accordance with precedent and the provisions of the California insurance Code.  For details see my e-book, Zalma on Rescission in California – 2013.

In 2005, Kerri Roepel and Roepel’s then-husband, Howard Breuer house and a detached quonset hut were destroyed by fire. Their residence, which at the time was under construction from a January 2002 fire, was completely destroyed. Roepel claimed to have lost several hundred thousand dollars in personal property stored in the hut. Roepel timely submitted her claim to her insurer, Pacific Specialty Insurance Company (PSIC). Approximately 20 months later, PSIC denied Roepel’s claim and rescinded her policy based on numerous material misrepresentations contained in her application for insurance. In Kerri Roepel et al v. Pacific Specialty Insurance Company, No. B230306 (Cal.App. Dist.2 03/14/2013) the California Court of Appeal was called upon to resolve multiple issues raised on appeal when one was sufficient to resolve the entire case.

FACTUAL BACKGROUND

After the 2002 fires, the Roepels separated and Roepel began dating Howard Breuer. In August 2003, Roepel and Breuer moved in together, renting a home in Granada Hills. The Roepels’ divorce was finalized in September 2004, and Roepel was awarded the Leona Valley property in lieu of support and other obligations.

To avoid a forced policy on the residence from their lender, Roepel randomly called several insurance companies to obtain coverage. She was unsuccessful, either because the residence was still under construction or because the property was in a high fire zone. On January 18, 2005, Roepel again sought homeowners insurance, this time through Freeway.

Roepel spoke to Freeway’s employee, Audrey Lopez. Roepel inquired as to the types of insurance Freeway offered. Lopez then telephonically assisted Roepel in completing the insurance application. Roepel provided Lopez with her name and the address of the Leona Valley property for the application. Lopez then faxed the prefilled application to Roepel; several questions were left blank and were circled for Roepel to answer. The application states: “I have reviewed the above information and warrant that the application is true and correct.” Roepel completed the application, signed it on January 18, 2005, and returned it to Lopez.

Freeway submitted the completed and signed application to PSIC on January 24, 2005. PSIC bound the policy, effective January 18, 2005, per Roepel’s request. On January 25, 2005, PSIC ordered an exterior inspection of the property. The Leona Valley property, however, is located in a rural area. The road leading to the location was inaccessible from weather damage. PSIC’s inspector either could not locate the property or was unable to obtain access to it.

PSIC ran a Comprehensive Loss Underwriting Exchange (CLUE) report on Roepel. The report disclosed Roepel had submitted (1) a theft claim to Allstate on May 17, 2001, (2) a fire claim on January 9, 2002, and (3) a fire claim on September 3, 2002. On January 26, 2005, to verify the accuracy of the CLUE report, PSIC sent a letter to Roepel and Freeway requesting further information about the previous fires. Neither Roepel nor Freeway responded to this letter.

Sometime after midnight, on February 12, 2005 – 18 days after PSIC received Roepel’s application – two separate fires struck the Leona Valley property, one at the house, the other at the quonset hut. The Los Angeles County Sheriff’s Arson Explosives Detail, noted the house had been reduced to a “pile of coal in [the] basement” and concluded there were two separate fires, both arson.

According to PSIC, Roepel’s claim had numerous red flags, indicating potential fraud, including multiple points of origin, the property was vacant and for sale, the fires occurred after 11:00 p.m., the fires occurred within 30 days of the inception of coverage, and Roepel’s application appeared to contain misrepresentations.  PSIC did not pay on Roepel’s claim, but instead referred the matter to its Special Investigations Unit for review.

In or around July 2005, Roepel hired Mike Vaughan, a public adjuster, to safeguard her rights. Sometime thereafter, Vaughan suggested she also hire a lawyer, which she did, retaining Stephen Zelig.

While PSIC suspected Roepel had caused the two February 2005 fires, PSIC ultimately concluded it was unable to prove her involvement in causing the fires. During its investigation, however, PSIC learned that the house was uninhabitable due to the January 2002 fire. This led PSIC to question the veracity of the information in Roepel’s application. PSIC focused on four questions.

Question No. 3: Will you occupy the dwelling as your only primary residence within 10 days of inception of the policy? If no, prohibited.Roepel answered this question “yes,” even though (1) Roepel was at the time living with Breuer and their children in a rented house in Granada Hills, and (2) their lease required 30 days written notice to vacate, which had not been given to their landlord. Additionally, Breuer testified he never stayed overnight at the Leona Valley residence and Roepel told Pierce no one was living at the property at the time of the fires. The residence only had a temporary power pole and the county had not issued a certificate of occupancy permit.

Question No. 14: Has insured reported any claim in the past three years? If yes, risk prohibited.Roepel answered this question “no,” even though she submitted a claim to Allstate for a wild fire at the location in September 2002. In fact, Roepel received money from Allstate for this claim, although at trial, she could not recall the amount. While Roepel’s earlier claim for the January 2002 fire fell days outside the three-year window, the September 2002 fire occurred within three years of her application.

Question No. 16: Has any damage remained unrepaired from previous claims and/or any pending claims and/or any known or potential (a) defects, (b) claim disputes, (c) property disputes and/or (d) lawsuits? If yes, risk prohibited.

Question No. 22: Does dwelling have any remodeling or construction performed without permit or ongoing extensive remodeling or renovation? If yes, risk prohibited.

Roepel answered “no” to the above two questions. Correspondence from Roepel to Allstate, however, dated January 18, 2005 –  the same date the PSIC application was signed –  paints a different picture. In the correspondence to Allstate, Roepel writes to Allstate and demands the holdback of $60,000 since repairs were 70 percent complete.

DISCUSSION

Trial in this matter spanned the better part of five weeks; trial transcripts cover 21 volumes and are nearly 6,000 pages in length. Appellants’ appendix exceeds 2,800 pages. Appellants spend in excess of 40 pages in their opening brief recounting purportedly favorable testimony of each witness, along with countless rulings appellants deem erroneous, for the most part, without presenting any specific argument, citation to case law or statutory authority.

In October 2006, PSIC rescinded Roepel’s policy on the grounds:

  1. Roepel did not occupy the Leona Valley property as her primary residence within 10 days of the inception of coverage;
  2. Roepel made a claim within the past three years; and
  3. there was unrepaired damage to the Leona Valley residence.

The jury agreed, finding PSIC properly rescinded Roepel’s policy. The jury expressly found PSIC did not delay in providing Roepel with notice of rescission, PSIC returned or offered to return the insurance premiums paid on behalf of Roepel, and PSIC did not waive its right to rescind the insurance policy.

A contract is extinguished by its rescission. The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received. (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 184 (Imperial).

Here, as in Imperial, the policy would be extinguished ab initio, as though it had never existed. In other words, Roepel, as a matter of law, was never an insured under a policy of insurance. Since she was never an insured, Roepel cannot now allege a valid cause of action for negligence, fraud or intentional infliction of emotional distress.

ZALMA OPINION

Roepel wanted to avoid the excessive premium and limited coverage of a force placed insurance. After being turned down by agents and brokers when she honestly reported the facts of the risk she went to a broker and signed an application for insurance with PSIC that contained obviously false statements of material facts that she knew at the time application was signed were false. Before PSIC could examine the property and discover the misrepresentations that Roepel lived on the property and that it was a complete dwelling, the dwelling and the quonset hut were destroyed by an arson fire.

Although PSIC suspected she was involved in setting the fire it concluded it could not prove the crime but it could prove the misrepresentation. Therefore, PSIC wisely ignored the arson defense and relied on the ancient equitable remedy of rescission. The jury, the trial court, and the court of appeal agreed that when a putative insured obtains a policy as a result of a lie about the risk the insurer is asked to insure, the policy is void from its inception, never existed, and Roepel recovered nothing on the claim.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Zalma on California SIU Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Causal Connection Required

Limited Coverage for Additional Insured

When one insurer sues another to share in the cost of defending and indemnifying an insured, it is essential that the plaintiff carefully analyze the issues. An insurer that seeks contribution from another insurer whose liability is unclear or ambiguous will tend to make unfavorable law. This was just the case when the Connecticut Supreme Court was called upon to determine whether an insurer has a duty to defend an additional insured when the complaint in the underlying personal injury action draws no connection between the injured person’s use of the insured premises and her injuries, and undisputed extrinsic facts indicate that the underlying action falls outside of the scope of coverage under the policy. In Misiti, LLC, et al. v. Travelers Property Casualty Company of America et al., No. SC 18915 (Conn. 03/26/2013) the Connecticut Supreme Court was required to determine if there was a causal relationship between the injury and the promises of the policy.

FACTS

Misiti, LLC (Misiti), was an additional insured on a commercial general liability insurance policy (policy), which was issued to Misiti’s tenant, Church Hill Tavern, LLC (tavern), by the named defendant, Travelers Property Casualty Company of America (Travelers).Misiti sought to invoke Travelers’ duty to defend under the policy after Sarah Middeleer was injured in a fall on Misiti’s property and brought the underlying action against Misiti. Misiti’s insurer, the Netherlands Insurance Company (Netherlands), provided a defense to Misiti after Travelers denied any duty to defend Misiti in the underlying action. Misiti then brought the present action seeking a judgment declaring that Travelers had a duty to defend Misiti in the underlying action and that Travelers was obligated to reimburse Netherlands for all or part of the defense costs that it had expended. Misiti claims that the Appellate Court improperly reversed the trial court’s judgment and improperly directed the trial court to render judgment in favor of Travelers because the Appellate Court misconstrued the language of the policy and incorrectly concluded that Middeleer’s injuries did not arise out of the use of the leased premises under the terms of the policy.

The record discloses the following facts and procedural history, which are relevant to our resolution of this appeal. Misiti owned commercial property at 1, 3 and 5 Glen Road in Sandy Hook, which included commercial buildings and a riverside park area. Misiti leased the first floor of the building at 1 Glen Road to the tavern and certain rights common to Misiti’s other tenants, including the use of a nearby parking lot.  The tavern carried a commercial general liability insurance policy issued by Travelers, which included an endorsement that named Misiti as an additional insured. The additional insured agreement, however, only covered Misiti with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to the tavern.

In the underlying action, Middeleer claimed that she had been injured after falling on Misiti’s premises. Middeleer did not sue the tavern, nor did she mention the tavern in her complaint. Rather, she only alleged that while Middeleer leaned against the top rail of the wood guard, the top rail collapsed into pieces, causing her to fall off the retaining wall onto the rocks situated on the riverbed located below the retaining wall. On the basis of these allegations, Travelers determined that it had no duty to defend Misiti in the underlying action. Misiti sued.

After the trial court granted Misiti’s motion for summary judgment and denied Travelers’ motion for summary judgment, Travelers appealed to the Appellate Court. Travelers claimed that the trial court improperly had granted Misiti’s motion for summary judgment and denied Travelers’ motion for summary judgment upon concluding that Travelers had a duty to defend Misiti in the underlying action. Travelers specifically contended that Middeleer’s injuries did not arise out of the use of the leased premises under the terms of the policy.  The Appellate Court agreed and reversed the judgment of the trial court.

ANALYSIS

The rule of construction that favors the insured in case of an ambiguity applies only when the terms are, without violence, susceptible of two equally reasonable interpretations. An insurer’s duty to defend is determined by reference to the allegations contained in the underlying complaint. If the complaint sets forth a cause of action within the coverage of the policy, the insurer must defend. On the other hand, if the complaint alleges a liability which the policy does not cover, the insurer is not required to defend.

It is generally understood that for liability for an accident or an injury to be said to “arise out of” the “use” of property for the purpose of determining coverage under the appropriate provisions of a liability insurance policy, it is sufficient to show only that the accident or injury was connected with, had its origins in, grew out of, flowed from, or was incident to the use of the automobile, in order to meet the requirement that there be a causal relationship between the accident or injury and the use of the property.

The Supreme Court was persuaded that in this context, “causally related to” encompasses both “connected with” and “incident to” the injuries claimed by Middeleer.  Misiti asked the Supreme Court to restrict its analysis to the allegations of the underlying complaint itself and infer that since the Tavern was on the property owned by Misiti the Travelers coverage should apply.

The duty to defend in Connecticut must be determined by the allegations set forth in the underlying complaint itself, with reliance on extrinsic facts being permitted only if those facts support the duty to defend.  The parties in the present case stipulated to a number of undisputed facts regarding the circumstances surrounding Middeleer’s injuries, which tend to undermine, rather than support, Travelers’ duty to provide a defense in the underlying action.

In the present case, focusing on the allegations in the underlying complaint, the Supreme Court was not persuaded that a causal connection can be fairly inferred because the complaint is silent with respect to the tavern. The underlying complaint described Misiti as owning “the real property, structures and improvements situated at, behind, and adjacent to the commercial buildings located at 1, 3 and 5 Glen Road,” and further described the part of Misiti’s premises on which Middeleer sustained her injuries as an area by a “wooden fence” above “a steep retaining wall” beneath which the riverbed of the Pootatuck River was located.

The underlying complaint made no mention of the tavern or any of Misiti’s other commercial tenants. Moreover, Middeleer brought an action against Misiti but not the tavern, which further supports Travelers’ claim that Middeleer’s injuries were not causally connected to the use of the tavern’s leased premises. These facts, coupled with the allegations set forth in the underlying complaint, further counsel against a determination that Travelers had a duty to defend Misiti.

Although it is undisputed that the insured premises on which the tavern operated fell within the facts alleged in the underlying complaint do not suggest that coverage exists, and to so conclude would require the court to speculate and conclude that the place where the underlying plaintiff fell was part of the property leased to the tavern.

The Supreme Court concluded that it will not require an insurer to extend coverage on the basis of a conceivable but tortured and unreasonable interpretation of an underlying complaint. The imposition of a duty to defend in the present case would require more than the bald reference to the addresses of three commercial properties that Misiti leased to its tenants, one of which was the tavern, coupled with an assertion that the purpose of such property was to invite persons such as Middeleer onto the premises to conduct business.

ZALMA OPINION

Travelers promised to defend and indemnify Misiti if the injury resulted from the action or premises of the tavern. The court was provided no allegations in the complaint, nor was there extrinsic evidence, that Middeleer’s injuries were in any way causally related to the tavern or the operation of the tavern.

Misiti and Netherlands tried to dip into Travelers’ pockets for something Travelers never agreed to do by the wording of its policy. Insureds and insurers should avoid such litigation unless there is clear evidence that the insurer that agreed to insure an additional insured provided coverage that could reasonably be causally related to the injury.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Zalma on California SIU Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Insurer is Not Insured’s Mommy

Good Faith Limited to Policy’s Promises

The implied covenant of good faith and fair dealing is broad but it is not unlimited. Insurers have a duty to investigate claims presented to it that deal with the coverages provided by the policy. The covenant does not, nor should it ever, make an insurer the parent of its insured to protect it against its own errors. In Colony Insurance Company v. the Human Ensemble, LLC, 2013 UT App 68 (Utah App. 03/14/2013) the Utah Court of Appeal was asked to decide whether a liability insurer was required to investigate and advise its third party liability insured that it does not cover damage to the insured’s property and that the insured should have made claim to the property insurer, Colony Insurance Company (“Colony”).

FACTS

The Human Ensemble, LLC (Human Ensemble) appealed from the entry of summary judgment in favor of Scottsdale Insurance Company (Scottsdale), Human Ensemble’s general liability insurance provider. Human Ensemble asserted that the court’s ruling was based on an erroneous understanding of the application of the implied covenant of good faith and fair dealing to insurance contracts. In particular, Human Ensemble asserts that a general liability insurance carrier has a duty to timely investigate the scope of coverage in order to promptly notify the insured when the policy does not cover the property damages incurred.

In October 2005, Human Ensemble purchased two insurance policies: a general liability policy from Scottsdale and a property damage policy from Colony Insurance Company (Colony). In late December 2005, a toilet overflowed in a building owned by Human Ensemble, resulting in several inches of standing water. When cleanup efforts stalled, Human Ensemble’s commercial tenants sued for damages because they had “to relocate and incur moving expenses, increased rent, lost profit and other damages.” Due to some confusion unexplained in the appellate briefing, Human Ensemble filed a claim in early January 2006 for its cleanup expenses with its liability carrier, Scottsdale, rather than with Colony, its property damage insurer. About this same time, Scottsdale agreed to defend Human Ensemble against the liability claims filed by its tenants. Approximately six weeks later, on February 21, 2006, Scottsdale informed Human Ensemble that it was the general liability insurer only and would not cover Human Ensemble’s claims for property damage because it had not issued Human Ensemble a property damage policy.

The six-week gap between Human Ensemble’s submission of the claim and Scottsdale’s disclosure became the basis for Human Ensemble’s assertion that Scottsdale violated the implied duty of good faith and fair dealing in the general liability policy that is now at issue on appeal.

Scottsdale asserted that its “only obligation, if any, at present is to participate in [Human Ensemble]’s defense” against the tenants, an obligation that it was then fulfilling. Human Ensemble opposed summary judgment, arguing that “Scottsdale had an obligation to promptly investigate [Human Ensemble]’s claims when the claim was made” and that this obligation was breached by the adjuster’s failure to notify Human Ensemble for over six weeks that its policy did not cover the property damage caused by the flooding. Scottsdale’s motion for summary judgment asserted that it had no actionable duty to inform Human Ensemble of the coverage terms in a policy Human Ensenble had sought out and purchased, and that, in any event, Human Ensemble was on notice of the coverage terms by virtue of signing the applications for insurance and the disclosures on both policies. After hearing argument the trial court granted the renewed motion for summary judgment. Human Ensemble appealed.

ANALYSIS

The district court granted summary judgment to Scottsdale on the basis that the duty of good faith extends only to benefits actually provided for under the applicable insurance policy and Scottsdale had not denied Human Ensemble any of the bargained-for benefits. Human Ensemble argues that this decision was incorrect because a breach of the insurance contract is not a prerequisite to a claim of breach of the implied covenant of good faith and fair dealing. Although, in Utah, a breach of contract is not necessary for a claim of bad faith to arise, the duty of investigation that Human Ensemble seeks to impose upon Scottsdale is outside the scope of the insurance contract.

The covenant of good faith and fair dealing inheres in almost every contract and is implied in contracts to protect the express covenants and promises of the contract. In Utah, like most states, the implied covenant imposes a duty not to intentionally or purposely do anything that will destroy or injure the other party’s right to receive the fruits of the contract and to act consistently with the agreed common purpose and the justified expectations of the other party. In the insurance context, the implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.

Human Ensemble asserts that Scottsdale breached the implied duty to investigate, not by failing to adequately inquire into what caused the water leak and the nature and extent of the resulting damage, but by failing to notify Human Ensemble for over six weeks that its general liability policy did not cover property damage. Specifically, Human Ensemble claims that had Scottsdale diligently investigated the facts to determine whether the claim was valid its property would have been promptly repaired.

While it is reasonable to expect that an insurer like Scottsdale would determine early in the process whether an insured’s claim falls within the general subject matter of its liability policy or involves a subject, such as a property damage claim, that is clearly outside the broad scope of the policy, that expectation arises from a sense of the insurer’s own self-interest rather than from any notion of a special duty to the insured under the circumstances. It was the insured in the first place who purchased from Colony Insurance a property insurance policy and from Scottsdale a liability policy.

The Utah court of appeal concluded that it was as reasonable to expect that Human Ensemble would be responsible for keeping track of which insurance company provided which type of coverage.  Human Ensemble admitted that it purchased a general liability policy from Scottsdale and a property damage policy from a separate company, Colony. While Human Ensemble purchased these insurance policies through an independent agent, it is undisputed that one of its principals signed the application for Human Ensemble’s property damage coverage with Colony, and signed policy disclosures on the Scottsdale liability policy that described the policy’s scope of coverage. In addition, the Scottsdale policy itself clearly identifies commercial general liability in the “Coverage Part(s)” and expressly excludes commercial property damage as “NOT COVERED.” Human Ensemble was on notice of the scope of its Scottsdale insurance policy and was aware that it had purchased property damage coverage from Colony, not Scottsdale. The court of appeal could see no basis for concluding that an insurer’s implied duty to refrain from actions that will injure the insured’s ability to obtain the benefits of the contract would make Scottsdale liable for failure to timely discover and disclose to Human Ensemble that it had not purchased property damage coverage from Scottsdale, but from another insurer altogether.

Human Ensemble is asking that an additional duty be imposed upon Scottsdale to be legally responsible to Human Ensemble for its own error in filing its property damage claim with the wrong carrier and under the wrong policy. Imposition of such an obligation would extend the duty of good faith and fair dealing beyond its intended purpose of protecting the express covenants and promises of the contract.

ZALMA OPINION

Again, fortunately, an appellate court has wisely resisted a request by a litigant to expand the duty of good faith and fair dealing. Insurers are merely parties to a contract of indemnity where the insurer promises to provide indemnity for certain specified risks of loss in exchange for payment of a premium. It cannot breach the obligation to fulfill the “implied duty to refrain from actions that will injure the insured’s ability to obtain the benefits of the contract” by protecting the insured immediately from its error in presenting a claim against the wrong insurer. Scottsdale, in this case, actually advised Human Ensemble of its error within six weeks of receiving notice of a claim, a fairly prompt response, while also immediately doing what it was paid to do, providing a defense to the third party claims.

Insureds and litigators must understand that insurers are not obligated to suckle each insured that presents a claim and protect it from more than it promised in its policy. Making a claim to an insurer does not require the insurer to protect the insured from every known possible loss, including the insureds own error in presenting claim to the wrong insurer.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Zalma on California SIU Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Insurer’s Lawyer’s Advice Not Privileged

Washington Supreme Court Creates Presumption Against Attorney Client Privilege

More than a century ago George Orwell wrote a book about the dangers of communism called Animal Farm. When the question of equality arose in the operation of the farm the pigs, who had taken control, concluded that all animals were equal but some were more equal than others. In Washington state, it appears, that all lawyers and litigants are equal except for insurers and their lawyers who are less equal than all others.

The attorney client privilege was designed to make a litigant, like an insurer, feel secure from the potential risk of having sensitive information fall into the wrong hands when speaking to its lawyer. By its nature, the attorney-client relationship affords a distinct, invaluable right to have communications protected from compelled disclosure to any third party, including business associates and competitors, government agencies and even criminal justice authorities.

The attorney-client privilege is the oldest privilege recognized by Anglo-American jurisprudence. In fact, the principles of the testimonial privilege may be traced all the way back to the Roman Republic, and its use was firmly established in English law as early as the reign of Elizabeth I in the 16th century. Grounded in the concept of honor, the privilege worked to bar any testimony by the attorney against the client.

The Washington state Supreme Court was called upon, in Bruce Cedell, A Single Man v. Farmers Insurance Company of Washington, Doing Business In the State of Washington, No. 85366-5 (Wash. 02/21/2013) to determine the right of an insured to discover communications between an insurer and its lawyer. The Washington Supreme Court concluded that in a dispute over a first party claim the privilege is presumed not to apply to most communications between a lawyer and his or her insurer client.

FACTS

Bruce Cedell’s home was destroyed by fire. After being unresponsive for seven months, his insurer threatened to deny coverage and made a take it or leave it one time offer for only a quarter of what the court eventually found the claims to be worth. Cedell brought suit alleging bad faith. The company resisted disclosing its claims file, among other things, and Cedell moved to compel production. After a hearing and a review of the claims file in camera, the trial court granted Cedell’s motion.

On interlocutory review, the Court of Appeals held that the attorney-client privilege applies to a bad faith claim by a first party insured, that the fraud exception to the attorney-client privilege requires a showing of actual fraud, and that the trial court erred in reviewing Cedell’s claims file in camera because Cedell had not made a sufficient prima facie showing of fraud. The Court of Appeals vacated the trial court’s sanctions and discovery orders. This case turns on the application and scope of the attorney-client privilege in a claim for insurance bad faith.

Cedell insured his home in Elma with Farmers Insurance Company of Washington (Farmers) for over 20 years. In November 2006, when Cedell was not at home, a fire broke out in his bedroom. His girl friend, Ms. Ackley, called the fire department and carried their two month old child outside. The fire completely destroyed the second story of the home. Ackley claimed that a candle had started the fire.

The Elma Fire Department and Farmers concluded that the fire was “likely” accidental.

In January 2007, a Farmers adjuster estimated that Farmers’ exposure would be about $70,000 for the house and $35,000 for its contents. A few months later, a Farmer’s estimator, Joe Mendoza, concluded that the fire-related damage to the residence alone was about $56,498. Farmers hired an attorney, Ryan Hall, to assist in making a coverage determination.

Hall examined Cedell and Ackley under oath. In July 2007, Hall sent Cedell a letter stating that the origin of the fire was unknown and that Farmers might deny coverage based on a delay in reporting and Ackley’s and Cedell’s inconsistent statements about the fire. The letter extended to Cedell a one-time offer of $30,000, good for 10 days. Cedell tried unsuccessfully to contact Farmers about the offer during the 10 days, but no one from Farmers returned his call.

In November 2007, Cedell sued Farmers, alleging, among other things, that it acted in bad faith in handling his claim. In response to his discovery requests, Farmers produced a heavily redacted claims file, asserting that the redacted information was not relevant or was privileged. Farmers also declined to answer some of Cedell’s interrogatories on the ground of attorney-client privilege, including Cedell’s question of why it “gave Bruce Cedell 10 days to either accept or reject the above offer.”

Cedell filed a motion to compel.  Cedell contended that the claim of privilege and work product in bad faith litigation is severely limited and does not apply to the insurer’s benefit in a bad faith action by a first party insured.  Cedell moved for disclosure or, in the alternative, for an in camera review of the files. Farmers opposed the motion, argued that Cedell had to make an initial showing of civil fraud to obtain the full claims file, and sought an order protecting from discovery all privileged communication with its counsel Ryan Hall.

Judge David Edwards held a hearing to consider the competing motions. He concluded that the insured was not required to make a showing of civil fraud before the claims file could be released, but instead merely “some foundation [in] fact to support a good faith belief by a reasonable person that [] there may have been wrongful conduct which could invoke the fraud exception.”  Judge Edwards found that:

  1. Cedell was not home at the time of the fire,
  2. the fire department and Farmers’ fire investigator had concluded the fire was accidental,
  3. Farmers knew the fire had left Cedell homeless,
  4. a Farmers adjuster appraised the damage to the house at $56,498.84,
  5. another adjustor estimated the damage at $70,000 for the house and $35,000 for its contents,
  6. Farmers made a one-time offer of $30,000 with an acceptance period that fell when Hall was out of town,
  7. Farmers threatened to deny Cedell coverage and claimed he misrepresented material information without explanation, and
  8. the damage to the house was eventually valued at over $115,000 and more than $16,000 in code updates.

The judge found these facts adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to invoke the fraud exception to the attorney-client privilege had occurred and ordered the claim files produced for an in camera review. He also awarded Cedell his attorney fees for the motion, capped at $2,500, and assessed punitive sanctions against Farmers of $5,000, payable to the court.

After reviewing the documents in camera, Judge Edwards, revised his view of what was required to release an unredacted claim file in a first party bad faith action and found the privilege did not apply. He ordered Farmers to provide Cedell with all documents that it had withheld or redacted based on the attorney-client privilege, increased the sanctions payable to Cedell to $15,000, and increased the sanctions payable to the court to $25,000.

The Court of Appeals reversed. The Court of Appeals found that “a factual showing of bad faith” was insufficient to trigger an in camera review of the claims file. The court below impliedly found that a showing that the insurer used the attorney to further a bad faith denial of the claim was not sufficient grounds to pierce the attorney-client privilege.

ANALYSIS

The scope of discovery is very broad. The right to discovery is an integral part of the right to access of the courts embedded in the Washington constitution.

Besides its constitutional cornerstone, there are practical reasons for discovery. Earlier experiences with a “blindman’s bluff” approach to litigation, where each side was required literally to guess at what their opponent would offer as evidence, were unsatisfactory. As modern day pretrial discovery has evolved, it has contributed enormously to a more fair, just, and efficient process. A party wishing to assert a privilege may not simply keep quiet about the information it believes is protected from discovery; it must either:

  • reveal the information,
  • disclose that it has it and assert that it is privileged, or
  • seek a protective order.

Farmers disclosed that it had the information and sought protection from its revelation by court order. However, the Washington state Supreme Court concluded that when an insured asserts bad faith against his insurer in the way the insurer has handled the insured’s claim, unique considerations arise. There are numerous recognized actions for bad faith against medical, homeowner, automobile, and other insurers in which the insured must have access to the claims file in order to prove the claim. For example, there are bad faith investigations; untimely investigations; failure to inform the insured of available benefits; and making unreasonably low offers. A first party bad faith claim arises from the fact that the insurer has a quasi-fiduciary duty to act in good faith toward its insured. The insured needs access to the insurer’s file maintained for the insured in order to discover facts to support a claim of bad faith. Implicit in an insurance company’s handing of claim is litigation or the threat of litigation that involves the advice of counsel.

To permit a blanket privilege in insurance bad faith claims (as exists for every other type of litigation) because of the participation of lawyers hired or employed by insurers would, the Supreme Court Concluded, would “unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices.”

The Supreme Court also concluded that “[i]t is a well-established principle in bad faith actions brought by an insured against an insurer under the terms of an insurance contract that communications between the insurer and the attorney are not privileged with respect to the insured. [Baker v. CNA Ins. Co., 123 F.R.D. 322, 326 (D. Mont. 1988)); accord Escalante, 49 Wn. App. at 394; Silva v. Fire Ins. Exch., 112 F.R.D. 699 (D. Mont. 1986).” In Silva, the Montana court noted, “The time-worn claims of work product and attorney-client privilege cannot be invoked to the insurance company’s benefit where the only issue in the case is whether the company breached its duty of good faith in processing the insured’s claim.”

First, the trial court must determine whether there is a factual showing adequate to support a good faith belief by a reasonable person that wrongful conduct sufficient to evoke the fraud exception has occurred. Second, if so, the trial court must subject the documents to an in camera inspection to determine whether there is a foundation in fact for the charge of civil fraud. The in camera inspection is a matter of trial court discretion.

The Washington Supreme Court recognized that two important principles are in tension in insurance bad faith claims. The purpose of discovery is to allow production of all relevant facts and thereby narrow the issues, and promote efficient and early resolution of claims. The purpose of attorney-client privilege is to allow clients to fully inform their attorneys of all relevant facts without fear of consequent disclosure.  First party bad faith claims by insureds against their own insurer are unique and founded upon two important public policy pillars: that an insurance company has a quasi-fiduciary duty to its insured and that insurance contracts, practices, and procedures are highly regulated and of substantial public interest.

The fraud exception to the attorney-client privilege is deeply rooted. “In first party insurance claims by insured’s claiming bad faith in the handling and processing of claims there is a presumption of no attorney-client privilege.” (emphasis added)

The insurer may assert an attorney-client privilege upon a showing in camera that the attorney was providing counsel to the insurer and not engaged in a quasi-fiduciary function. If the civil fraud exception is asserted, the trial court must engage in a two-step process. First, upon a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred, the trial court will perform an in camera review of the claimed privileged materials; and second, after in camera review and upon a finding there is a foundation to permit a claim of bad faith to proceed, the attorney-client privilege shall be deemed to be waived.

Addressing the Facts of This Case

Farmers hired an attorney, Hall, to advise it on legal issue of coverage. To the extent Hall issued legal opinions as to Cedell’s coverage under the policy, Farmers would be able to seek to overcome the presumption favoring disclosure by showing Hall was not acting in one of the ways the insurer must act in a quasi-fiduciary way toward its insured. However, Farmers hired Hall to do more than give legal opinions. The record suggests that Hall assisted in the investigation. Hall took sworn statements from Cedell and a witness and corresponded with Cedell. Hall assisted in adjusting the claim by negotiating with Cedell. Seven months after the fire, Hall wrote to Cedell offering a “one time offer” of $30,000, which was open for only 10 days, and threatened denial of coverage if the offer was not accepted. It was Hall who was negotiating with Cedell on behalf of Farmers and it was Hall who did not return his calls when Cedell was attempting to respond to the offer.

While Hall may have advised Farmers as to the law and strategy, he also performed the functions of investigating, evaluating, negotiating, and processing the claim. These functions and prompt and responsive communications with the insured are among the activities to which an insurer owes a quasi-fiduciary duty to Cedell.

Assuming Farmers was able to overcome the presumption of disclosure based upon a showing that Hall was not engaged in quasi-fiduciary activities, it was entitled to an in camera review and the redaction of his advice and mental impressions he provided to his client. Here, the trial court did examine in camera the documents to which Farmers asserted an attorney-client privilege.

CONCLUSION

Cedell is entitled to broad discovery, including, presumptively the entire claims file. The insurer may overcome this presumption by showing in camera its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating the claim. Upon such a showing, the insurance company is entitled to the redaction of communications from counsel that reflected the mental impressions of the attorney to the insurance company, unless those mental impressions are directly at issue in their quasi-fiduciary responsibilities to their insured.

The insured is then entitled to attempt to pierce the attorney-client privilege. If the insured asserts the civil fraud exception, the court must engage in a two step process to determine if the claimed privileged documents are discoverable.

The Supreme Court reversed the Court of Appeals in part, affirm in part, and remand to the trial court for further proceedings consistent with this opinion since it could not tell if its in camera review was a privilege communication.

ZALMA OPINION

This is an exceedingly dangerous decision. Lawyers do many things, some of which are not necessarily providing a legal opinion to his or her client. A real estate lawyer will view a property, interview witnesses, etc.; a personal injury lawyer will view an accident scene, hire experts, communicate with the potential defendant, and examine witnesses; and there are many other variations on the theme.

I have, in my career, taken hundreds of examinations under oath because my insurer client found it necessary so that I could give it good and appropriate legal advice. I did not act as an adjuster or in a quasi fiduciary capacity. I acted as a lawyer.

Mr. Orwell has been proven correct by the Washington state Supreme Court since, there, a lawyer for an insurer is not as equal as a lawyer for any other client. His or her advice should be protected by the ancient privilege and if insurers cannot be certain of the protection of the privilege it will be put at a disadvantage in breach, in my opinion, of the equal protection of the law.

Mr. Cedell had no more right to see Hall’s communications with his client, Farmers, than Farmers has to review the communications between Mr. Cedell and his lawyer. This case will chill, if not eliminate, the ability of an insurer to investigate questionable claims.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Foolish Insurance Fraud Continues

Foolish Insurance Fraud Continues

Continuing with the sixth issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the March 15, 2013 issue on:

  1. The knowledge of insurance needed to investigate insurance fraud.
  2. The California Department of Insurance Seeks to Add Tax on Disability Policies to continue anti-disability-insurance fraud effort.
  3. A guilty verdict of auto arson and fraud affirmed in Texas.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 18 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

1.       Go Directly To Jail
2.       Murder, Torture, Kidnapping
3.       Murder on High Seas
4.       Contract of Personal Indemnity
5.       Diminution or Repair Costs
6.       Don’t Sit on Your Rights
7.       Surety & Bankruptcy
8.       Failure to Object Terminal Error
9.       Contribution by Excess Insurers
10.       Commit Insurance Fraud – Go Directly to Jail
11.       Pollution
12.       Expert Testimony Limited
13.       Rescission is an Ancient Equitable Remedy
14.       Bad Faith Verdict Overturned
15.       Insured Must Pay Deductible
16.       Reformation Not Allowed
17.       No Fraud

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

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

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

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

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

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Go Directly To Jail

Insurance Fraud as Serious a Crime as Armed Robbery

Health care fraud is seriously depleting the earnings of insurers and the coffers of the United States and its Medical Insurance plans like Medicare and Medicaid. Some unscrupulous medical providers are becoming wealthy as a result of fraud with massive cash deposits available resulting from their crime. Even when caught the white collar medical fraud perpetrator only admits to the bare minimum the government could prove, not reality.

The United States is seriously seeking out and prosecuting medical practitioners it catches committing fraud. Dr. Rick Kuhlman was one of those the U.S. Attorney caught and prosecuted. Kuhlman pleaded guilty to perpetrating a five-year, $3 million health care fraud scheme. Regardless of the severity of the crime Kuhlman was sentenced to probation for the “time served” while out on pre-trial release awaiting his sentence. Although the United States Sentencing Guidelines set forth a sentencing range of 57 to 71 months of imprisonment, Kuhlman was able to avoid a custodial sentence by paying the money back and performing community service, including speaking to medical and nursing students about the perils of health care fraud.

The United States appealed the judgment of the trial court in United States of America v. Rick A. Kuhlman, No. 11-15959 (11th Cir. 03/08/2013) contending that Dr. Kuhlman should spend more time in jail.

BACKGROUND

The Fraudulent Billing Scheme

Kuhlman is a doctor of chiropractic medicine. He owns and operates five clinics in the Atlanta, Georgia metropolitan area, and one clinic in Nashville, Tennessee. Beginning in January 2005, Kuhlman embarked on what would be a five-year scheme, falsely billing health insurance companies for services he knew were not rendered to his patients.

Insurers put him on a watch list but continued to pay him reduced amounts on his fraudulent claims. It was only after the FBI became involved that Kuhlman reported that he ceased his improper billing practices. In total, Kuhlman admitted he stole $2,944,883 as a result of his fraudulent billing scheme.

Kuhlman was charged in a criminal information with one count of health care fraud. A few weeks later, on March 1, 2011, he pleaded guilty pursuant to a plea agreement. At the plea hearing, Kuhlman admitted that he did not steal out of need – he “was just pushing the envelope and billing for [CPT] codes that [his] doctors weren’t doing and once it started and [he] saw that the insurance companies were going to pay for it [he] just didn’t fix it and [he] should have.” In preparation for sentencing, the probation office drafted a Presentence Investigation Report, which calculated a base offense level of six. Kuhlman qualified for an 18-level enhancement because the loss amount was more than $2,500,000. As part of the plea agreement the government ultimately recommended a sentence of 36 months’ imprisonment, which was effectively a five-level downward variance.

A few days before sentencing, Kuhlman paid $2,944,883 in full restitution. Impressed, the district judge remarked that Kuhlman was the first defendant that the judge could recall who made such a large restitution payment prior to sentencing. The government objected, concerned that a continuance would allow Kuhlman to go right back to work and right back to his old routine of filing false claims with insurance companies.

Over the next several months, Kuhlman heeded the district judge’s advice. Between May 23, 2011, and the time of Kuhlman’s continued sentencing hearing on November 15, 2011, Kuhlman logged 391 hours of community service. He visited various medical, nursing, and chiropractic schools and gave presentations on health care insurance fraud. He also provided 18 days of free chiropractic services at homeless shelters across Atlanta and painted a gym at an elementary school. Kuhlman had paid back the full amount he admitted that he stole – $2,944,883 – prior to the initial May 23, 2011 sentencing hearing. At the second sentencing hearing on November 15, 2011, the district court lauded Kuhlman’s work during his six-month continuance. In light of Kuhlman’s full restitution payment, his community service, and the rising costs of incarceration, the district court sentenced Kuhlman to probation for the “time served” while awaiting his sentence. In doing so, the district court varied downward 20 levels.

Reasonableness of Sentence

When reviewing the reasonableness of a sentence, an appellate court’s task is two-fold: first ensure that the district court committed no significant procedural error or, second, failing to adequately explain the chosen sentence – including an explanation for any deviation from the Guidelines range.

When reviewing a sentence for reasonableness, the appellate court also evaluates whether the sentence imposed by the district court fails to achieve the purposes of sentencing. In order to determine whether that has occurred, the appellate court is required to make the sentencing calculus itself and to review each step the district court took in making it.  The sentencing court must impose a sentence sufficient, but not greater than necessary, to reflect the seriousness of the offense, promote respect for the law, provide just punishment for the offense, deter criminal conduct, protect the public from future crimes of the defendant, and provide the defendant with needed educational or vocational training or medical care.

Kuhlman’s Sentence

Neither party disputes that Kuhlman’s advisory Guidelines range was calculated accurately at 57 to 71 months. Rather, the government argues that it was procedurally unreasonable for the district court to disregard the importance of general deterrence, and to conclude that a 20-level variance was justified under the Guidelines.

The appellate court concluded that Kuhlman’s sentence was not substantively reasonable. He stole nearly $3 million and did receive no more than a soft pat on the wrist. To arrive at a sentence of probation for “time served” while out on pre-trial release, the district court varied downward by 57 months from the bottom of the advisory Guidelines range. Such a sentence fails to achieve an important goal of sentencing in a white-collar crime prosecution: the need for general deterrence.

Insurance companies, as does Medicare and Medicaid, rely on the honesty and integrity of medical practitioners in making diagnoses and billing for their services. Deterrence is an important factor in the sentencing calculus because health care fraud is so rampant that the government lacks the resources to reach it all. Thus, when the government obtains a conviction in a health care fraud prosecution, one of the primary objectives of the sentence is to send a message to other health care providers that billing fraud is a serious crime that carries with it a correspondingly serious punishment.

In awarding Kuhlman probation for the time he served while out on pre-trial release, the district court disregarded the importance of delivering such a message. Kuhlman’s sentence sends the opposite message – it encourages rather than discourages health care providers from engaging in the commission of health care fraud because they might conclude that the only penalties they will face if they are caught are disgorgement of the monies the government could prove was stolen and community service. It is difficult to imagine a would-be white-collar criminal being deterred from stealing millions of dollars by the threat of a purely probationary sentence, regardless of how much probation that person received.

Kuhlman knowingly and methodically stole millions of dollars from insurance companies over a period of several years. The district court’s sentence does not reflect the seriousness and extent of the crime, nor does it promote respect for the law, provide just punishment, or adequately deter other similarly inclined health care providers. The Sentencing Guidelines authorize no special sentencing discounts on account of economic or social status.

The appellate court, therefore, wrote to encourage all of its district court colleagues, not just the one who granted Kuhlman probation, to keep in mind that business criminals are not to be treated more leniently than members of the “criminal class” just by virtue of being regularly employed or otherwise productively engaged in lawful economic activity.

Criminals who have the education and training that enables people to make a decent living without resorting to crime are more, rather than less, culpable than their desperately poor and deprived brethren in crime.

As a result of its analysis the appellate court vacated Kuhlman’s sentence and remanded it to the trial court for resentencing so that the district court may be permitted to impose a reasonable sentence.

ZALMA OPINION

The trial judge in this case gave the impression of a naive, innocent and gullible person. Had he thought everything through he would have realized that for Dr. Kuhlman to pay full restitution in one fell swoop he must have stolen much more than the $2,944,883 he paid in restitution. White collar criminals, like every other kind of criminal, do not place the money they steal in a bank. They spend it. If Kuhlman had $2,944,883 in cash to make restitution there is a good possibility that he stole as much as $6 million or more.

He talked a trial judge into giving him probation by pretending to be a good person who had remorse for his crime when, in fact, he had admitted he committed the criminal acts for the shear joy of stealing. Hopefully his stay in prison will deter others from engaging in the same crime. The U.S. Attorney should be commended for taking the case up to the Eleventh Circuit Court of Appeal.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Murder, Torture, Kidnapping

Intentional Act or Loss Outside Coverage Territory

Liability insurance, by definition, can only provide indemnity for losses resulting from fortuitous acts. Intentional acts should never be an insurable risk of loss. In Chiquita Brands v. National Union Fire, 2013 -Ohio- 759. (Ohio App. Dist.1 03/06/2013) the Ohio court of appeals resolved a dispute between it and one of its insurers because of claims that Chiquita Brands engaged in funding terrorists and torture.

Plaintiff-appellee Chiquita Brands International, Inc. (“Chiquita”), filed a declaratory judgment action against defendants/third-party plaintiffs, Federal Insurance Company, American Motorists Insurance Company, and Lumbermens Mutual Casualty Company (the “insurers”). In its complaint, Chiquita asked the trial court to declare that the insurers had a duty to defend Chiquita in numerous tort claims that had been filed against it. Those claims alleged that from 1989 through 2004, Chiquita had illegally financed terrorist groups in Columbia, and that the plaintiffs in those suits had suffered damage as a result of the terrorists’ operations. Chiquita also contended that the insurance companies had breached the insurance contracts for failing to provide defenses and coverage in the underlying tort actions.

FACTUAL BACKGROUND

National Union asserted a direct claim against Chiquita, asking the court to declare that it did not have a duty to defend or indemnify Chiquita in the underlying suits, and that if it did, it was entitled to contribution from the other three insurance companies. Chiquita then filed a counterclaim against National Union, alleging that it, too, had a duty to defend Chiquita in the underlying suits.

While the case was pending, Chiquita settled with the insurers. Both Chiquita and National Union filed motions for summary judgment. The trial court granted Chiquita’s motion in part. It held that National Union had a duty to defend Chiquita in the underlying suits as a matter of law. The court also found that issues of fact existed as to other issues in the case, and denied the motions for summary judgment on those issues.

After a bench trial, the trial court determined the amount of defense costs for which National Union was required to reimburse Chiquita. It also found that National Union was responsible for all losses that occurred during the time its policies were effective. National Union appealed.

GROUNDS FOR APPEAL

National Union presents two assignments of error for review. In its first assignment of error, it contends that the trial court erred in finding that it had a duty to defend Chiquita in the underlying lawsuits. It argues that the underlying actions do not allege an “occurrence” as defined in the policies because Chiquita faced liability only for intentional conduct. It also argues that all the injuries for which Chiquita faced liability occurred in Columbia, outside of the National Union’s policies’ coverage territory.

ANALYSIS

An insurance policy is a contract, and the relationship between the insurer and the insured is purely contractual in nature. The interpretation and construction of insurance policies is a matter of law to be determined by the court using rules of construction and interpretation applicable to contracts generally. Where an insurance policy’s provisions are clear and unambiguous, courts must apply the terms as written and may not enlarge the contract by implication to embrace an object distinct from that contemplated by the parties.

When the allegations in the complaint or any allegations arising after the complaint state a claim that is potentially within the policy coverage, the insurer must accept the defense of the claim, regardless of the ultimate outcome or the insurer’s ultimate liability. But a duty to defend does not attach where the conduct alleged is indisputably outside the scope of coverage.

In this case, the policy covers “bodily injury” if the “bodily injury * * * is caused by an occurrence that takes place in the coverage territory.” An “occurrence” is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies cover only accidental occurrences, not intentional acts.

Ohio public policy generally prohibits obtaining insurance to cover damages caused by intentional torts. Inherent in a policy’s definition of “occurrence” is the concept of fortuity. That there must be an incident of an accidental, as opposed to an intentional, nature. Liability insurance does not, and should not, exist to relieve wrongdoers of liability for intentional, antisocial or criminal conduct.

In finding that National Union had a duty to defend Chiquita, the trial court examined the complaints in the underlying actions. It stated that “[t]hese complaints all make serious allegations of intentional even malicious conduct against Chiquita. However, each complaint, to some extent makes allegations of negligence. …  Those are questions for a trier of fact to determine.” It went on to find that based solely on the allegations in those complaints, National Union owed Chiquita a defense.

The court of appeal noted that the negligence claims in the underlying suits do not stem from the negligent actions of an insured arising from the intentional act of another insured. The negligence claims against Chiquita arise from its own intentional acts, not the acts of another insured party. The mere insinuation of allegations of negligence in a complaint cannot transform what are essentially intentional torts into something “accidental” that might be covered by insurance.

The court of appeal’s review of the record showed that although the underlying complaints set forth some causes of action sounding in negligence, those causes of action were all based on Chiquita’s alleged intentional conduct. The complaints alleged that Chiquita was both directly and vicariously liable for the deaths and injuries of numerous people through murder, torture, kidnapping and other atrocities. They claimed that Chiquita aided and abetted, conspired with, and participated in a joint criminal enterprise with the terrorists.

The complaints did not allege conduct that could be reasonably construed as negligent or accidental. Therefore the conduct alleged in the complaints for which Chiquita sought coverage and defense did not constitute “occurrences” within the meaning of the policy language.

Because the conduct in those complaints was outside the scope of coverage, National Union did not have a duty to defend Chiquita in the underlying suits or to indemnify Chiquita should it eventually be found to be liable for damages in those suits.

National Union also argues that all the injuries for which Chiquita faced liability occurred in Columbia, outside of its policies’ coverage territory. National Union’s policies stated that it would pay damages for injuries caused by an “occurrence” in “the coverage territory.” The policies defined the “coverage territory” as “[t]he United States of America (including its territories and possessions), Puerto Rico and Canada.” Chiquita understood the limitation of the National Union policy because it purchased policies from the insurers to cover its foreign liability. The lack of coverage territory limitation might be a reason why the insurers settled.

Even assuming that the complaint alleges activities that happened in the United States it is the location of the injury – not of some precipitating cause – that determines the location of the event for purposes of insurance coverage. The reasons for a “place of injury” test are clear. Applying a “cause in fact” test would let plaintiffs sweep any number of worldwide events into the ambit of a domestic policy as long as the underlying complaint alleged negligent supervision. Therefore, a causal test would create a windfall for the insured and render the insurer responsible for a liability for which it had not contracted. If domestic policies could be stretched to this extent, global policies would become superfluous and territorial coverage limitations would lose their meaning.

The events that inflicted the harm alleged in the underlying complaints took place in Columbia. Those events were the “occurrences” as defined in the policies as a matter of law. Chiquita’s decision to pay the terrorists was merely a precipitating event. Consequently, the “occurrences” did not happen in United States, the coverage territory.

National Union, therefore, had no duty to provide Chiquita a defense in the underlying suits.

ZALMA OPINION

Because the cost of defending intentional tort claims can be excessive, especially when they must be fought in foreign countries, actions that are obviously not an insured against risk like murder, torture, terrorist acts, those insured try to cause the insurer to pay rather than fight. National Union, defended this case with vigor and when it lost at the trial court protected its rights on appeal.

Trial courts should eliminate the inherent prejudice they have against insurers and stop bending over backwards to find some way to provide coverage where none exists. Further, trial and appellate courts should be able to look through the artful pleading of the plaintiffs’ lawyers who will always throw in a cause of action for negligence in hope of keeping the insurer’s deep pockets in the mix.

Revision

A friend pointed out that my opinion was not accurate.  He pointed out that: “That case you discussed about paying for terrorism is interesting. The problem with your explanation is that you repeating that the CGL policy does not cover intentional acts. I understand that claims people and defense attorneys are the biggest violators. It may be because they do not read the policies and simply repeat the same mistake. If you look at the CGL policy, however, the term “legally liable” encompasses unintentional and intentional acts. In fact, exclusion (a) of the CGL policy specifically excludes intentional injuries, not acts.  I keep reminding people about the erroneous comments some people make but many times it falls on deaf ears.”

I agree with my friend but also note that as a Californian, however, we also have some case law and statutes, Insurance Code Section 533, that sets up a public policy against insuring against intentional acts. Also, it defines, at insurance code section 22, “Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” Since an intentional act causing injury should never, by definition, be a contingent or unknown event, in those states like California that have a public policy against it, should carefully analyze facts before making a decision on coverage for an intentional act.

I will refrain, however, in the future from saying the CGL does not cover intentional acts.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Murder on High Seas

Person Making Claim Must Be Named on Policy

Every insurance contract has conditions precedent to making a claim. Failure to fulfill the conditions deprives the party of the right to make a claim. Because insurance is a contract of personal indemnity it does not follow the ownership or control of the damaged property. The insurer is only obligated to investigate and settle a claim if an insured or the insured’s legal representative makes a claim.

In Florida, to survive a motion to dismiss, a party is required to present evidence establishing that the claims he filed were valid or otherwise triggered an insurer’s contractual obligations.  Great Lakes Reinsurance (U.K.) PLC (“Great Lakes”) appealed from the denial of its motion for a directed verdict as to Joe Harry Branam, Sr.’s (“JHB”) breach of contract claim in Great Lakes Reinsurance (U.K.) Plc v. Joe Harry Branam, Sr, No. 3D12-1152 (Fla.App. 03/06/2013).

THE DAMAGE TO THE JOE COOL

On September 22, 2007, the Joe Cool, a charter fishing boat owned by Deep Sea Miami, Inc. (“Deep Sea Miami”) and insured by Great Lakes, was hijacked. The hijackers murdered all four members of the vessel’s crew, including Jake Branam, the sole officer, director, and shareholder of Deep Sea Miami, leaving the Joe Cool’s decks and cabin soaked with blood and damaged by gunfire. The hijackers threw the victims’ bodies overboard and attempted to abscond to Cuba on the vessel. According to JHB’s expert, on their way to Cuba, the hijackers caused extensive damage to the Joe Cool’s engines by running them at full throttle continuously for six or seven hours. Before reaching Cuban waters, the hijackers ran out of gas, and eventually abandoned the Joe Cool in a life raft.

Shortly after the hijacking, the Coast Guard recovered the Joe Cool off the coast of Cuba and towed it back to Miami. After the vessel arrived in Miami, the Federal government conducted a two-week investigation aboard the Joe Cool, during which the investigators disassembled the vessel’s electronics and much of its interior.  Eventually the Coast Guard released the Joe Cool to Jeff Branam, Jake Branam’s uncle, who docked it in the water behind his Star Island residence for the next three years.

THE LITGATION AND INSURANCE POLICY DEMANDS

On November 1, 2007, JHB filed the instant action against Jake Branam, Deep Sea Miami, and others to establish and foreclose on an equitable lien on the Joe Cool. Jeff Branam thereafter intervened as an additional lien claimant.

At that time, no one had authority to file an insurance claim for the damage done to the Joe Cool. The named insureds in the insurance policy were Jake Branam and Deep Sea Miami. But Jake Branam was deceased and, at that time, no one had been named the personal representative of his estate. Further, because Jake Branam was Deep Sea Miami’s sole officer, director, and shareholder, and because no one had been named conservator for Deep Sea Miami, no one had the authority to act on the company’s behalf. The trial court, in an attempt to provide a remedy issued an order that JHB and Intervenor Jeffery Branam, as lien claimants against the vessel, were authorized to file a claim for damage to the vessel.

After being advised that no claim had been received by Great Lakes, Ms. Garcia issued a second $250,000 policy limits demand directly to Great Lakes. Again, in making this second demand, Ms. Garcia admitted that she represented only JHB. Great Lakes refused to adjust the claim until it received documentation demonstrating that JHB was authorized to act unilaterally on behalf of the insureds, noting that JHB had not been appointed the receiver for Deep Sea Miami, nor the personal representative of Jake Branam’s estate. JHB did not provide such documentation. Indeed, as a stranger to the policy, he could not.

Genny Van Laar was appointed personal representative of Jake Branam’s estate. On October 5, 2010, the Joe Cool was sold for its salvage value of $60,000. Then, on November 22, 2010, Genny Van Laar, in her capacity as personal representative, assigned to JHB the rights to the Joe Cool and the insurance policy. After learning of the assignment, Great Lakes offered to settle JHB’s claim for $30,000 on April 14, 2011, and again on May 17, 2011. JHB, however, rejected the first offer, and did not respond to the second one.

At the close of JHB’s case-in-chief, Great Lakes moved for a directed verdict, arguing, among other things, that JHB lacked the authority to file the insurance claims at issue and, therefore, failed to prove that Great Lakes had breached the insurance contract as a matter of law. The trial court disagreed, determining that the trial court’s October 8, 2008, order provided JHB with the authority to file the policy claims. Further, relying on a Florida statute which sets forth a ninety-day time limitation for the payment or denial of certain types of insurance claims, the trial court determined there was sufficient evidence to establish that Great Lakes breached the insurance contract by not adjusting the claim within ninety days of the demands.

After the parties rested the trial court ruled in favor of JHB, determining that Great Lakes breached the insurance contract and that the Joe Cool was a constructive total loss, and calculating damages at $162,000. The trial court thereafter denied Great Lakes’s motion for a new trial or alternatively to amend the judgment, and entered final judgment in favor of JHB.  Great Lakes appealed.

ANALYSIS

The Florida court of appeal concluded from the evidence that JHB was neither a named insured nor a loss payee under the insurance policy. He was likewise neither the personal representative of Jake Branam’s estate nor the conservator for Deep Sea Miami. As a result, before receiving the assignment of the policy rights, JHB was a complete stranger to the insurance policy, and lacked authority to file claims thereunder.

Even assuming the order granting JHB the right to file a claim was valid, the order’s requirement that the claim be jointly filed was never satisfied. Accordingly, the claims purportedly filed pursuant to the October 8, 2008, order could not have triggered Great Lakes’ contractual obligations.

Contrary to the trial court’s determination, there is no ninety-day time limitation governing this insurance contract. Importantly, the insurance policy does not contain a time limitation for the adjustment of a claim. The plain language of the statute relied upon by the trial court specifies that “[f]or purposes of this section, the term ‘insurer’ means any residential property insurer.” Because Great Lakes in this situation acted as a marine insurer rather than a residential property insurer, it was not subject to this section’s ninety-day requirement.

Every provision of Florida and New York law cited by JHB purporting to set a strict temporal limitation on the adjustment of claims is inapplicable, and the trial court therefore erred in relying on such limitations to conclude that Great Lakes breached the insurance contract.

Conclusion

In this case, the record reflects that JHB issued various insurance policy demands upon Great Lakes under Jake Branam’s and Deep Sea Miami’s insurance policy. Upon receiving these claims, Great Lakes requested that JHB submit documentation establishing his authority to act on behalf of the insureds. JHB, however, had no such authority, and therefore could not submit the requested documentation. On this basis, Great Lakes refused to adjust JHB’s claims.

The record, therefore, did not support JHB’s breach of contract claim. The court of appeal, reversed the trial court’s denial of Great Lakes’s motion for a directed verdict, and remanded the case back to the trial court to enter judgment in favor of Great Lakes.

ZALMA OPINION

When making a claim on any insurance policy whether marine, personal property or real property, it is essential that the parties making the claim actually read the policy. In this case no one read the policy because, had they done so, they would have seen that JHB was not named as an insured and had no rights under the Great Lakes policy. The trial court exceeded its authority by allowing JHB and Jake Branham the right to make a claim apparently believing that for every wrong there is a remedy.

All that JHB and Jake Branham needed to do to prove their claim properly was to become appointed as the administrator of the deceased owner and as representative of the corporation who was insured. With that done they could have presented a claim that Great Lakes could investigate and pay if there was an insured loss. Failing to do so caused the plaintiffs to get nothing more than the salvage value of the Joe Cool.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Contract of Personal Indemnity

Who’s On First?

First party property insurance is a contract of personal indemnity. It only insures the person(s) named in the policy against certain risks of loss to property in which that person has an interest. A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property.

Sherrie Louise Taylor (Taylor), challenged a trial court’s summary judgment in favor of Alvin Lance Lough and Bank of America, N.A. (the “Bank”). Taylor asserted that the trial court erred in granting summary judgment in favor of the Bank and denying her summary-judgment motion. The Texas court of appeal was called upon to resolve the dispute in Sherrie Louise Taylor v. Foremost Lloyds of Texas, Alvin Lance Lough and Bank of America, Na, No. 10-12-00105-CV (Tex.App. Dist.10 03/07/2013).

BACKGROUND

The dispute in this case centers on who is entitled to insurance proceeds associated with a house that burned down. Taylor claimed that she is entitled to the proceeds because, among other things, she and Lough lived together in a house located at 116 Wood Dale in Burleson, Texas, from 2005 to 2007. Apparently, Taylor continued living in the house after the couple broke up and Lough moved out in mid-2007.

On March 1, 2007, Lough, an “unmarried person,” executed a homestead lien contract and deed of trust with the Bank for a loan secured by the property at issue in this case-the proceeds of which, according to Taylor, were used to buy land to move Lough’s feed store. The contract and deed of trust specifically stated that Lough granted the Bank a lien . . . “in and to the following described real property, together with all improvements, all proceeds (including without limitation premium refunds) of each policy of insurance relating to any of the improvements, or the Real Property . . . .”

As of March 1, 2007, the Johnson County property records indicated that title to the property was vested in Lough. The terms of the contract and deed of trust required Lough to purchase and maintain “policies of fire insurance with standard extended coverage endorsements” for the property, including “an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Owner or any other person.” The contract and deed of trust also stated that: “Whether or not Lender’s security is impaired, Lender may, at Lender’s election, receive and retain proceeds of any insurance and apply the proceeds to the reduction of the indebtedness, payment of any lien affecting the Property, or the restoration and repair of the Property.”

Thereafter, Lough purchased a fire insurance policy from Foremost Lloyd’s of Texas (“Foremost”). On the declarations page of the insurance policy, Lough was listed as the insured and the Bank was identified as the mortgagee. Nowhere in the insurance policy is Taylor listed as an insured.

In her third amended petition for declaratory relief, Taylor alleged that Lough executed a quitclaim deed to the property in favor of her on January 29, 2007. However, Taylor did not record this deed until September 17, 2007. Furthermore, the Bank contends in its brief that Lough and Taylor executed reciprocal quitclaim deeds to the property on or about January 29, 2007; thus, Taylor did not have a clear ownership interest in the property.

In July 2007, the relationship between Lough and Taylor soured, and a dispute arose over ownership of the property. After Taylor recorded her deed, Lough filed suit, seeking a declaration that he is the owner of the property and that Taylor’s deed is void. After several settings, the trial court signed a final judgment in favor of Taylor on May 26, 2009. Specifically, the final judgment stated that Taylor owned the property in question pursuant to the quitclaim deed.

Coincidentally, four days later, on May 30, 2009, the property was damaged by fire. Thereafter, Taylor sued Lough and Foremost to recover the proceeds from the insurance covering the property. The Bank intervened, seeking a declaration that it was entitled to the insurance proceeds pursuant to the terms of the insurance policy. Foremost deposited the insurance proceeds into the registry of the court and was subsequently non-suited.

ANALYSIS

The Bank filed traditional and no-evidence motions for summary judgment, arguing that it was entitled to the insurance proceeds because:

  1. the Bank is a third-party creditor beneficiary under the insurance policy with standing to enforce its rights to the proceeds;
  2. Taylor lacks standing to challenge the enforceability of the insurance policy because she is a stranger to the contract; and
  3. even if Taylor has standing, her challenges to the enforceability of the insurance policy fail as a matter of law.

Taylor responded to the Bank’s summary-judgment motions and also filed a “counter motion” for summary judgment, wherein she argued that the Bank’s lien is invalid because the Bank had notice of Taylor’s homestead rights and did not obtain her consent to the lien; the Bank had actual and constructive notice of Taylor’s ownership interest in the property; res judicata and collateral estoppel barred the Bank from disputing Taylor’s ownership interest; and the Bank’s lien violated the Texas Constitution’s prohibitions governing liens on homesteads.

The trial court granted the Bank’s summary-judgment motion without specifying the grounds. As a result of the trial court’s judgment, the Bank was awarded the insurance proceeds deposited in the court’s registry, and Taylor took nothing.

The purpose of a declaratory action is to establish the existing rights, status, or other legal relationships between the parties. Insurance policies are contracts, so the rights and duties they create and the rules governing their interpretation are those generally pertaining to contracts. Under the general law of contracts, a party must show either privity or third-party-beneficiary status in order to have standing to sue.

A court gleans the parties’ intention from the words of their contract, and not from what they allegedly meant. Here, the evidence indicated that Lough and Foremost entered into the insurance contract to directly benefit the Bank. In fact, as a condition of the loan, Lough was required to secure the fire-insurance policy specifically for the Bank’s benefit. Furthermore, the insurance policy at issue identifies the Bank as the mortgagee and states that, in the event of damage or loss to the property, the Bank, as mortgagee, is entitled to the insurance proceeds. Thus, it is clear from the document itself that the parties to the contract of insurance intended for the Bank to be a third-party creditor beneficiary to the insurance policy so long as the Bank’s mortgage encumbered the property.

Despite this, Taylor asserts that she was the true owner of the property when the deed of trust and insurance policy were executed, and thus, the insurance policy and deed of trust are invalid and the Bank is not entitled to the insurance proceeds. However Taylor did not proffer evidence indicating that she has standing to challenge the insurance policy. She does, however, rely on the quitclaim deed, which was signed on January 29, 2007, prior to the execution of the insurance policy.

In Texas, and every other state, a fire insurance policy is a personal contract between the insurer and the insured named in the policy and a stranger to the policy may not ordinarily maintain a suit on it. Taylor did not produce any evidence showing that she was a named insured or a party to the insurance policy. Furthermore, the insurance policy does not indicate that Taylor is a third-party beneficiary of the policy. As such, the court of appeal concluded that Taylor was a “stranger” to the insurance policy and lacked standing to challenge its enforceability.

With respect to property insurance policies, Texas law has long held that a party who is a complete stranger to the contract is not in a legal position to recover any interest in the policy proceeds. Taylor failed to produce more than a scintilla of summary-judgment evidence to raise a genuine issue of material fact regarding her lack of standing to challenge the enforceability of the insurance policy and her entitlement to the insurance proceeds.

ZALMA OPINION

Because insurance is always a contract of personal indemnity before anyone can collect on a fire insurance policy the person making the claim must have an insurable interest in the property and must be named as an insured or beneficiary of the policy. Insurance does not, as Ms. Taylor found, follow title to the property. Each person with an interest in the property can purchase insurance to protect that interest so that, had she desired, Ms. Taylor could have purchased a separate fire policy on her interest and avoided the claims of the Bank or Lough. She did not.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Diminution or Repair Costs

Diminution or Repair

A first party property insurance company is only required to make the insured whole. A property insurer, when the insured decides not to rebuild and sells the damaged property without repair, is only entitled to recover the actual cash value loss. It is not entitled to the costs of repair unless the cost of repair is less than the actual cash value loss. Some insureds attempt to profit from an insured loss rather than take the actual cash value loss it agreed to when the policy was acquired.

3140 L.L.C., attempted to have its cake and eat it, sued its insurance company following water damage from a fire sprinkler in a building it owned. 3140 L.L.C. argued the insurance company was negligent or negligently represented that it needed to maintain a working sprinkler system. A jury awarded 3140 L.L.C. $351,784.58 in damages on its claims. The district court vacated the verdict, set aside judgment, and ordered a new trial. In 3140 L.L.C v. State Central Financial Services, Inc., D/B/A State Central Insurance, No. 2-1186 / 12-0434 (Iowa App. 02/13/2013) the Iowa Court of Appeal resolved the dispute.

BACKGROUND FACTS

In December 2004, 3140 L.L.C. purchased property in Keokuk that had been used as a nursing home. They paid $286,000.00 for the property. In 2007, 3140 L.L.C. purchased an insurance policy on the property through State Central Insurance (State Central). The policy, issued by Mount Vernon Insurance Company (Mount Vernon), did not provide coverage for fire sprinkler leakage.

In November 2007, 3140 L.L.C. was advised as to the necessity of maintaining a fire sprinkler in its vacant property.

On December 23, 2008, the building owned by 3140 L.L.C. incurred damage after water pipes and fire sprinklers froze and broke. 3140 L.L.C. made a claim for damages with Mount Vernon but was denied because the policy did not provide coverage for damage due to sprinkler leakage. The disputes about coverage were resolved by a partial grant of summary judgment. Two claims went to trial: one count of negligence and one count of negligent misrepresentation stemming from State Central allegedly providing inaccurate information about maintaining a working sprinkler system.

After trial a jury reached a verdict in favor of 3140 L.L.C. in the amount of $351,784.58, but found 3140 L.L.C. was forty percent at fault. Reducing the total damages by forty percent, the district court entered judgment on behalf of 3140 L.L.C. in the amount of $211,071.74.

State Central moved for judgment notwithstanding the verdict and for a new trial. Following a hearing, the district court vacated the verdict, set aside the judgment entry, and granted a new trial.

ANALYSIS

The district court determined that instruction No. 29 was inadequate because it lacked an explanation or definition of “fair market value.” The court noted that State Central did not object to the instruction, but that it initially offered a different instruction that included a definition of “fair market value.” The court concluded that it “could have prepared a better instruction by including a definition of fair market value.” However, the court made this finding after determining the jury’s verdict was contrary to the instruction. The only question on appeal was whether the jury’s verdict conformed with the evidence and the law as instructed.

Instruction No. 29 states:

“If you find that Plaintiff is entitled to damages, you will consider either ‘diminution in value’ or ‘restoration.’

“Damage for diminution in value is the difference in the value of the property immediately before the injury and its value immediately after the injury.

“Damage for restoration is the reasonable cost of repairing the property by restoring it to the condition it was immediately before the injury plus the reasonable value of the use of the property for the time reasonably required to complete its repair.

“If the cost of restoration is greater than the diminution in value, the Plaintiff is limited to recovering only the amount of damages for diminution in value.”

“There is an exception to this limitation if:

“1. The cost of restoration is not unreasonably greater than the diminution in value; and

“2. The Plaintiff retains the property because it is personal to the Plaintiff, and the property will actually be restored to its original condition.

“If these propositions are proved by the Plaintiff, damages may be awarded for restoration even if it is greater than the amount of the diminution in value. If these propositions are not proved by the Plaintiff, then the damage award is limited to the amount of diminution in value.”

The district court found the substantial evidence presented at trial was that diminution would result in damages between $0 and $115,000, whereas “the cost of repairing the property by restoring it would amount to $351,784.” Because the jury found the total amount of 3140 L.L.C.’s damages was $351,784.58, the trial court concluded the jury chose to use the cost of restoration, which was contrary to the instruction because the cost of restoration was more than the diminution in value.

The court of appeal concluded that the exception set forth in instruction No. 29 was not followed. Fixing the amount of damages is a function for the jury; therefore, a court is always loath to interfere with a jury’s verdict. When reviewing an allegation that a jury verdict is excessive, the evidence is viewed in the light most favorable to the plaintiff.

A jury award must be reduced or set aside only if it is

  1. flagrantly excessive or inadequate;
  2. so out of reason as to shock the conscience;
  3. a result of passion, prejudice, or ulterior motive; or
  4. lacking evidentiary support.

Where a verdict meets this standard or fails to do substantial justice between the parties, the court must grant a new trial or enter a remittitur.

In 3140 L.L.C.’s closing argument, its attorney told the jury that the amount of damages attributable to the fire sprinkler leak would be between the difference in value of the building before the damage ($590,000) and the amount it sold for after the damage ($475,000)-a difference of $115,000-and the cost of restoration, which was $347,500. The jury found 3140 L.L.C. suffered $351,784.58 in damages, an amount in keeping with the cost of restoration. This is contrary to instruction No. 29, which required the jury to award damages for the diminution of value if that amount was less than the cost of restoration.

The undisputed evidence shows the diminution in value would be between the fair market value of the building prior to the damage and what it was sold for after the damage. The evidence places the fair market value of the building before the damage at either $475,000-the November 12, 2008 offer price – or the value estimate of $590,000. The difference then would be either $0 or $115,000, depending on which figure the jury chose.

The court of appeal concluded that an award of damages between $0 and $115,000 was supported by the evidence. The jury’s verdict of $351,784.58 was not supported by the evidence or the law. Where a verdict is the result of passion and prejudice, a new trial is warranted. However, where in the absence of passion and prejudice the verdict is merely excessive because it is not supported by sufficient evidence, justice may be effectuated by ordering a remittitur of the excess as a condition for avoiding a new trial.

The evidence supports an award of damages in the amount of $115,000 less forty percent, or $69,000. The court of appeal, therefore, conditionally affirmed the trial court’s grant of a new trial for excessive damages and conditioned its decision on the plaintiffs, within fifteen days of the issuance of the order must file with the clerk of the district court a remittitur of all damages in excess of $69,000, the judgment shall be reversed. If the plaintiff does not file a remittitur, the district court would be affirmed and a new trial would be granted.

ZALMA OPINION

This is only tangentially an insurance case. It is a damages case. The Iowa court accepted the fact that actual cash value of real property that is not repaired is the fair market value of the property before loss less the fair market value after loss. In this case the plaintiffs suffered real damage to their property, sold it without repair for almost twice what they paid for it, and then had the unmitigated gall to demand the full cost of repair as the damages due from the insurer. The jury agreed to punish the insurer and compel it to pay more damages than it owed.

The trial court and the Iowa court of appeal saw through the error and gave the plaintiffs one of two choices: accept the remittitur and take the money or retry the case knowing that at the next trial the instructions will follow the requirements of the court of appeal so that the chances of getting more damages are slim and there would be a possibility of getting nothing.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Don’t Sit on Your Rights

No Excuse For Waiting to Sue for 1995 Accident

Steven Pham, representing the estate of the driver of a car involved in a traffic accident, along with the deceased driver’s parents and the five passengers in his car at the time, sought review of the court of appeals’ judgment in Pham v. State Farm Mut. Auto Ins. Co., No. 09CA0768 (Colo. App. May 27, 2010). The Colorado court of appeals affirmed a summary judgment in favor of State Farm on grounds that the plaintiff-petitioners’ claims were barred by the statute of limitations governing underinsured motorist claims. In Steven Pham, As Personal Representative of the Estate of Louis Diep Pham, Deceased v. State Farm Automobile Insurance Company., 2013 CO 17 (Colo. 03/04/2013) the Colorado Supreme Court was called upon to resolve the dispute.

FACTS

Along with a number of other lawsuits, this action for underinsured motorist coverage arose from an automobile accident that occurred in December 1995. A vehicle driven by Louis Diep Pham was struck by a vehicle driven by Erwin Guerra, who later admitted fault. Mr. Pham and all five of his passengers were injured in the accident, and Mr. Pham subsequently died from his injuries.

At the time of the accident, Mr. Guerra, the at-fault driver, was covered for bodily injury by his own automobile liability insurance policy, issued by Allstate Insurance Company, with policy limits of $25,000 per person and $50,000 per accident.

Louis Diep Pham was driving a vehicle owned by Pham Enterprises and insured by State Farm Automobile Insurance Company, with a policy that provided uninsured/under-insured motorist coverage with limits of $100,000 per person and $300,000 per occurrence. Several of the other passengers had separate policies with State Farm on their own vehicles, which also included underinsured motorist coverage, and two of the passengers had excess underinsured motorist coverage with Liberty Mutual Insurance Company. Finally, Mr. Guerra’s employer, the owner of the vehicle he was driving, had a Business Auto policy issued by Hartford Fire Insurance Company, with $1 million in liability coverage.

In February 1996, Stephen Pham, the personal representative for the estate, and the five surviving passengers filed six separate lawsuits against various parties. A month later, State Farm paid $75,000 in underinsured motorist benefits to the estate, and still later that year, all six separate lawsuits were consolidated in the Denver District Court. Guerra and the plaintiffs entered into a Stipulated Confessed Judgment for $1,558,707.78. The plaintiffs accepted $50,000 in liability coverage from Allstate and agreed not to enforce the judgment against Guerra in exchange for Guerra’s assignment to them of any claims he might have against Hartford.

In April 2006, following summary judgment in Hartford’s favor, the federal lawsuit became final, and the stay of the 1998 state claim for underinsured motorist coverage against State Farm expired by its own terms.

The plaintiff-petitioners sued State Farm in March 2008, more than a dozen years after the initial accident and almost two years after their action against Hartford became final, alleging the same claims for relief against State Farm they had advanced in the 1996 and 1998 state actions.

Once again the plaintiffs asserted claims of negligence and loss of consortium against Guerra and claims of breach of contract and bad faith breach of contract for State Farm’s failure to pay underinsured motorist benefits. The trial court granted State Farm’s motion to dismiss the claims against it, concluding that they were barred both by the applicable statute of limitations and by the doctrine of claim preclusion. The court of appeals affirmed the district court’s summary judgment, interpreting the two-year limitations provision of Colorado statutes as running from May 1998, the point at which the plaintiffs received payment from Allstate of the settlement of their underlying bodily injury liability claim against Guerra, notwithstanding their pending action to recover additional liability insurance coverage by Hartford. The court of appeals did not address the claim preclusion issue.

ANALYSIS

Because Guerra clearly had applicable liability insurance, the statute of limitations governed the plaintiff-petitioners’ claim for underinsured motorist coverage only through the provisions of subsection (1)(b), according to which the limitations period for commencing an action or arbitration of those claims was not extended by final resolution of the Hartford case for at least two separate but related reasons.

Subsection (1)(b) permits filing within two years after the insured receives payment of the settlement or judgment on an underlying bodily injury liability claim if, but only if, the insured’s claim was preserved by timely commencing an action against the underinsured motorist on that claim or receiving payment within the time for filing such an action.

The Hartford action failed to result in the payment of any settlement or judgment. Further, even if it had, that action was not an action on the plaintiff-petitioners’ underlying bodily injury claim against the underinsured motorist. It was, rather, an action by the underinsured motorist’s assignees to recover on a claim of the underinsured motorist against a liability insurance carrier.

By timely commencing an action against Guerra on their underlying bodily injury claims, at least some of the plaintiff-petitioners clearly preserved their claims against the underinsured motorist, potentially permitting them to file for underinsured motorist benefits more than three years after accrual of their claims. Under this alternate method of calculation, however, their claims could nevertheless be filed no later than two years after receiving payment of the settlement or judgment on those preserved underlying bodily injury liability claims against the underinsured motorist. In

May 1996, the plaintiffs settled their action against Guerra, the underinsured motorist, for a confessed judgment, payment of the limits of Allstate’s liability coverage, and the assignment of any claims Guerra might have against Hartford, all in exchange for an agreement that the remainder of the confessed judgment could not be enforceable against the underinsured motorist. At that point, the action against the underinsured motorist was settled, and upon payment of Allstate’s liability coverage, the insureds had received payment of the settlement of the underlying bodily injury liability claim against the underinsured motorist, and the two-year period commenced.

In measuring the two-year period from payment of a settlement or judgment, the statute clearly contemplates either a settlement of the claim in lieu of a judgment or a settlement of the judgment against the underinsured motorist.

The plaintiff-petitioners characterize the court of appeals judgment as measuring the two-year period from a partial payment of a settlement or judgment, but the Supreme Court understood the court of appeals to have held merely that payment of the settlement with Guerra disposed of the only claim against the underinsured motorist preserved as required by the statute.

Because the plaintiffs failed to file this action or demand arbitration of their underinsured motorist claim within either three years of the accrual of their cause of action or within two years after receiving payment of a settlement or judgment on an underlying bodily injury liability claim that had been preserved as prescribed by the statute, the Supreme Court had no choice but to affirm the court of appeals.

ZALMA OPINION

This is another case where the greed of the plaintiffs to seek a bad faith judgment against an insurer clouded their judgment and allowed the statute of limitations to run against a party against whom a cause of action might have been successful.

Plaintiffs, by their sloth, and attempt to create a bad faith suit, lost every chance at a multimillion dollar judgment by waiting. Sad. The plaintiffs, of course, are not without a remedy since they can sue the lawyers who failed to file a prompt lawsuit.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Surety & Bankruptcy

Surety’s Security is New Value

Surety is a type of insurance where the surety insurer agrees to fulfill a contractual obligation of its insured if, for some reason, the insured fails to accomplish its obligation. Before agreeing to be a surety the surety will invariably obtain security from the obligor in the form of cash or property to secure the obligation. In Re: ESA Environmental v. the Hanover Insurance Company, No. 11-2150 (4th Cir. 03/01/2013) the Fourth Circuit was called upon to determine whether the security deposited by obligor was an avoidable preference such that it should have gone to the bankruptcy trustee for the benefits of all creditors and not to the surety.

The Trustee in bankruptcy of ESA Environmental Specialists, Inc. (“ESA”) appealed from the award of summary judgment by the bankruptcy court to The Hanover Insurance Co. (“Hanover”). The bankruptcy court concluded that ESA’s transfer of $1.375 million to Hanover within 90 days of ESA’s filing a petition for bankruptcy was not an avoidable preference under 11 U.S.C. § 547(b).

FACTS

ESA was an environmental and industrial engineering firm that sought and performed construction projects under contract with the federal government. Pursuant to the Miller Act, ESA was required to obtain and furnish to the government two types of surety bonds as a condition precedent before any contract of more than $100,000 could be awarded for the construction, alteration, or repair of any public building or public work of the Federal Government. These surety bonds functioned to secure ESA’s obligation to complete its contract and pay its vendors and subcontractors.

In April 2007, ESA borrowed $12.2 million from Prospect Capital Corp. (“Prospect”) to, among other things, meet current working capital needs, repay existing indebtedness, and “fund costs associated with entering into and fulfilling government contracts.” In May 2007, ESA asked Hanover to issue additional surety bonds (the “New Bonds”) in conjunction with seven additional government contracts that ESA sought to obtain (the “New Contracts” and collectively with the Existing Projects, the “Government Contracts”). ESA could not commence work on the New Contracts until it tendered the New Bonds to the appropriate government agencies, as the New Bonds were a condition precedent to the final contract award to ESA. Hanover, concerned about ESA’s financial stability, would not issue the New Bonds without additional security over and above the bond premiums.

ESA was required to obtain an irrevocable letter of credit from SunTrust Bank (“SunTrust”) in the amount of $1.375 million with Hanover as the beneficiary (the “Letter of Credit”). The Letter of Credit would collateralize the New Bonds but also all of Hanover’s existing guarantees and surety obligations on behalf of ESA. The bond premiums on the New Bonds totaled $74,624, and the face value of the New Bonds totaled $7.9 million.

As a condition precedent to issuance of the Letter of Credit, SunTrust required ESA to fund a certificate of deposit at SunTrust in the amount of $1.375 million (the “CD”) as security for the Letter of Credit. ESA had limited cash reserves, so it turned to Prospect for the additional capital necessary to fund the CD. Prospect and ESA then amended their existing credit agreement to increase the principal amount of Prospect’s existing loan to ESA by a total of $1.575 million (the “Prospect Loan”). On May 8 and May 17, 2007, in two separate transfers, Prospect tendered the Prospect Loan funds directly to ESA, and ESA deposited those funds into its bank account. On May 17, 2007, ESA transferred $1.375 million of the Prospect Loan proceeds to SunTrust to fund the CD to secure the Letter of Credit for Hanover. SunTrust then issued the Letter of Credit, and Hanover in turn issued the New Bonds, which ESA delivered to the appropriate federal government agencies for final award of the New Contracts.

Despite being awarded the New Contracts, ESA’s financial condition continued to deteriorate and it filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Western District of North Carolina on August 1, 2007. Hanover then drew on the Letter of Credit, receiving the $1.375 million face amount from SunTrust, which liquidated the CD. Later the bankruptcy was changed to Chapter 7.

In the course of ESA’s bankruptcy proceeding, the bankruptcy court approved the sale of substantially all of ESA’s assets to Prospect. In February 2008, the bankruptcy court entered an order allowing Hanover to take responsibility for the completion of the Government Contracts. Hanover represents, without contradiction, that since entry of that order, Hanover fulfilled its obligations, including ensuring that the Government Contracts were completed and subcontractors paid.

The bankruptcy court, approving the transfer of funds to Hanover, opined that it would be inequitable to require Hanover to return the portion of the Prospect Loan used to cover the costs to complete the Government Contracts when Hanover did the work, and paid the obligations.

ANALYSIS

The “new value” defense is an explicit statutory defense to a § 547(b) preference action:

The trustee may not avoid under this section a transfer –

(1) to the extent that such transfer was –

(A) intended by the debtor and the credi- tor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange.

The statute defines “new value” as money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. The party asserting the new value defense (Hanover, in this case) bears the burden of proof.

As to the new value defense element of intent to make a contemporaneous exchange, the Trustee does not dispute that ESA and Hanover intended the $1.375 million transfer to be a contemporaneous exchange for new value in the form of the New Contracts.

The Trustee did not contest that the New Contracts have value – claiming that the measure of value of these contracts is the expectation of the parties at the time of the transfer.

Hanover asserted, and the bankruptcy court agreed, that ESA received new value in the form of the New Contracts as a result of the transfer of funds (from Prospect to ESA to SunTrust to Hanover). In finding that the New Contracts constituted new value in excess of the transferred asset, the $1.375 million cash, the bankruptcy court relied on the affidavit of ESA’s former Chief Executive Officer, Charles Jacob Cole, (the “Cole Affidavit”) who stated that the “government contracts awarded to ESA had a face amount in excess of $3.9 million and the New Bonds provided ESA with the ability to proceed with the new government contracts and to earn revenues in excess of $1,375,000 – the face amount of the Letter of Credit.” The Trustee failed to introduce evidence to contradict the Cole Affidavit or to establish any other measure of value for the New Contracts.

Once Hanover offered its uncontradicted evidence that ESA received new value in excess of $1.375 million – the amount of the alleged preferential transfer – Hanover did not need to demonstrate any exact figure beyond that amount. Hanover only needed to prove with specificity that the New Contracts had a value at least as great as the amount of the alleged preferential transfer in order to demonstrate that ESA’s bankruptcy estate had not diminished as a result of the transfer. On the record evidence before the bankruptcy court that the value of the New Contracts met or exceeded the amount of the alleged preferential transfer – the $1.375 million – the court did not err in concluding that Hanover had carried its burden to prove with specificity the new value given to the debtor.

ZALMA OPINION

Sureties, unlike insurers, do not just pay money to indemnify the people it insures, they actually step in to the contract that the insured promised to fulfill, manage the work, hire the subcontractors, supervise the work, pay the material men and labor, and effect completion of the contract. This Hanover did as required by its surety agreement. The Trustee, and the creditors the Trustee represented, tried to deprive Hanover of the benefits of the surety contract.

This case teaches that a surety, obtaining security, must make clear the reasons for the security and that it is new value.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Failure to Object Terminal Error

Fifth Amendment Should Never Apply to Civil Plaintiff

When a plaintiff sues an insurance company for damages, he places in issue all factual matters relevant to any exclusion clause in that policy including fraud. The gravamen of the lawsuit is so inconsistent with the continued assertion of a privilege as to compel the conclusion that the privilege has in fact been waived. Even so, plaintiff finally may always claim his privilege. To do so, however, will have to dismiss his lawsuit if he persists in asserting the privilege.  A plaintiff suing an insurer cannot assert the Fifth Amendment privilege because he chose to file suit voluntarily and can protect himself by dismissing the lawsuit. He cannot have his cake and eat it too.

In Richard Gay et al. v. Safeco Insurance Company of America, No. AC 33846, (Conn.App. 03/12/2013) the Connecticut Court of Appeal, because of failures of the plaintiff’s counsel to assert the waiver at trial in an attempt to gain a tactical advantage, allowed Gay to have his cake and eat it.

Safeco Insurance Company of America (Safeco) appealed from the judgment of the trial court in favor of the plaintiffs, Richard Gay and Marie Gay (Gays).  Safeco argued that

  1. the court improperly advised Richard Gay, sua sponte, as to his privilege under the fifth amendment to the United States constitution against self-incrimination and
  2. the court abused its discretion by denying Safeco’s motion to compel inspection of the Gays’ home.

FACTS

In 2006 and 2007, the Gays held a homeowners insurance policy with Safeco. Pursuant to that policy, Safeco paid the Gays more than $100,000 in combined benefits for a furnace malfunction and a burst pipe. In February, 2008, the Gays filed a breach of contract action against Safeco alleging that it had failed to pay all covered losses. In February, 2009, Safeco filed a counterclaim alleging fraud, among other things, in connection with the Gays’ insurance claims.

Approximately two months before trial, on March 1, 2011, Safeco filed a disclosure of two expert witnesses, and on March 3, 2011, Safeco filed a motion to compel a reinspection of the home by those two witnesses. The Gays objected, arguing that Safeco already had inspected their home, and that the last-minute inspection by two experts would prejudice the Gays. The Gays argued that they would have to prepare a defense and perhaps find and employ experts of their own within a short period of time. The court denied Safeco’s motion.

The jury trial commenced in May, 2011. Richard Gay was called as the first witness. On cross-examination, counsel for Safeco questioned Richard Gay about his income tax returns and the Gays’ claims. Several times, outside the presence of the jury, the court apprised him of his fifth amendment privilege against self-incrimination. Safeco did not object. In the presence of the jury, Richard Gay claimed his fifth amendment privilege on cross-examination, and he refused to answer a number of questions.

The court instructed the jury that it could draw an adverse inference from Richard Gay’s invocation of the privilege. The jury returned a verdict for Safeco on the Gays’ claim for breach of contract, and the jury returned a verdict for the Gays on Safeco’s counterclaim. Safeco argued, for the first time, that the court improperly advised Richard Gay as to his fifth amendment privilege because he had waived the privilege by testifying on direct examination. The court denied the motions.

ANALYSIS

State Rules control and require that the appellate court shall not be bound to consider a claim unless it was distinctly raised at the trial or arose subsequent to the trial. However, the court may in the interests of justice, notice plain error not brought to the attention of the trial court. The plain error doctrine is reserved for truly extraordinary situations in which the existence of the error is so obvious that it affects the fairness and integrity of and public confidence in the judicial proceedings.

Safeco concedes that it did not object to the court’s advisement at the time it was given during evidence. Rather, Safeco argues that the issue is preserved because it raised the claim in posttrial motions. In the present case, the claim did not arise subsequent to the trial, and Safeco did not raise the issue prior to judgment. Accordingly, the claim was not preserved and the appellate court declined to review it.

Safeco’s argument that the claim qualifies as plain error is similarly unavailing. Safeco presents no reason to believe that the alleged error is so obvious that it would undermine public confidence in the judicial process nor to believe that the verdict is unreliable or a miscarriage of justice.

Furthermore, at oral argument before this court, counsel for Safeco acknowledged that he recognized a “beneficial effect” at the time from Richard Gay’s invocation of the privilege. Safeco enjoyed the tactical benefit of the court’s instruction to the jury that it could draw an adverse inference from Richard Gay’s refusal to answer, and Safeco withheld its objection until after the jury returned a verdict against its interests.

Safeco’s second claim is that the court abused its discretion by denying Safeco’s motion to compel inspection of the Gays’ home. Safeco argues that the court improperly denied the motion in concluding that Safeco had not shown that evidence outside the record was required.

In its brief on appeal, Safeco argues that the inspection was necessary to show the current condition of the property at issue in the case. In sustaining the Gays’ objection, the court stated that Safeco has not shown that it is reasonably probable that evidence outside the record is required. Although Safeco contends that further inspections were required, it concedes that there were prior inspections. The appellate court, therefore, concluded that the court did not abuse its discretion in denying Safeco’s motion to compel inspection.

ZALMA OPINION

The Fifth Amendment is a protection against the government ordering a person to incriminate himself. It is not a weapon that can be used to sue someone else and deprive the defendant of the right to get information necessary for its defense.

In this case Safeco had an absolute defense – if Gay refused to testify about his allegedly fraudulent conduct he would have needed to dismiss his suit or he would have had to testify and by that testimony incriminate himself and lose his lawsuit. Because Safeco failed to object that defense was lost and Gay had his cake and ate it to the point of getting a judgment against Safeco.

A clear understanding of the situation was reasoned out by the California Court of Appeal in Fremont Indemnity Co. v. Superior Court of Orange County, 137 Cal. App. 3d 554, 187 Cal. Rptr. 137 (Cal.App.Dist.4 11/19/1982) where it ordered that if plaintiff still refuses to appear for deposition as ordered to provide the documentary evidence as already ordered, the trial court must entertain and grant defendant’s motion to dismiss plaintiff’s action.

The difference between the Gay case and the Fremont case is that Fremont objected and sought a writ of mandate to protect itself while Safeco wanted the jury told that Gay took the Fifth Amendment.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Contribution by Excess Insurers

Vicariously Liable Insured Contributes Last

While working as a pastor for Crosswinds Community Church (Crosswinds) and Christian Evangelical Assemblies (CEA), and while driving his own car, Gary West struck and severely injured Robert Jester, who was riding his motorcycle. Jester and his wife subsequently sued West, Crosswinds and CEA for personal injuries (Jester action).

CEA is a religious organization that trains, licenses and ordains ministers, promotes mission activities, and establishes and oversees churches. Crosswinds is one of the churches operating under CEA’s oversight and control. Gary West was employed by CEA as Crosswind’s pastor.

GuideOne Mutual Insurance Company (GuideOne) sued two other insurers seeking contribution for the Jester action. GuideOne’s insurance policy covered an employee who negligently caused injuries to another person while driving his car in connection with business for his employer, and Utica National Insurance Group and Graphics Art Mutual Insurance Company (collectively Utica), whose policies only covered the driver’s employer. The driver’s employer was only vicariously liable for the actions of its employee. The California Court of Appeal was called upon to resolve the dispute in Guideone Mutual Insurance Company v. Utica National Insurance Group et al, No. D059833 (Cal.App. Dist.4 02/28/2013).

Eventually, protecting their insureds, GuideOne and Utica settled the underlying action, exhausting GuideOne’s primary and umbrella policies. GuideOne thereafter sought and obtained, by summary judgment, contribution in the amount of $600,000 from Utica’s umbrella policy, representing an alleged overpayment by GuideOne based upon its pro rata share of coverage. Utica appealed, asserting that because its umbrella policy covered a party only vicariously liable, it should not share pro rata with GuideOne’s umbrella policy that covered the tortfeasor employee.

FACTS

The Jester action settled for $4.5 million. West’s personal auto insurer, State Farm, paid its $100,000 policy limits. Crosswinds’s insurer, plaintiff and respondent GuideOne, paid its $1 million policy limits on a commercial general auto liability policy. GuideOne also paid its $1 million policy limits on a commercial liability umbrella policy. CEA’s insurers, Utica, paid its $1 million policy limits on a commercial auto liability policy and $1.4 million out of its $5 million policy limits on a commercial liability umbrella policy.

The trial court determined the priority of coverage for the $4.5 million Jester action settlement amongst the five policies was (1) State Farm’s $100,000 policy; (2) GuideOne’s $1 million primary policy and Utica’s $1 million primary policy; and (3) $400,000 from GuideOne’s $1 million umbrella policy and $2 million from Utica’s $5 million umbrella policy, representing the ratio as to the respective coverage held by GuideOne and Utica under those umbrella policies. The court thereafter entered a $600,000 judgment in favor of GuideOne, plus prejudgment interest.

ANALYSIS

Section 11580.9(d) provides: “Except as provided in subdivisions (a), (b), and (c), where two or more policies affording valid and collectible liability insurance apply to the same motor vehicle or vehicles in an occurrence out of which a liability loss shall arise, it shall be conclusively presumed that the insurance afforded by that policy in which the motor vehicle is described or rated as an owned automobile shall be primary and the insurance afforded by any other policy or policies shall be excess.”

The California Legislature enacted section 11580.9 to provide consistency in the allocation of loss between coinsurers and to resolve conflicts and litigation over which of two or more applicable policies providing automobile liability insurance are to be deemed primary or excess. Where applicable, the statutory scheme makes a definitive imposition of primary and/or excess liability on insurers in given situations. When section 11580.9(d) applies any policy which describes or rates the motor vehicle as an “owned automobile” bears primary responsibility for the loss and any other policy is excess.

Because the State Farm policy provided coverage for West’s vehicle as an owned or rated automobile, it is conclusively deemed a primary policy under section 11580.9(d). The GuideOne policies did not specifically identify West’s vehicle. However, they covered West and the vehicle as a non-owned auto. Likewise, the Utica policies did not specifically identify West’s vehicle, but covered CEA for West’s vehicle as a non-owned auto. section 11580.9(d) renders the two GuideOne policies and the two Utica policies excess to the primary State Farm policy.

After concluding that the State Farm policy paid first because it was primary (a point neither party disputes), the trial court had to prioritize the four policies deemed “excess” policies under section 11580.9(d). While section 11580.9(d) establishes that both the GuideOne and both the Utica policies are excess to the State Farm policy, the statute does not provide a method for allocating coverage amongst multiple policies deemed excess by the statute.

all section 11580.9(d) provides is that after the policy held by the driver, all other polices “shall be excess.” It does not address the priority and allocation of the other policies. Given the conclusive presumption provided in section [11580.9(d)], the policy covering the driver is also primary to the employer’s policy. The priority of liability of the remaining policies is not governed by section [11580.9(d)].

A vicariously liable party has the right to pursue indemnity against the primary tortfeasor and/or any insurance policy that covers the primary tortfeasor. Under equitable principles of subrogation the insurer of the employer who has been compelled to pay the judgment against the employer may recover against the negligent employe or the employe’s insurer.  Indeed, under the definition of insured in GuideOne’s policy, CEA is an insured of GuideOne as anyone else who is not otherwise excluded under paragraph b. above and is liable for the conduct of an ‘insured’ but only to the extent of that liability. The reason for this language is apparent. It is to protect and cover those who are only vicariously liable for the actions of an insured under that policy.

Accordingly, the court of appeal concluded that both GuideOne’s primary and umbrella policies must exhaust before Utica’s policies are implicated.

ZALMA OPINION

Although the statute made it easy to determine which insurer is primary and which is excess it did nothing to resolve how more than one excess insurer should contribute to pay a judgment or settlement on behalf of the insured. The court of appeal, recognizing the problem, analogized it to claims for indemnity and found that if there was no insurance in place, the vicariously liable employer would be entitled to indemnity from the employee. Therefore, GuideOne, as an insure that insured the employee, must first exhaust its limits before the insurer for the vicariously liable defendant is required to pay. As a result, it reversed the trial court and adopted the payment schedule originally agreed by the parties.

The three insurers should be commended for taking care of their insured before attempting to resolve the dispute over how to prorate damages. In doing so they showed the essence of good faith and fair dealing.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Commit Insurance Fraud – Go Directly to Jail

Commit Insurance Fraud – Go Directly to Jail

Continuing with the fifth issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the March 1, 2013 issue on:

1.    How an insurer in New York obtained damages and fees for fraud by an insured;
2.    Why there was no coverage allowed for an arson caused by a manager of a LLC.
3.    An analysis of management of legal fees and why trying to do so is like herding cats.
4.    The disbarment of plaintiffs’ lawyers for using monies received from insurers that belonged to the client.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 18 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

  1.     Pollution February – 28, 2013
  2. Expert Testimony Limited – February 27, 2013
  3.   Rescission is an Ancient Equitable Remedy –  February 26, 2013
  4. Bad Faith Verdict Overturned – February 26, 2013
  5. Insured Must Pay Deductible – February 25, 2013
  6. Reformation Not Allowed – February 22, 2013
  7. No Fraud – February 21, 2013
  8. Deported for Insurance Fraud – February 21, 2013
  9. Accord & Satisfaction – February 20, 2013
  10. New ISO Forms – February 19, 2013
  11. Buyers Remorse – February 19, 2013
  12. Contract of Personal Indemnity – February 18, 2013
  13. Medical Provider Gets Nothing – February 14, 2013
  14. Advertising Injury – February 13, 2013
  15. FIVE YEAR LATE NOTICE – February 12, 2013
  16. Read The Policy – February 11, 2013
  17. Primary v. Excess – February 8, 2013

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

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

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

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

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

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Random Thoughts on Insurance

Random Thoughts on Insurance From Barry Zalma

Since 2010 I have been writing a blog post at least five days a week. This e-book is a collection of those posts that reveal my interest in insurance case law.

Some of the cases reviewed were important. Some were of first impression. Others will be totally unimportant. All were interesting to me and I hope are interesting to the reader.

Zalma on Insurance was selected as a LexisNexis Top Blogs for Insurance Law – 2011! Top Blogs contain some of the best writing out there on insurance law. They contain a wealth of information for the insurance law community with timely news items, practical information, expert analysis, practice tips, frequent postings, and helpful links to other sites. These blogsites demonstrate how bloggers can impact the world of insurance law.

Half Off — Only $67.50

After you purchase please wait for the e-book to upload from PayPal. If it does not upload please e-mail zalma@zalma.com and I will personally send you a copy of the e-mail in pdf format.

TABLE OF POSTS

There are 268 Separate Posts on subjects of interest to anyone interested in understanding insurance and are listed at http://www.zalma.com/RANDOMTHOUGHTS.htm.

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Pollution

Cooking Grease Can Be A Pollutant

Christopher Roinestad and Gerald Fitz-Gerald, and Tim Kirkpatrick, D/B/A Hog’s Breath Saloon & Restaurant (“respondents”) were overcome by poisonous hydrogen sulfide gas while cleaning a large grease clog in a sewer near the Hog’s Breath Saloon & Restaurant. The district court concluded that Hog’s Breath caused respondents’ injuries by dumping substantial amounts of cooking grease into the sewer. On summary judgment, the district court found Hog’s Breath liable under theories of negligence and off-premises liability, and entered a damage award in respondents’ favor. Mountain States Mutual Casualty Company (“MSM”) sought a ruling that it had no obligation to indemnify Hog’s Breath and the district court agreed holding that dumping substantial amounts of cooking grease constituted a discharge of a pollutant under the policy’s pollution exclusion clause. The court of appeals reversed. It held that the terms of the pollution exclusion clause were ambiguous and that its application to cooking grease could lead to absurd results and negate essential coverage. The parties took the case to the Colorado Supreme Court who, in Mountain States Mutual Casualty Company v. Christopher Roinestad and Gerald Fitz-Gerald, and Tim Kirkpatrick, D/B/A Hog’s Breath Saloon & Restaurant., 2013 CO 14 (Colo. 02/25/2013) resolved the dispute.

FACTS

The Hog’s Breath Saloon discharged enough cooking grease into the sewer system to create a five- to eight-foot clog that led to a dangerous buildup of toxic gas. The conduct violated a city ordinance prohibiting the discharge of a pollutant in an amount that creates an obstruction to the sewer flow. The trial court found that under the circumstances of this case the discharge of cooking grease amounted to a discharge of pollutant. Hog’s Breath caused respondents’ injuries by dumping substantial amounts of cooking grease into the sewer, thereby creating a five- to eight-foot grease clog and consequent build-up of hydrogen sulfide gas.

Mountain States Mutual Casualty Company (“Mountain States”) insured Hog’s Breath. It sought a ruling that it had no obligation to indemnify Hog’s Breath arguing that Hog’s Breath’s conduct fell within the policy’s pollution exclusion clause, which excluded coverage for bodily injury arising out of the discharge of pollutants from the premises of an insured. The policy defined pollutants as any solid, liquid, gaseous, or thermal irritant or contaminant, or waste. The district court agreed with Mountain States, concluding that the pollution exclusion clause was unambiguous and that the dumping of substantial amounts of cooking grease into the sewer constituted a discharge of a pollutant under the policy’s pollution exclusion clause.

The court of appeals reversed. It held that the terms of the pollution exclusion clause were ambiguous and that its application to cooking grease – a common everyday waste product – could lead to absurd results and negate essential coverage.

The negligence per se claims were based on several La Junta city ordinances in effect at the time, including city ordinance 13.12.250(b), entitled “Restricted Discharges to Sewers,” which says,

(b) Substances which are prohibited are:
(3) Solid or viscous pollutants in amounts which will cause obstruction to the flow in the [Publicly Owned Treatment Works (“POTW”)] or other interference with the operation of the POTW.
(5) Pollutants which result in the presence of toxic gases, vapor or fumes within the POTW in a quantity that may cause acute worker health and safety problems.

THE POLICY

After respondents filed the lawsuit, Kirkpatrick notified his liability insurer, Mountain States, who had renewed a commercial general liability policy (the “insurance policy” or “policy”) issued to Hog’s Breath in 2003 that contained a pollution exclusion clause stating,

This insurance does not apply to: ….

f. Pollution

(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured; . . .Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Mountain States brought a declaratory judgment action in federal court asserting that it had no duty to defend Kirkpatrick based on the pollution exclusion clause. The federal court found Mountain States had no duty to defend because “under the plain meaning of the words and in the context of the facts and circumstances alleged in the Underlying Lawsuit…. [t]he grease and oil, in the quantities allegedly at issue,” are contaminants and therefore pollutants.

Thereafter, Mountain States did not defend Kirkpatrick and Hog’s Breath. After a one-day trial on damages, respondents obtained a monetary judgment against Kirkpatrick and were awarded costs. Apparently unable to collect from Kirkpatrick, respondents served a writ of garnishment on Mountain States.

ANALYSIS

The question here is whether the pollution exclusion clause at issue excludes the conduct that occurred in this case. Respondents do not dispute that cooking grease was “discharged” from the restaurant in quantities large enough to create the sewer clog, nor do they dispute their injuries “arose out” of such a discharge.

When interpreting an insurance contract, a court must first give effect to the plain meaning of its terms, and only find ambiguity where a term is reasonably susceptible to more than one meaning. While a resident of La Junta who dumps an occasional pan of greasy water into a sewer may not contaminate and therefore not pollute the sewer, a restaurant that repeatedly dumps large amounts of cooking grease or greasy water into a sewer over time, thereby creating a five- to eight-foot clog, is dumping contaminants (and thus pollutants as defined by Mountain States’ insurance policy) into La Junta’s sewers.

Respondents seek to avoid this conclusion by invoking the reasonable expectations doctrine. They claim that pollution exclusion clauses were incorporated in commercial liability policies to relieve insurers of liability for clean-up and other costs associated with federal environmental protection laws such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). From this, they argue that a reasonable insured would expect pollution exclusion clauses to exclude coverage only for “traditional” pollution as contemplated by CERCLA, not cooking grease..

The reasonable expectations doctrine may override exclusionary policy language, where an ordinary, objectively reasonable person would be deceived into believing that he or she is entitled to coverage, while the insurer would maintain otherwise.

The pollution exclusion clause in the policy says nothing about federal environmental protection laws, or “traditional” pollution. Instead, the policy uses general language to exclude coverage for discharges of waste or substances that irritate or contaminate. The dumping of large quantities of cooking grease into the sewer such that a clog would form would run afoul of at least one city ordinance should not cause an ordinary person to read the pollution exclusion clause to exclude “traditional” pollution but preserve coverage for conduct that violated a city ordinance prohibiting the discharge of “solid or viscous pollutants in amounts which will cause obstruction to the flow.”

The Supreme Court reasoned that an ordinary reasonable person would not have been “deceived” into thinking that there would be coverage for the dumping of cooking grease in such a great volume as to clog the sewer. Respondents, in addition, produced no facts in this case to suggest such deception.

The court of appeals based its decision on its concern that because cooking grease is a common everyday waste product, considering it to be “pollution” would lead to the negation of essential insurance coverage and absurd results. While the Supreme Court was mindful of the concerns expressed by the court of appeals, it fond them inapplicable because, in this case, the restaurant discharged enough cooking grease into the sewer system to create a five- to eight-foot clog that led to a dangerous buildup of toxic gas – conduct that violated a city ordinance prohibiting the discharge of a pollutant in an amount that creates an obstruction to the sewer flow.

The Supreme Court, therefore, agreed with the trial court that, under the circumstances of this case, the discharge of cooking grease amounted to a discharge of a pollutant. Concluding that the pollution exclusion clause bars coverage, and the insurance policy cannot be garnished to compensate respondents for their bodily injuries, the Supreme Court reversed the decision of the court of appeals.

ZALMA OPINION

Insurance policies are contracts that require interpretation with reason. Those who write insurance policies, and courts that interpret them, expect insurance contracts to be interpreted reasonably with common sense. Snake venom, for example, is a deadly poison that would seldom be considered medicinal. However, when injected into the facial tissue of an aging person it can tighten the skin and make the person look younger without harm.

Used bacon grease is healthful and often used to increase the flavors of other food products. However, when dumped improperly into a sewer where it builds up an eight foot clog and mixed with the sewer water creates toxic gas is clearly a pollutant. The Supreme Court of Colorado, intelligently, interpreted the insurance policy to provide meaning to its clear and unambiguous terms. Insurance covers many risks of loss but can never cover every possible risk of loss.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Rescission is an Ancient Equitable Remedy

 Zalma on Rescission in California  2013

California is the biggest insurance market in the United States. California is, as a result, the home of more insurance fraud than any other state.

Insurers in California have the right to rescind a policy of insurance if the insured misrepresents or conceals a material fact when seeking insurance. California, more than a century ago, adopted, and codified, the ancient Marine Rule with regard to the interpretation of insurance contracts created as a result of misrepresentation or concealment of a material fact allowing rescission even if the concealment or misrepresentation was innocent or unintentional.

The California Court of Appeal stated the basis for rescission:

“An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” (Emphasis added) Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581, 586.

California lawyer, expert witness and insurance consultant, Barry Zalma, has updated the only detailed resource on the remedy of rescission of insurance in California with the addition of more than 130 pages of new and updated material. In 934 pages Mr. Zalma provides the full text of almost every statute and decision of the California courts of appeal and federal courts that deal with rescission of California insurance policies in his new E-Book Zalma on Rescission of Insurance in California – 2013.

The new E-Book is published in Adobe Acrobat pdf format. Any person with a computer, I-Pad, smart phone, or book reader that can read the universal pdf format can read the book and search the entire book for key words using the Adobe Reader search function.

In the U.S., courts of law were charged with enforcing legitimate contracts and courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.

Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith. Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.

Rescission, since before the U. S. Constitution, was an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission. In California the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or an innocent misrepresentation of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, must be fair. The ancient maxim that “No one can take advantage of his own wrong” is applied when a court is faced with a request to confirm rescission.

California first enacted state statutes relating to insurance and the equitable remedy of rescission at the turn of the 20th Century. Those statutes remain basically unchanged today. The California Supreme Court and courts of appeal have consistently enforced the right of insurers to rescind policies of insurance even if the facts misrepresented or concealed were made innocently and without an intent to deceive.

Although the plaintiffs’ bar has tried to emasculate the rescission remedy based on the semi-fiduciary relationship between the insurer and insured, rescission of insurance contracts, as an equitable remedy, is effective and continues to be enforced by California courts when evidence establishes that the insurer was deceived and would not have agreed to the insurance with the same coverage or at the same price had it known the true facts.

To effectively rescind a policy of insurance insurers faced with an application that appears to contain false representations that would have been material to the decision to insure or not insure the insurer, must before deciding to rescind, complete a thorough investigation into the formation of the policy of insurance.

Insurers should never assume that the promise to pay indemnity to the insured under a policy of insurance can, with impunity, be broken by advising the insured that the insurer has rescinded the policy. Proof, beyond a preponderance of the evidence, must be able to show that the person(s) insured misrepresented or concealed a fact that the insure contends was material to the decision to insure or not insure. The insurer must also prove materiality, a subjective conclusion of the person who agreed to the insurance, that had that person, an underwriter, known the true facts the insurance would not have been issued on the same terms and conditions or for the same premium.

The E-book Zalma on Rescission of Insurance in California – 2013, provides the insurance professional with the information needed to understand why an insurer will decide to use the remedy, how to obtain sufficient facts to exercise the remedy, and what is needed to avoid the need to exercise the remedy.

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Where no valid ground for rescission exists, the threat or attempt to seek such relief may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.

California courts have made clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations of extra-contractual torts.

After you make a payment through PayPal, please wait for the E-Book to upload to your machine.  If you have a problem with the purchase please write to me at zalma@zalma.com

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Bad Faith Verdict Overturned

No Bad Faith for Lack Of Producing Cause

The Fifth Circuit Court of Appeal was asked to determine whether an insurer breaches a duty to its insured in Texas by surreptitiously attempting to settle a covered third-party claim and truncating its duty to defend, despite paying the full limits of its coverage in Mid-Continent Casualty Company v. Eland Energy, Inc.; Sundown Energy LP, No. 11-10649 (5th Cir. 02/22/2013).

ALLEGATIONS

According to appellant Sundown, Mid-Continent Casualty Company (“Mid-Continent”) prematurely tendered the limits of Sundown’s primary and umbrella policies ($6 million total) while undercutting Sundown’s ability to defend a class action suit for environmental damage following Hurricanes Katrina and Rita.

After extensive litigation, the district court overturned a jury verdict for Sundown and awarded Mid-Continent judgment as a matter of law.

BACKGROUND

Sundown’s oil and gas production facilities in Louisiana were destroyed and tanks containing crude oil spilled their contents after Hurricane Katrina hit Port Sulphur. Less than a month later, the storm surge from Hurricane Rita caused that oil to escape a containment boom constructed during Hurricane Katrina cleanup operations.

Sundown held a commercial general liability policy (“Primary Policy”) and an Umbrella Policy through Mid-Continent Casualty Company. The Primary Policy had coverage limits of $1 million per occurrence and $2 million total, and included a duty to defend. The Umbrella Policy had a total limit of $5 million and included a right to associate with an underlying insurer and the insured to defend.

Five lawsuits were filed against Sundown by neighboring property owners and commercial fishermen affected by the spillage of oil.

Mid-Continent filed suit for a declaratory judgment that it had no further duty to defend, and Sundown filed a cross-claim for breach of the duty of good faith and fair dealing, among other cross-claims. In three opinions, the district court granted Mid-Continent the declaratory relief it sought and judgment on several of Sundown’s claims. Sundown’s counterclaims were tried to a jury, which returned a verdict partially in favor of Sundown and awarded Sundown a total of $8.45 million in compensatory, penalty, and punitive damages. Mid-Continent sought judgment as a matter of law. The district court granted Mid-Continent’s motion, overturning the jury verdict.

Sundown’s appeal turns on actions taken by Mid-Continent, including a secret offer of settlement made to Chris Leopold, which it says prejudiced its ability to settle the Blanchard class action.

What followed next in the claims handling Sundown succinctly characterizes as “the extreme acts of Mid-Continent with respect to Leopold-the secret visit, secret investigation, secret sampling and secret offer” that consciously undermined Sundown’s defense of the Blanchard case.
Mid-Continent began putting together a settlement offer by obtaining a cleanup estimate from Greco Construction (“Greco”). Greco’s estimate was $98,560, but Mid-Continent subtracted the portions of the estimate that did not cover debris removal that was later performed by the government without charge. This brought the estimate to $54,536, and Mid-Continent alleges it made a written settlement offer of that amount to Leopold on June 2, 2006. Leopold testified that he “never got an offer in writing” and that an oral offer of “somewhere around a hundred thousand dollars” had been made, but that he rejected the offer.

In July, Mid-Continent informed Sundown that it had extended a settlement offer to Leopold. When asked why Mid-Continent did not tell Sundown about the settlement offer at the June 16 meeting, Mid-Continent Vice President Steve Haltom replied that he “didn’t think it was important.” Sundown demanded Mid-Continent withdraw the offer. Mid-Continent did so that day, and Leopold promptly became a member of the Blanchard class action.

Sundown settled the Blanchard litigation for $2 million and an agreement to remediate any Sundown oil found on any class member’s property. Sundown paid for the settlement, as Mid-Continent had already tendered policy limits and withdrawn from the defense. Sundown believed the settlement would have been smaller had an offer not been made to Leopold.

DISCUSSION

Sundown contends Mid-Continent breached an insurer’s common law duty of good faith and fair dealing. To prevail, Sundown must show that Texas law recognizes a cause of action for an insurer’s mishandling of third-party claims. Under Texas law, an insurer owes a duty of good faith in handling its insured’s own claim of loss. Sundown sought coverage, however, for a third-party claim covered by its comprehensive general liability policy.

There exists no statutory cause of action for breach of the duty of good faith and fair dealing in the context of an insurer’s handling of a third-party claim. The only previously recognized common law claim is for breach of the duty to settle a third-party claim within policy limits.

Sundown’s claim is inextricably tied to Mid-Continent’s mishandling of a third-party claim under the insurance policies and Mid-Continent’s motive to minimize its costs associated with the policies. In this case the “extreme” acts were subsumed within the claims-handling process, and they did not inflict injury independent from the policy claim.

JURY FINDING

The jury found that Mid-Continent committed five separate violations of the Texas Insurance Code, and it awarded $2 million compensatory damages for Sundown’s alleged injury in settling the Blanchard case. The district court granted judgment as a matter of law for Mid-Continent on all of these claims. On appeal, Sundown defends the verdict only as to two: Mid-Continent’s failure to give a prompt and reasonable explanation for the Leopold settlement offer, Tex. Ins. Code § 541.060(a)(3); and Mid-Continent’s four misrepresentations of material facts, Tex Ins. Code § 541.060.

The parties dispute whether the trial court correctly overturned the verdict finding that Mid-Continent delayed too long and then failed reasonably to explain its settlement offer to Leopold in July, 2006.

THE MISREPRESENTATIONS

Mid-Continent did not challenge the finding of four material misrepresentations presented to the jury:

  1. Mid-Continent misstated the law to Sundown when it denied that a conflict of interest was created by its reservation of rights letters;
  2. Mid-Continent misrepresented that it did not pay more than $200/hour for Louisiana attorneys (and hence would not pay more for Sundown’s separate counsel);
  3. Mid-Continent misstated that there was no coverage for Hurricane Katrina costs at Sundown’s facility unless Sundown obtained a written order from the Coast Guard; and
  4. Mid-Continent misstated the law when it maintained it had an unavoidable duty to investigate the Leopold claim.

The district court held as a matter of law that none of these unfair settlement practices was a producing cause of Sundown’s injury in the amount of the Blanchard settlement.

LACK OF PRODUCING CAUSE

A producing cause is an efficient, exciting, or contributing cause, which in a natural sequence, produced the injuries or damages complained of, if any. Producing cause requires a lesser burden than proximate cause because it does not require foreseeability.

There must, however, be a showing of cause in fact, which requires evidence that allows the fact finder to reasonably infer that the damages are a result of the defendant’s conduct. The plaintiff must show an unbroken causal connection between the alleged misrepresentation and injuries suffered by the complaining party.

To defeat the district court’s ruling, Sundown needed to successfully tie at least one misrepresentation by Mid-Continent to the increased settlement amount and establish that it was a producing cause.

It is not enough to merely show that Mid-Continent was a bad actor. Sundown argued extensively that without attempting to tie the misrepresentations found by the jury to the increased settlement. Instead, Sundown argued that it was injured by the Leopold offer and related actions, none covered by the jury’s misrepresentation findings, that led to inflated expectations and the inflated Blanchard settlement.

The evidence failed to establish that any of MidContinent’s misrepresentations were the producing cause of an increased settlement for the Blanchard litigation.

The Fifth Circuit concluded that, applying Texas law, an insured has no claim for bad faith premised on the insurer’s investigation or defense of a claim brought against it by a third party. This is because an insured is fully protected by his contractual rights.

ZALMA OPINION

Every liability insurance policy I have read in the last 45 years gives the right to the insurer to enter into any settlement it can justify as long as it does not deprive the insured of the right to defense and indemnity. In this case the settlement occurred within the available policy limits.

Although MidContinent acted with less than professional manner sufficient to be called a “bad actor” by the Fifth Circuit, its bad conduct and lack of professional claims handling was not a producing cause of the injuries claimed by Sundown and, therefore, the windfall exemplary damages jury verdict evaporated like snow falling in the Sahara at noon.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Zalma on California SIU Regulations

Zalma on California SIU Regulations

Zalma On California SIU Regulations is an e-book designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

By statute, the state of California requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and that the insurer must train all integral anti-fraud personnel to recognize indicators of insurance fraud. Since almost every employee of an insurer who approaches a claim qualifies as “integral anti-fraud personnel” they must all be trained annually.

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state and be in a position to prove to the California Department of Insurance that the SIU Regulations have been complied with and all integral anti-fraud personnel have been trained.

In addition to explaining the SIU Regulations the appendix contains an outline for the training required.

You can purchase the e-book at http://www.zalma.com/zalmabooks.htm.

 

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Insured Must Pay Deductible

No Excuse for Failure to Read Policy

Liability insurance policies often contain deductibles or Self Insured Retention (“SIR”) amounts to limit the premium by making the insured responsible for the first amount of a loss and remove from the insurer the obligation to defend and indemnify the insured from small claims. Insureds enter into such agreements with pleasure because of the premium savings only to balk when a claim arises and they find they must pay the lawyers to defend the claim and indemnify the injured up to the amount of the deductible or SIR.

The Supreme Court of Mississippi was called upon to resolve a dispute when insureds filed suit against their insurers claiming they were unaware their insurance policy had a $250,000 per-claim deductible. The insureds also alleged that the insurer breached its insurance contract by refusing to provide a defense until the insureds paid the $250,000 deductible for each of five separate claims. The circuit court granted summary judgment for the insurers and the insureds appeal in Southern Healthcare Services, Inc v. Lloyd’s of London A/K/A Underwriters, No. 2011-CA-01833-SCT (Miss. 02/21/2013).

FACTUAL BACKGROUND

Daleson Enterprises, LLC (“Daleson”) operated Jones County Rest Home in Ellisville. Medforce Management, LLC (“Medforce”) operated Willow Creek Retirement Center in Byram. Southern Healthcare Services, Inc. (“Southern Healthcare”) managed both Daleson and Medforce. Southern Healthcare purchased professional and general liability insurance from Lloyd’s of London (“Lloyd’s”) to cover Daleson, Medforce, and others. Southern Healthcare was the first named insured on the policy. Southern Healthcare, Daleson, and Medforce will be referred to collectively as the “Insureds.”

The Insureds contend the Fox-Everett agent informed them their new policy had a higher premium and lower policy limit. Otherwise, the Insureds believed their new policy was identical to the previous one. In fact, the policy had a $250,000 per-claim deductible. The Insureds claim Fox-Everett failed to inform them about the different deductible. They also claim they did not receive a copy of the policy until eleven months after the purchase. The policy was renewed in October 2003. Again, the Fox-Everett agent informed them that the premium was going up, but the Insureds claim the agent said nothing about the $250,000 deductible.

In 2003 and 2004, various plaintiffs filed five lawsuits against the Insureds. When each civil action arose, the Insureds notified Lloyd’s in accordance with the policy terms. Caronia Corporation (“Caronia”) acted as the third-party administrator for Lloyd’s, and Caronia sent a reservation of rights (“ROR”) letter to the Insureds acknowledging receipt of each claim. Via the ROR letters, Caronia informed the Insureds that “Lloyd’s would not provide coverage under the policies until the $250,000 deductibles were paid in full.”
The ROR letters were standard communications that included claim information, acknowledged receipt of the lawsuit, stated that indemnification and defense would be provided, and set forth any issues that would not be covered under the policy or that would be defended under a reservation of rights. The letters provided the name and contact information of the attorneys Lloyd’s had hired to defend the Insureds. Each letter included the following language about the deductible:

As you are aware, Southern Healthcare Services, Inc., d/b/a Jones County Rest Home [Willow Creek Retirement Center] has a $250,000 deductible for each and every Professional Liability claim. Therefore, the first $250,000 of indemnity and/or claims related expenses will be paid directly by Southern Healthcare Services, Inc., d/b/a/ Jones County Rest Home [Willow Creek Retirement Center].

Caronia sent the ROR letters directly to the nursing homes, rather than to Southern Healthcare. Daleson and Medforce initially paid the attorneys directly until the dispute arose over the deductible.

ANALYSIS

Whether the Trial Court’s Grant of Summary Judgment on the Insureds’ Claims Against Lloyd’s and Caronia Was Proper.

The trial judge granted summary judgment in favor of Lloyd’s and Caronia, finding the two entities had performed their duties under the contract and no dispute of material fact existed. The Insureds were ordered to reimburse Lloyd’s in the amount of $701,153.54 for defense costs and settlements that fell within the per-claim deductible.

Whether the Insureds Were Subject to the Deductible.

Insurance policies are contracts, and where the terms of an insurance policy are ambiguous, the rules of contract interpretation and construction will be applied. A court must effect a determination of the meaning of the language used, not the ascertainment of some possible but unexpressed intent of the parties. Pursuant to the policy, the Insureds bore responsibility for a $250,000 deductible on any general or professional liability claim, and defense costs were to be included in that amount. Specific terms pertaining to the deductible were found throughout the policy.

According to the terms set forth in the policy, taken together and read as a whole, the Supreme Court found that the Insureds were subject to the deductible, and the Insurers’ duty to provide coverage for damages applied after the deductible was met.

The insureds received a copy prior to renewing the policy in 2003, and the 2003 policy is the one at issue. Therefore, even if the Insureds did not know about the deductible the first year, by the time they renewed the policy in 2003, they had a copy of it, and they should have known about the deductible before they renewed. In light of the numerous references to the deductible throughout the policy, with several pages referencing the deductible signed by the Insureds, the Insureds cannot argue that they were unaware of the deductible when they renewed the policy in 2003.

Under Mississippi law, a contracting party is under a legal obligation to read a contract before signing it, and a person is charged with knowing the contents of any document that he executes. Where one has a duty to read a contract before signing it, he will not be heard to complain of an oral misrepresentation the error of which would have been disclosed by reading the contract. Therefore, as a matter of law, the Supreme Court had no choice but to presume that the Insureds read the policy and saw the terms setting forth the $250,000 deductible.

Whether the Insurers Fulfilled Their Duties under the Contract.

The Insureds argue that the trial court’s grant of summary judgment was improper because Lloyd’s breached its contractual duties under the policy, as well as its fiduciary duties of good faith, fair dealing, and reasonable care by conditioning coverage on payment of the deductible.

As with any deductible, the insured is required to expend the amount of the deductible before coverage becomes available. An insurer’s duty to indemnify is not triggered until the deductible has been paid. The purpose of a deductible is to shift some of the insurer’s risk (that is, covered risk) to the insured, which is accomplished by setting a limit on the value of covered losses below which the insurer is not obligated to pay. An SIR is just what its name implies, a form of self insurance. In this case, the policy states that defense costs are included in the deductible. So the deductible here operates more like a SIR, and the Insurers have no duty to pay for the defense until the deductible is exhausted.

The Insurers did not breach any contractual or fiduciary duties to the Insureds. The Insurers did not deny coverage as the Insureds contend. The Insurers exercised their right to provide a defense while reserving their right to deny coverage for claims that may not be covered under the policy. They also exercised their right under the policy to advance part of the deductible amount to settle the claims. In fact, all of the claims were settled or dismissed between December 2006 and August 2007. Of the four claims that were settled, three were settled for less than the deductible amount.

The Insurers did not breach any contractual or fiduciary duties, and the Insureds failed to show the existence of any genuine issues of material fact that should have precluded summary judgment.

Whether the Trial Court’s Grant of Summary Judgment on Lloyd’s Counterclaim Was Proper.

The Insureds claim that summary judgment in favor of Lloyd’s on Lloyd’s counterclaim was not proper because the Insureds were discharged from liability by Lloyd’s breach of contract, and/or the counterclaim was barred by Lloyd’s fraud, bad faith, and gross negligence.  The Insureds’ claims in this regard are wholly without merit. Therefore, no conduct by the Insurers served to discharge the Insureds from any responsibility. The Insureds are bound by the contract, and they must pay the amount of the deductible owed for each claim according to the terms of the policy. The trial judge did not err in granting summary judgment in favor of Lloyd’s on its counterclaim, and the Insureds owe Lloyd’s $701,153.54 for the amount Lloyd’s expended in the defense and settlement of the claims that fell within the deductible.

ZALMA OPINION

Mississippi, intelligently, requires an insured to read and understand an insurance policy when the language of the policy is open, obvious, clear and unambiguous. In This case the insured signed the deductible endorsement and agreed to it when they renewed the policy.

The Mississippi Supreme Court refused to be conned by the plaintiff insureds by allowing their blatant claim they did not know about the deductible was specious and unenforceable. Therefore, before filing suit against an insurer it is prudent to actually read the policy and determine if the arguments made can be supported by the facts and the law.

The Supreme Court should have punished the plaintiffs for bringing this action claiming something they knew or should have know were not true.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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“Zalma on Diminution of Value Damages — 2013″

“Zalma on Diminution of Value Damages — 2013″

This is the 2013 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more 910 pages of material. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2013 was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001). Available at http://www.zalma.com/diminution.htm

The Complete Authority on Diminution of Value Damages in the United States Zalma on Diminution of Value Damages — 2013 This is the 2013 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more 910 pages of material. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2013 was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property has been repaired. It will assist you in answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It will allow you to find the answer in the appropriate jurisdiction if the proper measure of damage:

  • Is it cost of repair?
  • Is it the difference between fair market value before and fair market value after it is damaged?
  • Is it the cost of repair plus stigma damages?
  • Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged?
  • Is it something in the middle?

The subject of diminution of value damages caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay the cost of repair. It also caused concern to appraisers, adjusters, lawyers and every person who incurred property damage. The methodology used to establish true indemnity is different in each decision. The application of which measure of damages is to be used is different from state to state and from U.S. District Court of Appeal to District Court of Appeal.

Because of the differences in the various jurisdiction and apparent confusion concerning diminution of value damages this E-Book was created to more thoroughly review how each jurisdiction in the United States deals with the issue. The E-book covers each of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court.

Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and tries to deal with the issue of establishing the amount of loss to property in each jurisdiction.

Since this is an update of the 2010 E-book, Zalma on Diminution in Value Damages some of the original information remains in the 2013 version which is, regardless, a new book.

The E-book covers in detail how each of the jurisdictions deal with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, or their insurers, to determine how to calculate what they must pay to those whose property is damaged by their actions.

Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and deals with the issue of establishing the amount of loss to property in each jurisdiction that has written on the issue.

Since this is an update of the 2010 and 2012 E-books, Zalma on Diminution in Value Damages some of the original information remains in the 2013 version. It is, however, a new book.

The E-book covers in detail how each of the jurisdictions who have been asked to do so determine recovery of insurance proceeds for damage to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, whether insured or not, to determine how to calculate what they must pay to those whose property is damaged by their actions.

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Reformation Not Allowed

Need Does Not Change Policy Wording

Serious injuries often result in litigation when insufficient insurance exists to compensate the injured. When Hatem Alshwaiyat was injured and his wife died in an automobile accident he sought coverage for underinsured motorist coverage with limits of $500,000 regardless of the limits stated in the policy.  Alshwaiyat sought a determination that a policy of automobile insurance issued to Alshwaiyat’s employer by American Service Insurance Company (ASI), provided $500,000 in underinsured motorist coverage for an automobile accident involving both plaintiff and his deceased wife. ASI has appealed from an order entering summary judgment in favor of plaintiff. In Hatem Alshwaiyat v. American Service Insurance Company, An Illinois Corporation, 2013 IL App 123222 (Ill.App. Dist.1 02/19/2013) the Illinois Court of Appeal resolved the dispute.

BACKGROUND

On July 11, 2011, Alshwaiyat filed a complaint for declaratory judgment, naming both ASI and Alshwaiyat’s employer, Mojo Enterprises (Mojo), as defendants. In that complaint, Alshwaiyat alleged that on June 17, 2008, he was employed by Mojo as a taxi driver when the automobile he was driving was struck by a vehicle operated by Mr. Robert Pas. As a result of this accident, Alshwaiyat suffered significant physical injuries and his wife, a passenger in the taxi, suffered injuries that resulted in her death. Claims against Mr. Pas for Alshwaiyat’s injuries and his wife’s wrongful death were ultimately settled for $100,000 each, the liability limits of the insurance policy held by Mr. Pas.

Alshwaiyat’s complaint further alleged that both Alshwaiyat and Mojo were insured under a policy of automobile insurance issued by ASI to Mojo, effective January 1, 2008, through January 1, 2009. That insurance policy was alleged to include $500,000 in liability coverage for bodily injury and property damage. It was further alleged that, due to the fact that uninsured motorist (UM) and underinsured motorist (UIM) coverage in an amount equal to that amount was never rejected by Mojo, “the policy must be construed to provide for $500,000.00 [in] underinsured motorist coverage.”

ASI filed an answer and affirmative defenses to Alshwaiyat’s complaint. Among ASI’s defenses was an assertion that in Mojo’s initial application for insurance, Mojo “specifically requested limits of $20,000/$40,000 for uninsured/underinsured motorist coverage, and rejected higher limits for that coverage.”

Alshwaiyat and ASI did not dispute the underlying facts. As such, they agreed that ASI issued an original policy of automobile insurance to Mojo. This policy originally provided a “combined single limit” (CSL) of $300,000 in bodily injury and property damage liability coverage. In the course of applying for this policy, Mojo’s president was informed of Mojo’s right to UM or UIM coverage in an amount equal to the bodily injury and property damage coverages. Mojo’s president signed a written rejection of such coverage, and also acknowledged in writing that Mojo could “at any future date, by written request, increase this coverage.” Therefore, the original policy only provided UM coverage in the amount of $20,000 per person and $40,000 per accident. It did not specifically provide for any coverage for UIM coverage.

That original policy was subsequently modified by a number of endorsements, including endorsements adding additional insured drivers and adding and removing specific insured vehicles.  There was no request for increased UM or UIM coverage on this form. Pursuant to this request, ASI prepared an endorsement to the original policy – issued on October 3, 2007, but effective October 1, 2007- in which the bodily injury and property damage liability limits were both increased to $500,000. The amount of UM coverage was not altered.

Alshwaiyat argued that both the endorsement and the subsequent policy were “new policies.” As such, Alshwaiyat contended that the Illinois statutes did indeed require Mojo to again reject higher UM and UIM coverage, both when the liability coverage limits were increased via endorsement and when the subsequent policy was issued with liability coverage limits that were higher than the original amounts. Because it was undisputed that no such rejection was made in connection with either the endorsement or the subsequent policy, Alshwaiyat further asserted that the statute required that the policy be reformed to provide UM and UIM coverage in an amount equal to the $500,000 bodily injury liability limit.

The trial court entered both a written order and a written decision denying ASI’s motion for summary judgment and granting summary judgment in favor of Alshwaiyat on his cross-motion. The trial court found that, because ASI had failed to comply with the provisions of the statute by obtaining a rejection of higher UM and UIM limits at the time of the endorsement increasing the amount of liability coverage in the original policy, the “RENEWAL” policy it issued to Mojo should be “reformed to set uninsured/underinsured motorist coverage limits at $500,000 to match the bodily injury liability limit.

ANALYSIS

As our supreme court has generally summarized, the statute requires that “[u]ninsured-motorist coverage must be provided in an amount equal to the liability coverage, unless the insured specifically rejects such additional coverage. [Citation.] If the uninsured-motorist coverage limit exceeds the minimum liability limit required by the Financial Responsibility Law, the policy must also include underinsured-motorist coverage in an amount equal to the uninsured-motorist coverage. [Citation.]”  Phoenix Insurance Co. v. Rosen, 242 Ill. 2d 48, 57 (2011).

The statutory exception to the requirement to offer matching UM and UIM coverage – in those cases where an insured has previously rejected higher UM or UIM limits – originally applied only to “renewal or supplementary” policies. That statutory exception was expanded to include “any renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary” policies in a 1989 revision to the statute. When, as noted above, this provision was subsequently changed from a requirement to offer matching UM and UIM coverage to a requirement to provide such coverage, that expanded statutory exception was retained.

The Court of Appeal concluded that the statute did not require ASI to obtain another rejection of higher UM or UIM coverage limits in connection with either the endorsement increasing Mojo’s liability limits or when the “RENEWAL” policy was issued. Thus, the Court of Appeal concluded that failure to obtain such a rejection did not require reformation of the renewal policy to include $500,000 in UIM coverage.

The endorsement at issue here merely modified a term of the original policy – a policy that had already been delivered by ASI to Mojo – and did so without changing any other policy terms, the policy number, or the original policy’s duration. The policy in effect at that time was the subsequent “RENEWAL” policy. Clearly, this policy was one that “renewed” the original policy, or at the very least was one that had been “delivered or issued for delivery” by ASI.

It is undisputed that Mojo rejected UM or UIM coverage in excess of the statutory minimums when applying for the original policy, and did not make a written request for any higher UM or UIM coverage in connection with the “RENEWAL” policy. Moreover, it is apparent from the record that both the original policy and the “RENEWAL” policy were issued to Mojo (the named insured) by ASI (the insurer). ASI was not required to provide any greater UM or UIM coverage in the second policy so long as that policy was a renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary policy.

The Court of Appeal’s interpretation of that language best accomplishes the goal of determining and effectuating the legislature’s intent, as it gives the current language of the statute’s plain and ordinary meaning. The statutory language clearly provides an exception for any renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary policy. The court concluded: “If the court was to graft an additional requirement that any renewal, substitute, amended, replacement or supplementary policy not make any substantial or material changes onto the current language of the exception contained in the statute. To do so the court would improperly depart from the statute’s plain language by reading into it conditions, exceptions, or limitations that contravene legislative intent.”

ASI was not required to provide any greater UM or UIM coverage than the minimum amounts contained in the original policy, either in connection with the endorsement to the original policy or the subsequent renewal policy that was in effect at the time of the accident.

ZALMA OPINION

The trial court erred and provided monies to the injured widower without recognizing that the policy and statute made it clear that Mojo had rejected high UM/UIM limits and did so in accordance with the meaning of the statute.

It would be nice if Mr. Alshwaiyat was able to obtain an additional $500,000 to indemnify him for the loss of his wife and his injuries. However, to do so, he was required to convince the court to change the policy that his employer, Mojo, decided to buy. The Court of Appeal ruled upon the policy and the statute as written and failed to be moved by the serious injuries.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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No Fraud

No Right to Return of Premium When No Claim Paid

Juan M. Espinosa sued Allstate for fraud and lost. He appealed from the trial court’s entry of a final summary judgment in favor of Allstate, Allstate Insurance Co., Allstate County Mutual Insurance Co., and Allstate Property and Casualty Insurance Co. In Juan M. Espinosa, Appellant v. Allstate Insurance, No. NUMBER 13-12-00509-CV (Tex.App. Dist.13 02/14/2013) the Texas Court of Appeal resolved the dispute.

BACKGROUND

Espinosa purchased two automobile insurance policies from Allstate. Subsequently, Espinosa filed suit against Allstate for fraud, alleging that Allstate had fraudulently concealed information about their internal policies and procedures for handling claims, which according to Espinosa, was material to his decision to purchase the policies.

After suit was filed Allstate filed a motion for summary judgment. Among other things, Allstate argued that they were entitled to judgment as a matter of law because there is no evidence that Espinosa suffered an injury as a result of the conduct alleged. Specifically, Allstate argued that Espinosa had no evidence that

  1. the form and contents of his policies were not promulgated or approved for use by the Texas State Board of Insurance;
  2. the policies did not provide the coverages Espinosa requested;
  3. the premiums paid by Espinosa were other than those required by the filed-rates;
  4. the value of the policies for the policy periods when no claim was made was less than the premiums Espinosa paid for those policy periods; and
  5. Espinosa sustained any legally cognizable injury by virtue of how a claim would or might have been handled under the policies if a claim had been made.

Espinosa produced evidence that he argued established that:

  • in or about July, 1995, Allstate adopted new practices, procedures and forms for handling policyholder claims;
  • Allstate did not disclose these new practices, procedures and forms to Espinosa; and
  • if Allstate had disclosed these practices, procedures and forms to Espinosa, Espinosa would not have purchased or renewed either policy.

The trial court granted Allstate’ motion for summary judgment. In relevant part, the trial court’s corrected final summary judgment recites the following: “[Espinosa] is the named insured on two, and only two, automobile policies …  and Casualty Insurance Company…”

Three claims were made against one policy. Benefits were paid to or on behalf of Espinosa on each of these claims, and each of these claims has been fully resolved. There were no claims made against the other policy.

There is no evidence that the form and contents of either these policies were not promulgated or approved for use in Texas by the State Board of Insurance.

There is no evidence that either of these policies did not provide the coverage requested by Espinosa. There is no evidence that the premiums Allstate charged and Espinosa paid for either of these policies were not the amounts required under the insurer’s rate for the coverages provided by the policies filed under the State’s flexible rating program for personal automobile insurance.

Espinosa seeks to recover restitution of the premiums he paid for policy years in which he had no claims for benefits under these automobile insurance policies, together with interest and punitive damages, for fraud by which he was induced to buy all of the insurance in question. Espinosa claims that with respect to such “no benefit years,” the Texas public policy against permitting perpetrators of fraud to keep the fruits of their fraud requires that Espinosa be allowed to recover restitution of the premiums he paid for such “no benefit years.” Allstate claimed that Espinosa had the benefit of coverages sold to Espinosa for such “no benefit years,” even if Espinosa made no claims for benefits in those years, so that restitution is not a remedy available to Espinosa, even if he were induced by fraud to buy the insurance in question.

The trial court concluded under the facts the Motion should be granted for the sole reason that Espinosa had the benefit of coverages sold to him for such “no benefit years,” even though he made no claims for benefits in those years.

ANALYSIS

In deciding whether there is a genuine issue of material fact, evidence favorable to the non-movant is taken as true, and all reasonable inferences are made, and all doubts are resolved, in favor of the non-movant.
The gist of fraud is successfully using cunning, deception or artifice to cheat another to the other’s injury. The elements of fraud are:

  1. that a material representation was made;
  2. the representation was false;
  3. when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion;
  4. the speaker made the representation with the intent that the other party should act upon it;
  5. the party acted in reliance on the representation; and
  6. the party thereby suffered injury.

In this case, Espinosa alleged that because of Allstate’ fraud, he purchased two automobile insurance policies that he otherwise would not have purchased. In response Espinosa produced an affidavit in which he states that, if the information at issue had been disclosed to him, he would not have purchased or renewed either of the two automobile insurance policies he purchased from Allstate. According to Espinosa, this is a sufficient injury to support a cause of action for fraud.

The fraud alleged in this case is fraud in the inducement. In a claim of fraudulent inducement, the elements of fraud must be established as they relate to an agreement between the parties.  Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof.

To establish the element of an injury, Espinosa was required to produce evidence of either (1) an economic loss related to the policies or (2) a distinct tortious injury with actual damages. Espinosa produced no evidence of an economic loss related to the policies. Nor did Espinosa produce evidence of a distinct tortuous injury with actual damages.

In fact, Espinosa concedes that Allstate provided him with the benefit of coverage under the policies. Espinosa concedes that absent Allstate’s fraud, it could rightly be said that Allstate earned the premiums they collected from Espinosa for the ‘no benefit years.’

The Court of Appeal concluded that the trial court was correct in ruling that Espinosa received the benefit of coverage, that there is no evidence of an injury for purposes of maintaining a cause of action for fraud, and that Allstate were therefore entitled to judgment as a matter of law.

ZALMA OPINION

The lawsuit and appeal should have been the subject of a motion for sanctions for being frivolous. Although most people believe they only need insurance when they have a loss and paying a premium for the years when there is no reason to file a claim is a waste, it is not fraud, it is insurance.

Insurance is a risk spreading device. It only works when thousands of people get together and pay premiums so that a few who need to make a claim can recover the indemnity promised by the policy. The premium is earned when the insurer agrees to take on the risk not when it is called upon to pay.

People who are insured, lawyers, judges and the public at large must understand insurance as a contract where one party agrees to indemnify another against a contingent or unknown risk for the payment of a premium. No one would buy insurance if that person could wait until the loss occurs and then pay a small amount of premium to cover for a major loss. Insurance cannot work unless the risk is spread among many.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Deported for Insurance Fraud

Commit Insurance Fraud – Leave the Country – Now!

Immigration officials initiated removal proceedings against petitioner Roselva Chaidez in 2009 upon learning that she had pleaded guilty to mail fraud in 2004. To avoid removal, she sought to overturn that conviction by filing a petition for a writ of coram nobis (the designation of a remedy for setting aside an erroneous judgment in a criminal action that resulted from an error of fact in the proceeding), contending that her former attorney’s failure to advise her of the guilty plea’s immigration consequences constituted ineffective assistance of counsel under the Sixth Amendment. While her petition was pending, this Court held in Padilla v. Kentucky, 559 U. S. ___, that the Sixth Amendment requires defense attorneys to inform non-citizen clients of the deportation risks of guilty pleas. The District Court vacated Chaidez’s conviction. The Seventh Circuit reversed, holding that Padilla had declared a new rule and should not apply in a challenge to a final conviction. In Chaidez v. United States, No. 11-820 (U.S. 02/20/2013) the U.S. Supreme Court, by Kagan, J. resolved the issue of whether, before Padilla, a lawyer was required to advise the client of the immigration consequences of a guilty plea.

A person whose conviction is already final may not benefit from a new rule of criminal procedure on collateral review. A case announces a new rule if the result was not dictated by precedent existing at the time the defendant’s conviction became final.

KAGAN, J., delivered the opinion of the Court, in which ROBERTS, C. J., and SCALIA, KENNEDY, BREYER, and ALITO, JJ., joined. THOMAS, J., filed an opinion concurring in the judgment. SOTOMAYOR, J., filed a dissenting opinion, in which GINSBURG, J., joined.

History

In Padilla v. Kentucky, 559 U. S. ___ (2010), the Supreme Court held that the Sixth Amendment requires an attorney for a criminal defendant to provide advice about the risk of deportation arising from a guilty plea. The U.S. Supreme Court considered whether that ruling applies retroactively, so that a person whose conviction became final before it decided Padilla can benefit from it.

Petitioner Roselva Chaidez hails from Mexico, but became a lawful permanent resident of the United States in 1977. About 20 years later, she helped to defraud an automobile insurance company out of $26,000. After federal agents uncovered the scheme, Chaidez pleaded guilty to two counts of mail fraud. The District Court sentenced her to four years of probation and ordered her to pay restitution. Chaidez’s conviction became final in 2004.

Aggravated Felony

Under federal immigration law, the offenses to which Chaidez pleaded guilty are “aggravated felonies,” subjecting her to mandatory removal from this country. According to Chaidez, her attorney never advised her of that fact, and at the time of her plea she remained ignorant of it.

Immigration officials initiated removal proceedings against Chaidez in 2009, after an application she made for citizenship alerted them to her prior conviction. To avoid removal, Chaidez sought to overturn that conviction by filing a petition for a writ of coram nobis in Federal District Court. She argued that her former attorney’s failure to advise her of the immigration consequences of pleading guilty constituted ineffective assistance of counsel under the Sixth Amendment.

While Chaidez’s petition was pending, the Supreme Court decided Padilla. The ruling vindicated Chaidez’s view of the Sixth Amendment. It held that criminal defense attorneys must inform non-citizen clients of the risks of deportation arising from guilty pleas. The trial court determined that Padilla “did not announce a new rule. It then found that Chaidez’s counsel had performed deficiently under Padilla and that Chaidez suffered prejudice as a result. Accordingly, the court vacated Chaidez’s conviction.

The United States Court of Appeals for the Seventh Circuit reversed, holding that Padilla had declared a new rule and so should not apply in a challenge to a final conviction. The Supreme Court granted certiorari to resolve a split among federal and state courts on whether Padilla applies retroactively.

Chaidez filed her coram nobis petition five years after her guilty plea became final. Her challenge therefore fails if Padilla declared a new rule. A case announces a new rule when it breaks new ground or imposes a new obligation on the government.  To put it differently a case announces a new rule if the result was not dictated by precedent existing at the time the defendant’s conviction became final.

Ten federal appellate courts that considered the question decided, in the words of one, that counsel’s failure to inform a defendant of the collateral consequences of a guilty plea is never a violation of the Sixth Amendment. That constitutional guarantee assures an accused of effective assistance of counsel in criminal prosecutions; accordingly, advice about matters like deportation, which are not a part of or enmeshed in the criminal proceeding, does not fall within the Amendment’s scope.

When the Supreme Court decided Padilla, it answered a question about the Sixth Amendment’s reach that was left open, in a way that altered the law of most jurisdictions. The Supreme Court’s reasoning reflected that it was doing as much.

Before Padilla, the Supreme Court had declined to decide whether the Sixth Amendment had any relevance to a lawyer’s advice about matters not part of a criminal proceeding. Perhaps some advice of that kind would have to meet a reasonableness standard-but then again, perhaps not.  It was Padilla that first rejected that categorical approach when a criminal lawyer gives (or fails to give) advice about immigration consequences.

Chaidez offers a different account of Padilla, in which we did no more than apply earlier precedent to a new set of facts. That argument failed and Justice Kagan wrote that the Supreme Court announced a new rule in Padilla. Defendants whose convictions became final prior to Padilla therefore cannot benefit from its holding.

JUSTICE THOMAS, concured in the judgment. He stated that he continues to believe that Padilla was wrongly decided and that the Sixth Amendment does not extend-either prospectively or retrospectively-to advice concerning the collateral consequences arising from a guilty plea. He concurred, therefore, only in the judgment.

JUSTICE SOTOMAYOR, with whom JUSTICE GINSBURG joined, dissented.

ZALMA OPINION

The Supreme Court’s opinion is important to immigrant felons who were convicted of aggravated felonies like mail or insurance fraud before Padilla must be deported immediately even if their lawyer failed to advise the defendant of the immigration hazard of pleading guilty. After Padilla all criminal defense lawyers must advise their clients of the immigration problems a guilty plea will cause. I expect that when an immigrant – legal or undocumented – pleads guilty to an aggravated felony like insurance fraud, the court will advise the defendant of the consequences of the plea.

The U.S. government should be advised of all convictions of non-citizens of an aggravated felony so that they can be immediately deported. Ms. Chaidez, by appealing her coram nobis petition to the U.S. Supreme Court spent a great deal of money and time of the U.S. government and has established beyond doubt that she must be deported and never return and proved that – for some – insurance fraud does not pay.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Accord & Satisfaction

Acceptance of Policy Limits Concludes Claim

After a fire destroyed its warehouse, Go Wireless, LLC, sued its insurer, Maryland Casualty Company, for breach of contract and reformation. Go Wireless contended that Maryland had agreed to provide $2.5 million in business personal property coverage. Maryland subsequently asserted coverage was limited to $546,400. The circuit court granted summary judgment in favor of Maryland, concluding that Go Wireless’s acceptance of $546,400 from Maryland constituted an accord and satisfaction. The Wisconsin Court of Appeal resolved the dispute in Go Wireless, LLC v. Maryland Casualty Company, No. 2012AP321 (Wis.App. 02/19/2013).

Background

Go Wireless was co-owned by David Graves and Ned Bartels. From 2003 until November 2008, Go Wireless was an exclusive sales agent for U.S. Cellular. At its peak, Go Wireless had fifty-five stores in seven states.

Go Wireless purchased its business insurance through Northern Insurance Associates-Bartels & Brown, LLC, which served as its insurance agent for nine years. In addition, Northern routinely advised Go Wireless on insurance matters.

Through Northern, Go Wireless purchased an insurance policy from Maryland that provided business personal property coverage. As of July 2008, Go Wireless had fifty store locations, and the Maryland policy provided about $50,000 in business personal property coverage for each location. The policy also provided “blanket” business personal property coverage in the amount of $2,577,601. That figure represented the total amount of business personal property coverage for all of Go Wireless’s locations. The blanket coverage allowed Go Wireless to aggregate the policy limits for each of the insured locations in order to cover a single loss at any one location.

In fall of 2008, U.S. Cellular decided not to renew its contract with Go Wireless. As a result, Go Wireless sold the leases on all of its retail locations to U.S. Cellular and began winding up its business. On November 17, 2008, Kristen Vosters, Go Wireless’s office manager, contacted Maryland through the “Zurich Small Business Customer Service Center.” Vosters informed Maryland that Go Wireless had sold its operations to U.S. Cellular, and, therefore, needed to remove all but two locations from its policy. The two remaining locations covered by the policy were: (1) Go Wireless’s corporate headquarters, located at 740 Ford Street in Kimberly; and (2) a warehouse, located at 575 Timmers Lane in Appleton.

On March 16, 2009, Graves informed Northern that Go Wireless’s operations at the Ford Street location had ceased, and he directed Northern to delete coverage for the Ford Street location. This left the Timmers Lane warehouse as the only location insured under the Maryland policy. Graves instructed Northern to increase the business personal property limit for the Timmers Lane warehouse from $50,000 to $546,400, which had been the business personal property limit for Go Wireless’s previous primary location. Northern did not inform him that removing the Ford Street location would affect the blanket coverage. About one week later, the Timmers Lane warehouse was destroyed in a fire.

Go Wireless subsequently submitted a claim to Maryland, alleging the fire had destroyed $1.2 million of business personal property. At the time, Bartels and Graves believed the Maryland policy provided $2.5 million of blanket business personal property coverage.

Maryland subsequently tendered two checks to Go Wireless. After paying $546,000 Maryland pointed out that there was still outstanding claim available for the replacement of the building.

Go Wireless deposited both of the checks it received from Maryland.

Go Wireless then sued for breach of contract and negligence claims against Northern and breach of contract and reformation claims against Maryland. Northern filed a cross-claim against Maryland, seeking contribution or indemnification. Specifically, Northern argued that Maryland breached a duty to advise Go Wireless that removing locations from its policy would eliminate the blanket coverage and therefore result in inadequate business personal property coverage.

The trial court concluded that Go Wireless’s claims against Maryland were barred because Go Wireless’s acceptance of Maryland’s payments constituted an accord and satisfaction. Regarding Northern’s cross-claim, the court concluded all the coverage issues were dealt with from Northern Insurance agents and not directly with Maryland Casualty, Consequently, the court concluded Northern was not entitled to contribution or indemnification from Maryland, and it dismissed the cross-claim.

Accord & Satisfaction

The circuit court concluded Go Wireless’s claims against Maryland were barred by the doctrine of accord and satisfaction. An accord and satisfaction is an agreement between parties to discharge an existing disputed claim. Under the doctrine of accord and satisfaction, if a creditor cashes a check from a debtor that has been offered as full payment for a disputed claim, the creditor is deemed to have accepted the debtor’s offer, notwithstanding any reservations by the creditor.

An accord and satisfaction is a contract. Where the facts are undisputed, the existence of a contract is a question of law that a court of appeal reviews independently.  Like other contracts, an accord and satisfaction requires an offer, an acceptance, and consideration.

First, for a valid accord and satisfaction, the debtor must make an offer that contains expressions sufficient to make the creditor understand that performance is offered in full satisfaction of the creditor’s claim. It is immaterial that checks making payment did not contain the words “full payment” or other “magic language.”  Instead, if the letters conveying the checks reasonably notified the farmers that the accompanying checks were offered as full payment under the contract there is sufficient proof of an accord and satisfaction.

The letters Maryland sent Go Wireless explained that, when Go Wireless removed all but one insured location from its policy it eliminated the policy’s blanket business personal property coverage.  On November 2, 2009, Maryland sent Go Wireless a second letter that enclosed a check comprising the remainder of the $546,400 policy limits. The November 2 letter expressly stated that, together with a previous payment of $350,000, the second payment “brings the claim settlement amount to the [business personal property] policy limit of $546,400.00, thus exhausting the [business personal property] coverage for this loss.”

It was immaterial that Maryland’s first letter included a boilerplate reservation of rights. When read together and in their entirety, the two letters clearly informed Go Wireless:

  1. that Maryland believed Go Wireless’s business personal property coverage was limited to $546,400; and
  2. that, in Maryland’s view, the payment enclosed with the second letter extinguished Maryland’s obligation to provide business personal property coverage.

Notice

The letters gave Go Wireless the reasonable notice required for an accord and satisfaction.

Acceptance

An accord and satisfaction also requires an acceptance. However, where accord and satisfaction is concerned, acceptance does not require mental assent or a meeting of the minds. Instead, the question is whether the creditor manifested an intent to accept the debtor’s offer. The requisite intent can be manifested either by actions or words, and actions can constitute acceptance even when accompanying words express a contrary intent. Go Wireless deposited Maryland’s checks, and it gave no indication that the checks were not accepted as payment in full. Thus, Go Wireless manifested its intent to accept Maryland’s offer. Because mental assent is not required for an accord and satisfaction, whether Go Wireless actually intended to accept Maryland’s offer is irrelevant.

Consideration

The amount of business personal property coverage is something of monetary value, and it was clearly in controversy following the fire. The resolution of the parties’ dispute over the amount of coverage therefore provided sufficient consideration for an accord and satisfaction.

Consequently, the undisputed facts establish that Go Wireless’s acceptance of Maryland’s checks constituted an accord and satisfaction.

Because Maryland did not waive its accord and satisfaction defense, and because the undisputed facts established an accord and satisfaction, the appellate court concluded that the trial court properly granted Maryland summary judgment on Go Wireless’s claims.

Northern’s Cross-Claim

The circuit court also granted Maryland summary judgment on Northern’s cross-claim.

Unlike Northern, which had developed an intimate knowledge of Go Wireless’s business, Maryland had no way of knowing that Go Wireless still wanted or needed $2.5 million in blanket business personal property coverage after it removed the vast majority of its locations from the policy. In practice, the responsibility for advising Go Wireless remained with Northern, regardless of the language of the producer agreement. Consequently, Northern’s cross-claim for contribution or indemnification fails.

ZALMA OPINION

Insurers and insureds faced with a dispute over the available policy limits should take warning from this case and its use of the ancient remedy of accord and satisfaction. The insurer must make clear that the payments presented are for the full amount of the obligation owed by the policy so that if there is a later dispute it can claim accord and satisfaction.

The insured, on the other hand, should never accept payment if it disputes the amount of loss without first obtaining from the insurer its agreement that acceptance and cashing of the check(s) by the insured is not a waiver of its right to claim higher limits and that its cashing of the checks do not constitute an accord and satisfaction. Most insurers would agree to avoid charges of bad faith.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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New ISO Forms

ISO is presenting new wordings to the various states.

Insurance Services Office’s (ISO’s) four major filings in commercial property, business auto, businessowners coverage, and commercial general liability (CGL) make 2013 a big year for insurance professionals. The author expects to present two future articles that focus on the changes that begin taking effect this year in the commercial general liability forms and endorsement

You can get details on the new forms at http://www.mynewmarkets.com/articles/181365/isos-commercial-general-liability-filing-get-ready

Part II is at http://www.mynewmarkets.com/articles/181397/isos-commercial-general-liability-filing-part-two-endorsements and part III is at http://www.mynewmarkets.com/articles/181416/isos-commercial-general-liability-filing-part-three-new-endorsements

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Buyers Remorse

You Only Get What You Pay For!

Most young people believe they are indestructible and immortal. They never think they will be injured in an accident.  Insurance, especially insurance for motorcycle riders can be expensive. Almost every state, like South Carolina, requires that automobile and motorcycle liability insurers must offer uninsured and underinsured motorist insurance coverage. Many people, in an attempt to save money, refuse uninsured and underinsured motorist coverage. After they are involved in an accident they regret their decision and hire lawyers to get them the coverage they did not order and did for which they did not pay the insurer.

Greg and Stacy Cohen sued Progressive Norther Insurance Company (“Progressive”) requesting reformation of a motorcycle insurance policy issued by Progressive to include underinsured motorists (UIM) coverage. The trial court refused to reform the policy, finding Progressive made a meaningful offer of UIM coverage. In Greg Cohen and Stacy Cohen v. Progressive Northern Insurance Company and Autoowners Insurance, No. 5083 (S.C.App. 02/13/2013) the South Carolina Court of Appeal was asked to resolve, and did resolve, the dispute.

Facts

In 2005, Greg Cohen called Citizens Insurance Agency to purchase a policy for his motorcycle. He remembers speaking with a female employee about the policy but does not recall her name. Meredith Thomason, a Citizens Insurance agent, does not specifically recall speaking with Cohen but testified she wrote the quote sheet generated as a result of that call. She also signed the application form for Cohen’s policy.

Thomason that a transaction begins with a phone call, and she fills out a quote sheet while talking with the client. She then creates an application form using input from the client, and prints it only after she and the client have discussed and agreed upon what types and limits of coverage he wants. When the client comes to Citizens Insurance’s office to complete the application, Thomason gives him an opportunity to read it. Going through each page of the application, she explains UIM coverage, tells the client he is not required by law to have it, and recommends the client buy UIM coverage with limits equal to the other types of coverage he is purchasing. She also reviews which coverage the client is selecting and which he is rejecting in the application form. The client signs the application in several places, including an acknowledgment stating he has read the information that Thomason presented to him regarding UIM coverage. Thomason then signs on a line indicating that the client has completed and signed the application. After that, she gives the client a copy. Thomason testified she never deviates from this procedure.

Cohen’s recollection of applying for his policy differs from Thomason’s procedure. He testified that when he called Citizens Insurance, he told the agent, “I want the same coverage that I have on my Expedition, my other vehicle. “He does not recall talking on the phone about UIM coverage. The next day, he went to Citizens Insurance’s office and spent less than five minutes signing paperwork. The employee with whom he met did not explain what was in the paperwork, and Cohen did not review the documents before signing them. They did not discuss what coverage limits he wanted or what would happen if he did not buy UIM coverage and was later injured. He testified he did not tell the employee that he did not want UIM coverage.

The application Cohen and Thomason signed includes an explanation of what UIM coverage is and how it works. Additionally, the application explains that UIM coverage is optional and that it can be purchased up to the limits of the liability coverage Cohen was purchasing. Another page, entitled “Offer of underinsured motorist coverage,” has a table listing four levels of UIM coverage limits and the increased premium Cohen would have to pay for each level. The highest of the four levels is equal to the limits of the liability and uninsured motorist coverage Cohen requested in the application form. Below that table, the application asks, “Do you wish to purchase underinsured motorist coverage?” and provides blanks next to the words “Yes” and “No.”A computer-generated “X” appears in the blank next to “No.”Thomason selected that “X” when she generated the form on her computer. The next line of the application states, “If your answer is ‘no’ then you must sign here,” and then provides a signature line. Cohen signed on that line.  The word “REJECTED” is typed below and based on the application form, Progressive issued Cohen a policy that does not provide UIM coverage.

In 2007, Cohen was injured while riding his motorcycle. The Cohens filed this declaratory judgment action against Progressive and Auto-Owners Insurance Company. They asked that Progressive’s policy be reformed to provide UIM coverage in the amount of the limits of the policy’s liability coverage.

The trial court found Progressive made a meaningful offer of UIM coverage and Cohen rejected the offer.

Meaningful Offer of UIM Coverage

Automobile insurers are required by statute to offer underinsured motorist coverage up to the limits of the insured’s liability coverage. The South Carolina Supreme court has interpreted this language to require that the insured be provided with adequate information to allow the insured to make an intelligent decision of whether to accept or reject the coverage.

In general, for an insurer to make a meaningful offer of UIM coverage, (1) the insurer’s notification process must be commercially reasonable, whether oral or in writing; (2) the insurer must specify the limits of optional coverage and not merely offer additional coverage in general terms; (3) the insurer must intelligibly advise the insured of the nature of the optional coverage; and (4) the insured must be told that optional coverages are available for an additional premium.

The trial court also based its factual findings on the contents of the form Progressive used to make the offer. The court specifically found “the offer form fully satisfied the five requirements of the statute.

The court of appeal agreed with the trial court that the form, which was prescribed by the South Carolina Department of Insurance and includes language nearly identical to that endorsed by the supreme court in earlier decisions, contained all of the information required by statute and case law. Finally, the trial court found that by signing the form, Cohen was deemed to understand its contents. Cohen signed the form in three places, including a page in which he acknowledged that he either read, or had someone read to him, the form’s explanation of UIM coverage and its offer of that coverage. It is important to note that failure to comply with the statute does not automatically require judicial reformation of a policy. Rather, even where an insurer is not entitled to the presumption that it made a meaningful offer, it may prove the sufficiency of its offer by showing that it complied.

The court of appeal held that an insurer’s noncompliance with the statute does not render the use of the statute’s form a non-complying offer. Rather, the phrase non-complying offer, refers to an offer that is not meaningful. Therefore, the insurer’s inability to get the conclusive presumption under the statute does not mean the insurer did not make a meaningful offer in compliance with the statute. Rather, it simply means the trial court must make the factual determination of whether the insurer made a meaningful offer. The trial court made that factual determination.

ZALMA OPINION

Hindsight is always 20/20. The Cohens, after the accident, knew that they needed UIM coverage. They tried to get the court to provide that coverage that they did not order and did not pay for, by claiming they asked for the coverage and should have received it. The trial court, finding from the signature on three different forms  refusing the coverage, and the testimony of the agent who took the application, that the Cohens received a meaningful offer of coverage and refused it.

If his injuries were serious enough it might have been worthwhile to try to get that coverage but the signature on three forms made it clear there was no ground for reformation of the insurance policy since there was no mutual mistake, misrepresentation or fraud to support reformation.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Contract of Personal Indemnity

Consent Needed to Assign a Liability Insurance Policy

Insurance is, by definition, a contract of personal indemnity. The insurer decided whether the individual or corporation it is insuring was a risk it was willing to take. Every liability insurance policy I have read contains an anti-assignment clause requiring the written consent of the insurer before a policy can be assigned to another. The reason for such clauses is that the insurer has the right to determine who it will insure and does not give that right away to an insured. If there is to be an assignment the new insured must provide sufficient information to the insurer so that it can make a reasoned decision whether it wished to insure or not insure the new entity.

WASCO LLC sued Bituminous Casualty Corporation (Bituminous), an insurance company, claiming it breached its duties under two insurance policies when it did not defend WASCO after receiving a notice of potential liability from the United States Environmental Protection Agency (EPA) during an EPA investigation process. Bituminous claimed that WASCO cannot be an assignee of the policy without Bituminous’s written consent pursuant to the terms of the insurance policy. WASCO claims that no written consent is required. The trial court granted Bituminous’s motion for summary judgment dismissing the suit. The Illinois Court of Appeal resolved the dispute in Water Applications and Systems Corporation, N/K/A Wasco LLC v. Bituminous Casualty Corporation, 2013 IL App 120983 (Ill.App. Dist.1 02/15/2013).

BACKGROUND

WASCO filed a breach of contract action against Bituminous involving two general liability insurance policies where WASCO was not named as an insured. WASCO argues that it assumed the policies by purchasing the assets of Palm Oil Recovery, Inc., a palm oil recycling company, the named insured.

Policy A contains an anti-assignment clause, which states:

“9. Assignment: Assignment of interest under this policy shall not bind the company unless its consent is endorsed hereon ***.”

WASCO claims that, in 1971, Palm Oil Recovery, Inc., merged with some other companies to form Pori, Inc., which was then sold in 1981 to Pori Holdings, Inc., and thereafter renamed PORI International, Inc.

On November 30, 1971, Bituminous issued a second third-party liability insurance policy (No. GA686764; hereinafter Policy B), which covered Pori, Inc. as the named insured from November 9, 1971, through November 9, 1972. Policy B was issued with the same contract language as Policy A and included the same provisions. Under its declarations, Policy B states that it is a renewal of Policy A.

On February 28, 1997, PORI International, Inc. executed an asset purchase agreement (Purchase Agreement) to sell its assets to U.S. Filter Recovery Services (Midatlantic), Inc. (USFRSM), a subsidiary wholly owned by U.S. Filter Recovery Services, Inc. (USFRS). USFRS was a wholly owned subsidiary of United States Filter Corporation (USFC). At the time of the Purchase Agreement, WASCO was known as USFC. On August 2, 2004, USFC changed its name to Water Applications & Systems Corporation, which was later renamed WASCO LLC on December 22, 2006.

The Purchase Agreement set forth the terms of the sale of PORI International, Inc.’s assets to WASCO.  It also provided: “Insurance. Schedule 3.19 discloses all insurance policies on an ‘occurrence’ basis with respect to which Seller is the owner, insured or beneficiary.”

The Purchase Agreement additionally contained the following clause on consent rights:

“2.12 Certain Consents. Nothing in this agreement shall be construed as an attempt to assign any contract, agreement, Permit, franchise, or claim included in the Purchased Assets which is by its terms or in law nonassignable without the consent of the other party or parties thereto, unless such consent shall have been given, or as to which all the remedies for the enforcement thereof enjoyed by Seller would not, as a matter of law, pass to Buyer as an incident of the assignments provided for by this Agreement.”

The appellate record does not show that Bituminous consented to the alleged assignment of the subject policies. The appellate record does not contain the alleged assignment or any evidence that its premiums were prorated or paid by WASCO.

The Instant Action

WASCO brought suit in the circuit court of Cook County against Bituminous on May 1, 2009.

Bituminous filed a motion for summary judgment, claiming that WASCO did not provide any evidence that it had properly assumed the subject policies by assignment and therefore was not entitled to a defense of the EPA matter. Bituminous argued that assignment of the subject policies required Bituminous’s consent, which was not given.

ANALYSIS

WASCO filed this appeal seeking to reverse the trial court’s order granting summary judgment in favor of Bituminous. WASCO claims that the trial court erred because WASCO presented sufficient evidence to create a material issue of fact about whether it owns the subject policies and is entitled to a defense in an action by the EPA. WASCO also argues that it assumed the subject policies when it purchased the assets of PORI International, Inc., in 1997.

WASCO argued that it assumed the subject policies in the Purchase Agreement, which assigned to WASCO “substantially all of [PORI International, Inc.’s] assets and certain *** liabilities.” Bituminous claimed that while the sale included many insurance policies, the policies at issue were not identified among them. Bituminous argued that any insurance policies not named in the Purchase Agreement are retained liabilities that do not transfer in an asset sale.

In its entirety, section 5.5 does not assign the subject policies to WASCO. Instead, section 5.5 describes PORI International, Inc.’s future responsibilities regarding insurance policies that were not assigned to WASCO in the asset sale. Additionally, there is no evidence in the appellate record that the subject policies were assigned to WASCO at any point in time. The policies at issue were not named in the asset sale. The Purchase Agreement clearly states that all insurance policies that are assigned are named in schedule 3.19, which does not list the subject policies. It follows that all insurance policies that were not assigned are retained liabilities that remain with PORI International, Inc., pursuant to the Purchase Agreement.

The issues presented in the instant case involve the interpretation of the subject policies, not the Purchase Agreement. In addition, section 2.12 of the Purchase Agreement prohibits the assignment of contracts that are nonassignable by its terms or in law. By the terms of the insurance contract, the subject policies cannot be assigned without Bituminous’s consent.

It has been well established under Maryland law that an anti-assignment clause is valid and enforceable. The appellate record does not indicate Bituminous’s reasoning behind the inclusion of the anti-assignment clause in its policy. The language could have been included in the policies to prevent the insurance company from receiving claims from multiple parties or exposing itself to additional risks that it did not foresee when it issued its policies.

PORI International, Inc., was not changing the legal status of its business. Rather, it was selling its assets to WASCO, which is an entirely different corporation. As a result the court of appeal concluded that the Bituminous policies were not assigned to WASCO because Bituminous did not provide its written consent.

The anti-assignment clause prohibited the assignment of the policies without written consent and Bituminous never gave its written consent to an assignment of the insurance policies. Additionally, even if the policies were properly assigned to WASCO, a general liability insurance policy does not cover a regulatory action by the EPA. Therefore, Bituminous did not have a duty to defend WASCO because the policies at issue did not cover the EPA investigation process.

ZALMA OPINION

It is, and should be, impossible for an insured to assign its rights under an insurance policy, before a loss, to anyone without first obtaining the permission of its insurer. Insurance, as a contract of personal indemnity, is a contract where an insurer makes a determination that it is willing to insure the person or corporation seeking insurance. If the anti-assignment clause was made unenforceable as WASCO contented in this case insurers would be required to insure anyone forced upon them by its insured.

WASCO’s argument would allow a good risk like APPLE to assign its policy to Bernard Madoff, and force an insurer to insure a person it would never insure if given a choice. The clause is there to allow the insurer to select he who it will insure.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Insurance Fraud Continues Unabated

Zalma’s Insurance Fraud Letter

Continuing with the fourth issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the February 15, 2013 issue on the state of Minnesota’s call for more insurance fraud investigations, prosecutions and convictions; a report on the conviction of an insurance fraud perpetrator who made claim to multiple insurance companies for the theft of the same items of jewelry; a “man bites dog” story about an insurer who was found by a jury to have defrauded an agent; and a “just for fun” transcript of trial testimony proving that a lawyer should never ask a question to which he or she does not know the answer.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    Medical Provider Gets Nothing
•    Advertising Injury
•    FIVE YEAR LATE NOTICE
•    Read The Policy
•    Primary v. Excess
•    Aggravated Assault Not an Occurrence
•    One Occurrence – One Limit
•    Premium Audit or Prosecution
•    No Third Party Direct Action in Kentucky
•    Fraud Continues and Destroys Insurer

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

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

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

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

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

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Medical Provider Gets Nothing

No-Fault Release Ends Obligation of Insurer

The Michigan Court of Appeal was asked to decide whether an insured’s release bars a health care provider’s claim for reimbursement for medical services rendered to the insured after the release was executed. In Michigan Head & Spine Institute, P.C v. State Farm Mutual Automobile Insurance Company, No. 307253 (Mich.App. 02/12/2013) the Michigan Court of Appeals resolved the dispute by interpreting the release language and applying its clear and unambiguous language.

FACTUAL BACKGROUND

Pellumbesha Biba (“Biba”) was insured under a no-fault policy that State Farm Mutual Automobile Insurance Company (“defendant”) issued. Biba was injured in an accident. On July 30, 2009, in exchange for $35,000 and in settlement of ongoing litigation with defendant, Biba executed a release, which stated in pertinent part:

For the sole consideration of the amount of $35,000.00, Pellumbesha Biba … does hereby release and discharge [defendant] … from any and all claims and demands for no-fault insurance benefits, of any kind whatsoever, for any and all expenses incurred to date and/or which may be incurred at any time in the future by or on behalf of Pellumbesha Biba arising out of [the] accident … including but not necessarily limited to:

1. Other than explained in the paragraph below, any and all allowable expenses of any kind whatsoever for reasonably necessary products, services, and accommodations for [Biba’s] care, recovery, or rehabilitation, including, but not limited to, medical, psychiatric, psychological, counseling, dental, chiropractic, medication, mileage, caretaking, attendant care, skilled nursing care, assistant care and/or skilled care from the date of the above accident through the present and/or which may be incurred at any time in the future.

* * *

5. Any and all expenses incurred in obtaining ordinary and necessary services from the time of the above accident to the present and/or which may be incurred at any time in the future for services which may have been paid or payable at the maximum rate of $20 per day pursuant to the Michigan No-Fault Act.

Notwithstanding any other provision in this document, [Biba] is permitted to seek and make a claim for expenses for accident-related medical care provided by the University of Michigan Health System, if that care is provided prior to July 6, 2010. Any expenses incurred after July 6, 2010 by [Biba] and related to the above-described accident will not be considered and [Biba] is forever barred from making claims for such expenses…

On February 26, 2010, more than six months after signing the release, Biba began treating with plaintiff because of injuries that she sustained in the accident. Defendant refused to reimburse plaintiff its costs incurred in treating Biba on the basis of the release. On December 17, 2010, plaintiff filed a complaint against defendant in the 46th District Court seeking reimbursement under the no-fault act for its services and accommodations rendered to Biba as well as penalty interest, attorney fees, and a judgment declaring that defendant is liable for the no-fault benefits payable to plaintiff.

Plaintiff filed a motion for partial summary disposition arguing that the release did not bar its independent cause of action against defendant for the recoupment of no-fault benefits pursuant to state statutes. In response, defendant moved for summary disposition under applicable statutes. The defendant maintained that the release barred plaintiff’s claim. The trial court granted plaintiff’s motion and denied defendant’s motion on the basis that plaintiff had an independent cause of action against defendant and the release executed by Biba did not waive plaintiff’s separate cause of action. The district court entered a judgment in plaintiff’s favor in the amount of $12,450, inclusive of costs and attorney fees, plus interest in the amount of $1,623.60. On appeal, the circuit court affirmed the district court’s ruling based on the same reasoning.

LEGAL ANALYSIS

As a result of state statutes it is common practice for insurers to directly reimburse health care providers for services rendered to their insureds.  It is well established that an injured person entitled to no-fault benefits may waive that entitlement and release an insurer from payment of future benefits in exchange for a settlement.

Courts generally apply principles of contract law to disputes involving the terms of a release. The scope of a release is governed by the intent of the parties as it is expressed in the release. If the text in the release is unambiguous, the parties’ intentions must be ascertained from the plain, ordinary meaning of the language of the release.

The plain language of the release in this case states that, “[f]or the sole consideration of the amount of $35,000.00,” Biba “does hereby release and discharge” defendant “from any and all claims and demands for no-fault insurance benefits, of any kind whatsoever, for any and all expenses incurred to date and/or which may be incurred at any time in the future by or on behalf of” Biba arising out of the accident, including “any and all allowable expenses of any kind whatsoever for reasonably necessary products, services, and accommodations for [Biba’s] care, recovery, or rehabilitation, including, but not limited to, medical, . . . medication, . . . . skilled nursing care, . . . and/or skilled care from the date of the above accident through the present and/or which may be incurred at any time in the future.” Thus, the plain language demonstrates that, in exchange for defendant’s payment of $35,000, the parties intended to discharge defendant’s liability altogether, including its liability for future medical services. The language of the release is clear and unambiguous, and the parties’ intent, expressed in the release, governs its scope.

Biba’s argument that there is no evidence that any additional money was paid to cover future medical treatment is without merit. The language of the release plainly includes expenses related to future medical treatment in exchange for defendant’s payment of $35,000. Plaintiff also argues that by including in the release the provision allowing Biba to make a claim for expenses for accident-related care provided by the University of Michigan Health System, defendant preauthorized accident-related treatment up to July 6, 2010, nearly one year after the release was executed. Biba’s argument is without merit. The parties to the release bargained for a narrow exception to the bar on future benefits, and treatment at plaintiff’s facility does not fall under the exception. There is nothing ambiguous about the provision, which is limited to “accident-related medical care provided by the University of Michigan Health System . . . prior to July 6, 2010.” Because the provision is unambiguous, this Court cannot read anything additional into it.

Plaintiff Has A Remedy

The court noted that plaintiff is not without a remedy. Although Biba provided her insurance claim number on plaintiff’s intake form and indicated that bills should be sent to defendant, she also signed a form that stated, “I agree to pay in full any and all charges for medical services provided to me by [plaintiff] not otherwise covered by my Medicare, insurance company or carrier, or other payor.” Therefore, Biba agreed to be responsible for charges that defendant did not pay. Further, Biba checked “yes” on the intake form after the question “[i]s there a lawsuit involved?” Directly beneath the question, however, she stated, “it is over (done).” Therefore, plaintiff was on notice that the lawsuit had concluded and could have inquired into the terms of the settlement before treating Biba.

At a minimum, plaintiff could have contacted defendant to verify Biba’s assertion that defendant would cover her medical expenses. Biba even provided the insurance adjuster’s name and telephone number on the intake form. Accordingly, plaintiff could have verified Biba’s claimed entitlement to no-fault benefits, but failed to do so.

Moreover, upholding the lower court decisions would have a chilling effect on settlements of claims involving future no-fault benefits because the decisions effectively nullify Biba and defendant’s settlement. The parties did not intend such a result considering the clear language of the release.

ZALMA OPINION

A release is nothing more than a contract. If it is clear and unambiguous it will be enforced as written. Because of the way no-fault insurance is dealt with in states like Michigan medical services providers rely on direct billing to the insurer. They act as if their right is separate and apart from the claim of the patient.

This case makes it clear that the assumption is not correct. The right of the medical provider is derivative of the right of the patient. If the patient releases the insurer for a lump sum the patient gives up all rights to the money and the provider has no right to get money from the insurer. Fortunately, the patient, Biba, promised to pay the provider and they are not without a remedy.

Why the trial court gave the provider money in light of the clear language of the release is confusing to me and can only be put down to the public’s animosity toward insurers even when the insurer does everything it is required to do.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Advertising Injury

Loss Must Be Due to Advertising for Coverage to Apply

Basic Research, LLC, along with related corporations and officers thereof (Basic Research), appealed the trial court’s grant of summary judgment in favor of Admiral Insurance (Admiral). Basic Research contended that in finding that Admiral had no duty to defend it against the underlying claims, the district court interpreted provisions of Basic Research’s insurance policy too narrowly. The Utah Supreme Court resolved the dispute in Basic Research, LLC, Dynakor Pharmacal, LLC v. Admiral Insurance Company, A Delaware Corporation, 2013 UT 6 (Utah 02/08/2013).

BACKGROUND

Basic Research is a limited liability company organized and existing under the laws of Utah. Its principal place of business is located in Salt Lake City, Utah. Basic Research markets the weight-loss product Akavar, using the slogans “Eat All You Want And Still Lose Weight” and “And we couldn’t say it in print if it wasn’t true!”

Customers who purchased Akavar filed lawsuits in multiple federal and state jurisdictions, all claiming false advertising, defective product, and/or failure to perform as promised (the underlying claims).

Basic Research was insured by Admiral under two consecutive Commercial General Liability insurance policies (the Policy). A portion of the Policy provided coverage for “Personal and Advertising Injury,” defined relevant terms, and contained a list of types of claims specifically excluded from coverage. After the underlying claims were filed, Basic Research invoked its coverage and asked Admiral to defend it. Admiral refused to defend because the underlying claims were not covered by the terms of the Policy.

ANALYSIS

In Utah, like almost every other state, an insurer has a duty to defend when the insurer ascertains facts giving rise to potential liability under the insurance policy. Where the allegations, if proved, show there is no potential liability under the policy, there is no duty to defend.

The question of whether there is potential liability in Utah under the policy is determined by comparing the language of the insurance policy with the allegations of the complaint. The question is whether the allegations, if proved, could result in liability under the policy. If the language found within the collective “eight corners” of these documents clearly and unambiguously indicates that a duty to defend does or does not exist, the analysis is complete.

The relevant portions of the Policy provide:

Coverage B – Personal and Advertising Injury Liability Insuring Agreement

We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for personal and advertising injury to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or “suit” that may result . . .

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

f. The use of another’s advertising idea in your “advertisement.”

Admiral argues that the phrase “those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” must be understood to limit its duty to defend to liability incurred as a result of “personal and advertising injury.”

Basic Research argues that the causes of action pled in the underlying claims fall within the Policy’s definition of “personal and advertising injury,” and specifically that the claims stem from “the use of another’s advertising idea.” Accordingly, Basic Research asks the court to require indemnification against claims of “personal and advertising injury” where the claim has some factual connection with Basic Research’s “use of another’s advertising idea” in its advertisement. In so doing, Basic Research ignores the definition of “personal and advertising injury” within the context of the coverage provision, creating ambiguity where there is none.

A contract term is not ambiguous simply because one party ascribes a different meaning to it to suit his or her own interests.

It is true that “personal and advertising injury” may factually arise out of the “use of another’s advertising idea.” But in order to trigger Admiral’s duty to defend, the underlying claims must allege “personal and advertising injury” that occurred as a result of the “use of another’s advertising idea.” Although the underlying claims asserted that Basic Research used the slogans “Eat All You Want And Still Lose Weight” and “And we couldn’t say it in print if it wasn’t true!,” the underlying causes of actions were in no way dependent on the source or ownership of those slogans. In fact, if the underlying claims were to go to trial, the plaintiffs would never be required to prove the original source of the slogans. They would need to prove only that Basic Research used the slogans to market a defective product.

None of the plaintiffs allege injury as a result of Basic Research’s having misappropriated or otherwise wrongfully used the advertising slogan of another. In interpreting a contract, the intentions of the parties are controlling.  To so interpret the Policy would expand the scope of the contractual terms beyond their plain meaning and the parties’ original intentions. Where the alleged damages do not legally arise out of the policyholder’s “use of another’s advertising idea,” the underlying claims do not obligate the insurer to indemnify.

In the instant case the “use” of the slogans is not the wrongdoing from which the underlying plaintiffs are claiming injury. Rather, they claim damages due to the allegedly false nature of those slogans and the resulting inducement to buy a defective product.

Basic Research has attempted to re-characterize the underlying claims, asserting that they do not allege injury from the class members’ failure to lose weight, but from their purchase of the product caused by the advertising. A claim of injury resulting from reliance on the slogans ultimately depends on whether those slogans were true or not. Indeed, at oral argument Basic Research conceded that what is alleged is simply that the product is advertised in a way that it cannot possibly perform. Again, the underlying claims do not depend on whether Basic Research owned or was otherwise entitled to use the slogans, but on whether the slogans constitute false advertising.

Exclusions

The policy also contained the following exclusion:

This insurance does not apply to: … 

g. Quality or performance of goods–failure to conform to statements: “Personal and advertising injury” arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your “advertisement.”

The underlying claims assert injury and damages resulting from Akavar’s failure to live up to the promises of quality and performance expressed by the slogans.

CONCLUSION

After comparing the language of the Policy with the allegations in the underlying claims, the Utah Supreme Court concluded that the claims asserted are not covered by the Policy, and are in fact squarely excluded by its terms and that Admiral therefore has no duty to defend Basic Research.

ZALMA OPINION

Insurance protects against many risks of loss including, in a CGL, the risk of loss defined in the policy as a “personal injury” or an “advertising injury”. Insurance does not protect, nor can it, protect against every possible risk of loss. Although the insured’s advertising was allegedly false it was not the reason for which the insured was sued. It was the failure to lose weight after using the product that brought about the suit.

Counsel for the insured were imaginative and tried to bring the case within the meaning of the policy. Imaginative arguments, however, will always fail when there are no facts actually bringing the case within the wording of the policy.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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FIVE YEAR LATE NOTICE

Prejudicial or Not

1500 Coral Towers Condominium (“Coral Towers”) appealed a final summary judgment in favor of Citizens Property Insurance Corporation (“Citizens”) in a breach of contract action. The Florida Court of Appeal attempted to resolve the question in 1500 Coral Towers Condominium Association, Inc. v. Citizens Property Insurance Corporation, No. 3D12-132 (Fla.App. 02/06/2013).

FACTS

At the time of Hurricane Wilma, in October 2005, Coral Towers was insured under a commercial-residential property insurance policy with Citizens. Approximately five years after Hurricane Wilma, on June 29, 2010, Coral Towers notified Citizens for the first time that the property had sustained damages as a result of Hurricane Wilma. Pursuant to the terms of the insurance policy, Citizens requested Coral Towers to submit a sworn proof of loss within sixty days. Coral Towers did not submit the proof of loss within sixty days. In October 2010, Coral Towers brought suit for breach of contract alleging that it had properly and timely notified Citizens of the damages it had sustained to the condominium properties as a result of Hurricane Wilma. It also alleged that Citizens had denied its claim. Citizens filed an answer and asserted affirmative defenses alleging that Coral Towers had failed to give prompt notice of the alleged loss and had breached the following policy provisions:

4. You[r] Duties After Loss. In case of a loss to covered property, you must:

a. Give prompt notice to us, or your producer, who is to give immediate notice to us. . . .

d. Send to us, within sixty (60) days after our request, your signed, sworn proof of loss …

Citizens also asserted as an affirmative defense that Coral Towers was barred from recovery because it had failed to comply with conditions precedent to filing the lawsuit under the following policy provision:

15. Suits Against Us. No action can be brought unless the policy provisions have been complied with and the action is started within five (5) years from the date the loss occurs.

Three months after filing suit, Coral Towers provided the sworn proof of loss. The first opportunity Citizens had to inspect the property was in early August of 2010 almost five years after the loss.

In discovery, Coral Towers admitted knowledge of the loss in November 2005, and that a roofer had repaired the elevator, roof, and surrounding walls in December 2005. The roof continued to leak and Coral Towers obtained estimates to replace the roof. The latter of the estimates was for $259,269.20. The reason Coral Towers alleged it did not notify Citizens immediately after Hurricane Wilma was because initially there was a question of whether the damages would exceed the policy deductible.

In September 2011, Citizens moved for summary judgment on grounds that Coral Towers was barred from recovery as a result of the failure to give prompt notice and failure to provide a sworn proof of loss within sixty days. Citizens alleged that it was prejudiced by the inability to investigate and evaluate the claim under the policy. Coral Towers maintained that the type of damages it had sustained appeared over time and would not have necessarily evidenced themselves within the first two years after the Hurricane. The two issues addressed by the trial court and presented on appeal are whether Coral Towers’ notice of loss was timely and, if not, whether Citizens was prejudiced by the late notice.

There was no factual dispute that Coral Towers failed to give timely notice of the loss. When an insurance contract contains a provision which applies to submitting a proof of loss and notice of the damage claim, an insured must give notice of the loss that implicates a potential claim without waiting for the full extent of the damages to become apparent.

PREJUDICE

An insurer is prejudiced by untimely notice when the underlying purpose of the notice requirement is frustrated by late notice. Citizens alleges that the extended passage of time creates a very strong inference that Citizens’ investigation and defenses have been diminished as a result of the late notice. Also, it alleges that the repairs that were made without first notifying Citizens hampered the monitoring of, and efforts to coordinate, the mitigation of damages.

The court of appeal noted that whether or not the delay in investigating the damages was prejudicial to the insurance company is a question of fact for the jury.

Whether the prompt investigation would have enabled Citizens to determine the cause of the damage with greater certainty, to take steps to mitigate the damage, or whether it was placed in a substantial disadvantage to be prejudiced by the delay, present genuine questions of material fact that cannot be resolved on motion for summary judgment.

The the trial court’s grant of summary judgment on the issue of whether Citizens was prejudiced by the untimely notice was reversed and the issue of prejudice is factual and is not one to be determined on summary judgment and therefore remands to the trial court to determine whether the insurer was prejudiced.

The final summary judgment in favor of Citizens on the issue of the failure of the insured to give prompt notice was reversed for factual determination of the issue of whether or not Citizens was prejudiced by the delay in Coral Towers’ late notice.

ZALMA OPINION

This decision ignores the true meaning of a condition precedent that failure to fulfill a condition precedent loses the right to the contract. The complete fulfillment of a condition – whether the party asserting the condition is prejudiced or not – is essential to the enforcement of the contract. The insurer demanded a sworn proof of loss and did not receive it within the 60 days required by the policy even though the insured had five years to determine its loss.

The conditions of the policy regarding notice, proof of loss, and suit cannot be ignored. On the contrary, the law is clear that the conditions relating to notice and proof of loss are conditions precedent to suit. [McCormack v. N. British Ins.  Co., 78 Cal 468, 21 P 14 (1889); White et. al. v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900); and Basle v. Pacific Indemnity, 200 Cal. App. 2d 207, 19 Cal. Rptr. 299 (1962).

These cases hold “in general, failure to file a proof of loss within the time limit is fatal to an action on the policy.”

In Texas, the Court of Appeals held:

The insurance policies required timely filing of the proof of loss form as a condition precedent to payment of the loss. The appellants were not obligated to make any payment to the Viles [insured] unless and until the condition was performed. See Brugette 728 S.W.2d at 764. Unless this condition was met or waived, we hold the appellants had ‘a reasonable basis for denial of claim.’ Security National Insurance v. William, 773 S.W.2d 68 (1989).

Florida treats insurance companies different than any other contracting party when dealing with a condition precedent. They should consider California and Texas, among others, that uphold the right of a party to enforce a condition precedent rather than rewriting the terms of the contract to add a requirement for “prejudice” before the insurer can enforce the condition.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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Read The Policy

Don’t Give Up Your Right to Damages from Tortfeasor

American States Insurance Company (“American States”) appealed to the Supreme Court of Appeals of West Virginia from an adverse jury verdict in an insurance coverage declaratory judgment action brought by Barbara Surbaugh (“Ms. Surbaugh”). American States contended that the circuit court erred in submitting the insurance coverage issue to a jury as a matter of law and erred in denying its motion for summary judgment in American States Insurance Company v. Barbara Surbaugh, Administrator of the Estate of Gerald Kirchner, No. 11-1186 (W.Va. 02/06/2013).

FACTUAL HISTORY

On or about June 6, 1997, Gerald Kirchner was accidentally shot and killed by Robbie Bragg. At the time of the shooting, Mr. Kirchner and Mr. Bragg were both employees of Grimmett Enterprises, a sporting goods store located in Rainelle, West Virginia. Grimmett Enterprises was owned by David Grimmett (“Mr. Grimmett”). Mr. Kirchner was shot accidentally while Mr. Bragg was showing a customer how to load a handgun that was for sale in the store.

The mother of Mr. Kirchner, Ms. Surbaugh, filed a wrongful death action against Mr. Bragg and a workers’ compensation deliberate intent cause of action against Grimmett Enterprises. In 2002, Mr. Bragg and Grimmett Enterprises entered into a settlement with Ms. Surbaugh. Under the terms of the settlement, Mr. Bragg and Grimmett Enterprises agreed to a judgment against them for $1.5 million. Ms. Surbaugh agreed to not execute the judgment against the defendants in exchange for the defendants assigning all claims they might have against their respective insurers for refusing to provide a defense and coverage. The trial court bifurcated the declaratory judgment action from the underlying wrongful death/deliberate intent action.  Ms. Surbaugh argued that an employee exclusion in the policy was ambiguous, was not conspicuous, and had not been brought to the attention of Mr. Grimmett. American States argued that the policy was unambiguous and conspicuous.

The evidence shows that, at some point in 1995, Mr. Grimmett opened a sporting goods store. The owner of the building where the store was going to be located informed Mr. Grimmett that he would have to obtain insurance. Mr. Grimmett contacted a New York agent of American States and made arrangements by phone to purchase a policy. Mr. Grimmett received the first policy in October 1995. The policy subsequently was renewed for the period October 1996 to October 1997. The shooting accident occurred during the second year of the policy.

First, the circuit court held as a matter of law that the exclusionary language contained in the policy was not ambiguous. Second, the court ruled that the issue of whether the exclusion was disclosed to Mr. Grimmett was to be resolved by a jury. A jury trial was held to determine coverage under the policy.

The only witness called during the trial was Mr. Grimmett. At the conclusion of the evidence, the case was submitted to the jury with a special verdict form that had only one question: “Was the exclusionary language at issue in this case brought to the attention of the insured, Grimmett Enterprises, Inc.”

The jury returned a verdict answering the question in the negative. The trial court thereafter entered a final order concluding that, based upon the jury’s answer to the special verdict question, the employee policy exclusion was unenforceable.

DISCUSSION

Whether a Policy’s Exclusionary Language Was Brought to the Attention of an Insured

The trial court determined that it was for the jury to decide whether the exclusionary language at issue in this case was brought to the attention of Mr. Grimmett. American States argued below, and in this appeal, that this issue was for the trial court and not a jury.

The Supreme Court of West Virginia has previously held that “when a declaratory judgment proceeding involves the determination of an issue of fact, that issue may be tried and determined by a judge or jury in the same manner as issues of fact are tried and determined in other civil actions.” Erie Ins. Prop. & Cas. Co. v. Stage Show Pizza, 210 W. Va. 63, 66, 553 S.E.2d 257, 260 (2001).

Issues of fact, that are normally tried by a jury, may be submitted to a jury in a declaratory judgment action. However, in the context of a declaratory judgment action to determine insurance coverage, generally the issues presented are for the trial court to decide. Only if the court makes the determination that the contract cannot be given a certain and definite legal meaning, and is therefore ambiguous, can a question of fact be submitted to the jury as to the meaning of the contract.

A court should read policy provisions to avoid ambiguities and not torture the language to create them. If a court properly determines that the contract is unambiguous on the dispositive issue, it may then properly interpret the contract as a matter of law and grant summary judgment because no interpretive facts are in genuine issue.

The policy’s coverage section clearly stated that it was subject to various exclusions. The portion of the insurance policy titled “Commercial General Liability Coverage Form,” which contains the relevant exclusionary language, cautions in its first sentence that “[v]arious provisions in this policy restrict coverage. Read the entire policy carefully to determine rights, duties and what is and is not covered.”

In this case the language of the policy exclusion was set out as follows:

B. EXCLUSIONS

1. A  Applicable to Business Liability Coverage -

This Insurance does not apply to:

e. “Bodily injury” to:

(1) An employee of the insured arising out of and in the course of employment by the insured; or (2) The spouse, child, parent, brother or sister of that employee as a consequence of (1) above. This exclusion applies: (a) Whether the insured may be liable as an employer or in any other capacity; and (b) To any obligation to share damages with or repay someone else who must pay damages because of the injury. [Emphasis added]

In Ms. Surbaugh’s motion for summary judgment she argued that this exclusion was ambiguous. Ms. Surbaugh contended that the exclusion could be read to mean that the employer had to cause the injury. To support this assertion, Ms. Surbaugh submitted an affidavit by Mr. Grimmett, in which he stated that when he read the exclusion after the accident, he thought that it meant that he, as the employer, had to cause the injury. Ms. Surbaugh also presented deposition testimony of a linguistics expert, who opined that the exclusion was ambiguous.

The trial court’s order addressed the issue as follows: “This Court rules as a matter of law that the policy language is not ambiguous.”

The exclusion was conspicuous.

Ms. Surbaugh contended below that the exclusion was not conspicuous because the policy did not contain a table of contents. Obviously, a table of contents would be helpful in understanding any insurance policy, but such helpfulness has not been mandated by the Supreme Court, nor has Ms. Surbaugh pointed to any statute or regulation requiring the same.

The relevant exclusion in this case is found on page two of this policy Form. The policy sets out the exclusion section in bold, capital letters that use a larger font size than the substantive material. The employee exclusion is the fifth exclusion on the page.

The Supreme Court also noted that failing to read a policy is not sufficient reason to hold a clear and conspicuous policy provision unenforceable. To hold otherwise would turn both contract and insurance law on its head. Insurers are not required to sit beside a policy holder and force them to read (and ask if they understand) every provision in an insurance policy. The insured cannot escape the effect of the conditions of a policy on the ground of ignorance, due to failure to read his policy, it being his duty to examine it.

CONCLUSION

In view of the foregoing, the circuit court’s order of June 30, 2011, which entered judgment in favor of Ms. Surbaugh based upon a jury verdict, was reversed. The case was remanded with instructions that the circuit court enter summary judgment in favor of American States in the bifurcated declaratory judgment part of the action.

ZALMA OPINION

Much to my surprise another plaintiff chose to seek damages from an insurer and relieve the tortfeasor (a business owner who had assets) of the obligation to pay damages believing it is easier to sue and collect from an insurer. The trial court made the decision appear correct only to have defeat drawn from the jaws of victory by the Supreme Court.

The Supreme Court reversed because the exclusion was clear and unambiguous and available for the insured to read and understand before a loss rather than after with the need to obtain coverage. To do otherwise would require insurers to do the impossible and sit beside each policy holder and force them to read (and ask if they understand) every provision in an insurance policy.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Primary v. Excess

Additional Insured Did Not Procure Policy

A New York trial court granted plaintiffs’ motion for summary judgment declaring that defendant Lincoln General Insurance Company (‘Lincoln General”) has a duty to defend East 51st Street Development Company, LLC and to reimburse Illinois Union Insurance Company (“Illinois Union”) for past defense costs in the underlying crane collapse litigation from the date of the crane collapse to the date that Lincoln General exhausted its policy limits. The trial court declared that defendant AXIS Surplus Insurance Company (“Axis”) also has a duty to defend East 51st Street and to reimburse Illinois Union for past defense costs and to pay all future defense costs in the crane-collapse litigation.

A New York Appellate Court was asked to resolve the appeals of all the parties in In Re East 51st Street Crane Collapse Litigation v. Lincoln General Insurance Company, Defendant-Respondent-Appellant, Axis Surplus Insurance Company, et al, No. 7256- (N.Y.App.Div. 02/05/2013).

FACTS

On March 15, 2008, a crane collapsed at a construction site on East 51st Street in Manhattan, causing the deaths of six construction workers and a pedestrian, injury to several other individuals, and extensive damage to property. Multiple claims for bodily injury and property damage were brought against plaintiff East 51st Street, the owner of the property on which the accident occurred, Reliance Construction Ltd. (“Reliance”), the construction manager on the project, and Joy Contractors, Inc. (“Joy”), and the superstructure subcontractor, whose employee was operating the crane at the time of the accident.

THE INSURANCE

It was undisputed that the insurance policies issued by AXIS and  Interstate Fire and Casualty Company (“Interstate”) to Reliance and the policy issued by Lincoln General to Joy were primary to the policy issued by Illinois Union to East 51st Street. Although Illinois Union had already taken up East 51st Street’s defense, its intent to seek contractual indemnification from Reliance and Joy created a potential conflict between East 51st Street and Lincoln General, giving East 51st Street the right to obtain independent counsel.

The “Supplementary Payments” provision of the AXIS policy issued to Reliance states that “[w]e will pay, with respect to any claim we investigate or settle, or any suit’ against an insured we defend[] … [a]ll expenses we incur,” and that “[t]hese payments will reduce the limits of insurance.” However, the amended Insuring Agreement of the policy provides that AXIS’s “duty to defend ends when [AXIS has] used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B [i.e., damages].”

ANALYSIS

The appellate court found an ambiguity as to whether “expenses” includes defense costs that result from conflicting provisions and concluded the language of the policy must be construed against AXIS.

Interstate’s contention that East 51st Street is not listed on the additional insured endorsement or the declarations page of the policy issued to Reliance failed because it admitted in its answer that East 51st Street was an additional insured under that policy.

Interstate has demonstrated that its policy was exhausted upon its July 2009 settlement with Reliance of the declaratory judgment action commenced in federal court which sought defense and indemnity for several lawsuits relating to the crane accident. The settlement agreement clearly states that Interstate’s payment of $1 million to Reliance was in settlement of all of Interstate’s indemnification and defense obligations under the policy and that the settlement “exhausts all potentially applicable Interstate Policy limits and all coverages. . .”

Because it found Interstate’s policy was exhausted by the $1 million settlement other issues raised by the parties became moot.

The policy clearly provides that failure by the named insured to comply with conditions of that endorsement will reduce the limits of coverage for “all insureds” and, accordingly, any failure of Reliance to comply with the contractors’ conditional endorsement reduced the coverage for Reliance as well as its additional insureds.

DECISION

Pursuant to the “Other Insurance” provision in the AXIS, Lincoln General and Interstate policies, the insurance provided to East 51st Street, an additional insured on those policies, is primary regardless of the “Additional Insured” endorsement in the AXIS policy, which provides that “such insurance as is afforded by this policy for the benefit of [East 51st Street] shall be primary insurance as respects any claim, loss or liability arising out of [Reliance’s] operations, and any other insurance maintained by [East 51st Street] shall be excess and non-contributory with the insurance provided hereunder.”

A reasonable business person would understand the term “insurance maintained by” to refer to insurance actually procured by East 51st Street (the Illinois Union policy), rather than afforded it as an additional insured. Although, as Interstate points out, a low premium suggests that a policy may not be primary, it is not conclusive.

The language of the Interstate policy does not establish the policy as a pure excess policy.

ZALMA OPINION

Additional insured endorsements become a problem in massive damage cases like this crane collapse case. Interpretation of the multiple policies and multiple insureds and additional insureds become a nightmare for the claims personnel and their counsel. In this case, the Appellate Department of the New York Supreme Court – in a short opinion – agreed that the primary insurer’s limits had been exhausted and that the insurers who had agreed to make the defendant additional insured, were all primary and owed a defense to the insured.

The lesson learned is that in massive tort cases like that involving the crane collapse, is that all the insurers should work together to provide a defense and indemnity to the insured and sort out their differences after all the tort cases are resolved. Regardless of the wording of the policies a court will do everything possible to provide as much insurance as possible to indemnify the injured and heirs of the deceased.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Aggravated Assault Not an Occurrence

No Coverage For Intentional Beating

The Sixth Circuit Court of Appeal was asked to determine if Liberty Mutual Fire Insurance Company was required to indemnify an insured who had been convicted of battery. Liberty Mutual filed a declaratory judgment action in the United States District Court for the Western District of Kentucky seeking an order that it owed nothing to its insured.

In Liberty Mutual Fire Insurance Company v. Kenneth R. Harris and Kathryn L. Harris, No. 11-5548 (6th Cir. 02/05/2013) Liberty Mutual sought a declaration that the homeowner’s policy it issued to Kenneth and Kathryn Harris did not cover a physical altercation between Kenneth Harris (“Harris”) and Bunker.

FACTS

The underlying altercation occurred in September 2006 in Scottsdale, Arizona. At the time of the incident, Harris was 73 years old and Bunker was 61 years old. Harris was subsequently prosecuted and convicted of two counts of aggravated assault.

In addition to the criminal action, Harris was also subject to a civil action in the Arizona courts, which ultimately led to this lawsuit. Bunker sued Harris in the Arizona courts over the altercation. The Harrises notified Liberty Mutual about the lawsuit. Liberty Mutual declined to provide coverage. Because Harris did not respond to Bunker’s motion for summary judgment, Harris was found liable for negligence, assault, battery, and intentional infliction of emotional distress. A trial on the damages resulted in a judgment in Bunker’s favor for approximately $500,000.

Bunker filed several suits attempting to collect the judgment, including a garnishment proceeding in the Arizona courts against Liberty Mutual and an action in the Kentucky courts to register the Arizona judgment and secure a judgment lien against Harris’s assets in Kentucky.

Harris and Bunker entered into an agreement in which, in part, Harris assigned to Bunker any rights and claims Harris had against Liberty Mutual.

Liberty Mutual then initiated this lawsuit in federal court. Liberty Mutual filed, and prevailed, on a motion for declaratory judgment. The district court denied Bunker’s request for a continuance. Bunker filed this appeal.

ANALYSIS

The district court carefully analyzed the language of the homeowner’s policy and Kentucky law. The district court relied on an opinion of the Kentucky Supreme Court, Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., 306 S.W.3d 69, 73 (Ky. 2010), in which the Court concluded that a commercial general liability policy did not provide coverage for faulty workmanship. The policy defined the word “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Because the policy did not define the word “accident,” the Kentucky Supreme Court gave that word its plain and ordinary meaning.

The Kentucky Supreme Court held that, inherent in the plain meaning of the word “accident” is the doctrine of fortuity, which consists of two central aspects: intent and control. The district court correctly noted that the word “occurrence” in the homeowner’s policy was the same as the definition of “occurrence” in the policy in Cincinnati Insurance. Following Cincinnati Insurance, the district court gave the word “accident” its plain and ordinary meaning, and applied the doctrine of fortuity. The district court held that the underlying altercation or incident between Harris and Bunker was not an occurrence, as that term is defined under the homeowner’s policy. The district court noted that no party had argued that Harris lost control of his own body during the altercation when Bunker was injured and intended to cause the injuries Bunker suffered.

In this situation, Harris’s intent, or lack of intent, to cause injury during the underlying altercation does not determine whether the policy provides coverage. The policy language on which Bunker relies falls under the portion of the policy excluding from coverage any bodily injury that is expected or intended by an insured. Where a policy does not initially provide coverage, a court need not consider the application of an exclusion.

The district court did not err in granting Liberty Mutual’s motion for declaratory judgment after finding that the homeowner’s policy did not provide coverage for the underlying altercation between Harris and Bunker.

Without dispute, a physical altercation, a fight, occurred between Harris and Bunker. The record contains no assertion by any party, and no evidence to support such an assertion, that Harris did not or could not control his actions during the altercation. Applying these facts to the language of the policy, under Kentucky law, the Sixth Circuit concluded that there was no occurrence that triggered coverage.

ZALMA OPINION

The finding of the Sixth Circuit seems obvious. A jury found that the 71-year-old Harris intentionally beat up the younger Bunker and caused him injury. Since he could not have been convicted of the crime of aggravated assault for accidentally causing injury to Bunker there was no fortuitous event nor was there an accident. No liability insurance policy covers intentional criminal conduct of an insured.

What this case also teaches is that attempting to get insurance money for such a situation when the defendant has assets that could be attached to satisfy a judgment is not a wise choice. Unless Harris had no assets this effort on the part of Mr. Bunker to collect his $500,000 judgment was a wasted effort and, in doing so, gave up the right to collect the judgment from Harris and his assets.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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One Occurrence – One Limit

Plaintiffs Should Not Limit Recovery to Insurance

A New York appellate court was called upon to determine the meaning of a non-cumulation clause in a commercial general liability policy when two children, at different times, were exposed to the same lead paint in an apartment building owned by the insured/defendant in Jannie Nesmith, In Her Representative Capacity Only As Parent and Natural Guardian of v. Allstate Insurance Company, No. 1252 CA 12-00182 (N.Y.App.Div. 02/01/2013). The issue presented to the court was whether more than one policy limit could be used to defend and indemnify the insured.

FACTS

Plaintiffs commenced this action seeking a declaration of the rights of the parties to an insurance policy. In November 1991, defendant issued the policy to Tony Clyde Wilson, the owner of an apartment building in the City of Rochester. The policy, which had a per-occurrence limit of $500,000, was for one year, and it was renewed for two additional one-year periods.

In 1993, two children were exposed to lead paint while living in an apartment in that building, and one suffered injuries as a result of that exposure. According to Wilson’s deposition testimony, he attempted to remediate the lead paint condition after learning that the children had been exposed to lead, although the record is unclear with respect to the exact actions that he undertook. That family moved out of the apartment shortly thereafter, and the mother of those children later commenced an action against Wilson, seeking damages for injuries that the child sustained as a result of her exposure to lead (first tort action). In 1994, two children of a subsequent tenant were also exposed to lead in the same apartment. Plaintiffs commenced a separate action to recover damages for the personal injuries sustained by those two children (second tort action). While the second tort action was pending, the first tort action settled for $350,000, which defendant paid pursuant to its policy.

Defendant took the position that the noncumulation clause in the policy limited its liability for all lead exposures in the apartment to a single policy limit of $500,000, and offered plaintiffs the remaining $150,000 of coverage to settle the second action.

The parties entered into a stipulation whereby Wilson was released from liability. They further agreed that plaintiffs would recover $150,000 if the noncumulation clause limited recovery to a single policy limit as claimed by defendant, but plaintiffs would recover $500,000 if the policy also required defendant to pay the full policy limit for the injuries sustained by the second set of children.

ANALYSIS

At issue on this appeal is whether the policy requires defendant to pay a second full policy limit under these circumstances or whether plaintiffs’ losses are encompassed by the $500,000 per occurrence limit in the insurance policy.

The appellate court’s analysis, as with all insurance disputes, begins with the well-settled proposition that 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 policy provision at issue states:

“Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss” (emphasis omitted).

The mere fact that the property owners renewed their policy for two additional policy periods does not permit the plaintiffs to recover more than a single policy limit. The clear language of the policy, the number of claims and claimants does not require the insurer to pay more than its single policy limit.

The appellate court’s determination turned on the resolution of the discrete issue whether the exposure of children to lead paint in an apartment during different tenancies is encompassed by the phrase “resulting from . . . continuous or repeated exposure to the same general conditions” in the noncumulation clause. The appellate court concluded that the only reasonable interpretation of that clause requires that the two claims be classified as a single accidental loss within the meaning of the policy.

The evidence established that the two sets of children lived in the same apartment at different times, less than a year apart. Although the owner testified at a deposition that he attempted to remediate the lead hazard, there is nothing in the record establishing that he removed all of the lead paint from the subject apartment.

Since there was no evidence that the owner added other lead paint to the apartment in the interim, and indeed paint containing lead could not legally have been sold anywhere in the United States for more than 15 years prior to that time, the evidence established that the lead paint that injured the second set of children is the same lead paint that was present in the apartment when the first set of children lived there.

Although the children may have ingested the lead at different times and their blood tests showed different levels of exposure, the injuries all flowed from the same conditions in their immediate environment. The noncumulation clause limits the plaintiffs in the first and second tort actions to a single policy limit. The appellate court ordered judgment should be granted in defendant’s favor, declaring that plaintiffs’ losses are encompassed by the $500,000 per occurrence limit in the insurance policy at issue and that plaintiff, by the stipulation, may recover no more than $150,000.

ZALMA OPINION

This case establishes that the owner of the slum building with flaking lead paint that injured children had better lawyers than those representing the injured children. Seeking to recover from the insurer the plaintiffs let the owner of the property — who at least had the value of the building as an asset — free from liability to gain money from an insurance company.

If the child was truly injured to an amount equal to or in excess of $500,000 counsel for the children should have obtained advice from a coverage lawyer about the viability of the claim for more than one limit and investigated the assets of the defendant to determine if he was capable of paying a judgment in excess of his policy limits.

Cases of this type are usually quite valuable to the plaintiff since juries are not pleased by defendants who poison children with lead. To limit recovery to the policy when there are assets available is unconscionable.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Premium Audit or Prosecution

Employees Must Be Protected

The Connecticut Court of Appeal was asked to resolve a dispute between a roofer and its insurer in National Fire Insurance Company of Hartford v. Beaulieu Company, LLC, No. (AC 33612) (Conn.App. 02/05/2013) that was more akin to an Abbot & Costello comedy routine known as “who’s on first.”

The case came to the court of appeal when Beaulieu Company, LLC (“Beaulieu”), appealed from the judgment of the trial court rendered in favor of the plaintiff, National Fire Insurance Company of Hartford, also known as the CNA Insurance Companies (“CNA”), in connection with the underlying civil action in which CNA sought from Beaulieu unpaid premiums for workers’ compensation insurance coverage. Beaulieu claimed that it was clearly erroneous for the trial court to find (1) that three workers who performed roofing work for Beaulieu were employees of Beaulieu rather than independent contractors, (2) that even if these three workers and two others were not employees, they engaged in work that could make CNA liable to provide workers’ compensation benefits under the relevant policies and (3) assuming the workers had employees, the employees were not independently insured because Beaulieu provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured.

FACTS

Beaulieu is a roofing contractor that performs work primarily for commercial construction projects. It uses its own employees, contract labor and subcontractors to conduct its work. CNA, a workers’ compensation insurance carrier, provided workers’ compensation coverage to Beaulieu under two policies for the periods of March 26, 2005, to March 26, 2006, and April 3, 2006, to June 26, 2006.

In its memorandum of decision, the trial court stated: “Because it is difficult to predict exactly how much labor will be needed during an upcoming policy period and because workers’ compensation insurance premiums are based on the type of labor and amount of time expended by various workers for a particular job, the insurer prepares an estimated bill at the beginning of the policy term. After the term expires, the insurer audits the insured’s payroll and expenditures to calculate the precise coverage which was provided and the appropriate premium for that coverage. Depending on whether the estimated premium was excessive or deficient, a refund or a supplemental bill issues.” “The audit determines the amount of compensation paid during the policy term for each occupation and uses a formula to arrive at the adjusted premium, retrospectively.” The insurer calculates the final premium using an insurance industry manual that assigns specific rates for different occupations, which vary based on the risk of injury associated with that occupation.

On June 24, 2009, CNA sued Beaulieu for unpaid premiums owed for workers’ compensation coverage it provided to Beaulieu under the previously mentioned policies. In its complaint, CNA alleged that Beaulieu breached its insurance contract with CNA by failing to pay the premiums for these policy periods. The dispute between the parties concerns whether certain workers to which the rate was applied ought to have been included in the premium recalculation. The parties stipulated that Beaulieu owed $49,807 in premiums, but disputed an additional $46,529 in premiums for workers’ compensation coverage provided to the roofers; and to Mike Rome, all of whom performed roofing work for Beaulieu.

THE TRIAL COURT DECISION

In a memorandum of decision issued on May 20, 2011, the court concluded that the coverage provided by CNA to Beaulieu embraced employees of Beaulieu, contract labor of Beaulieu and employees of subcontractors of Beaulieu, unless the sub-contractors provided workers’ compensation coverage for its employees. Beaulieu’s records showed that the workers did not have independent workers’ compensation insurance during the policy terms at issue. Beaulieu submitted to CNA certificates of insurance for the workers, but the certificates were silent as to who was covered under the independent insurance policies. An audit manager who oversaw Beaulieu’s account for CNA investigated each policy and determined that the policies failed to cover the workers or failed to provide coverage during the effective period of CNA’s policies that are the bases for its breach of contract claim.

ANALYSIS

In determining whether the terms of an insurance policy are clear and unambiguous, a court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity. Similarly, any ambiguity in a contract must emanate from the language used in the contract rather than from one party’s subjective perception of the terms.

Based upon review of the court’s memorandum of decision the court of appeal concluded that the court did not make an express finding that the workers were employees but, rather, found only that they “all fit within part five C 2 of the insurance policy in that they engaged in work that could make CNA liable to provide workers’ compensation benefits.” It was sufficient for the court to find that the workers fell under the policies because they engaged in work that could make CNA liable to provide workers’ compensation benefits.

Evidence of the following facts relevant to this claim was presented at the hearing in damages. The contested “independent contractors” did roofing work for Beaulieu and worked on a number of different jobs. They received individual payments by the hour or by square. Payment by the hour is indicative of employee status. Beaulieu would direct some of the workers on how they should do work at times so Beaulieu could ensure that the work was done according to its contract with the owner of a particular property. Beaulieu would verify that the work done by the workers was performed properly before issuing payment. One was paid in two different ways during the policy terms. During one portion of the term, Beaulieu paid him as an employee, and he received a W-2 form indicating his tax withholdings. During another portion of the term, Beaulieu paid him outside of the regular payroll on a 1099 basis.

Under the act, an employer must secure workers’ compensation for its employees.

The fundamental distinction between an employee and an independent contractor depends upon the existence or nonexistence of the right to control the means and methods of work. It is the totality of the evidence that determines whether a worker is an employee under the state statutes not subordinate factual findings that, if viewed in isolation, might have supported a different determination. The test of the relationship is the right to control. It is not the fact of actual interference with the control, but the right to interfere, that makes the difference between an independent contractor and a servant or agent.

Beaulieu’s entire claim is predicated on its conclusory contention that the workers were sole proprietors, and, therefore, were not subject to the act unless they affirmatively elected to be covered. Without more than Beaulieu’s bald assertion that these workers were sole proprietors, the court concluded that the trial court did not err in finding that CNA could have been exposed to liability under the policies, even in the absence of evidence demonstrating that the workers affirmatively elected to be covered under the act.

Last, Beaulieu claimed that, assuming the workers had employees, it was clearly erroneous for the court to find that the employees were not independently insured because it provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured. Beaulieu argues that, therefore, these workers should not have been included in the premium audit because, upon its showing of proof of coverage, it was exempt, per the terms of the policy, from having them included in the audit. See footnote 5 of this opinion.

The court was entitled, as the trier of fact, to credit the audit manager’s testimony and disregard other conflicting testimony from Beaulieu. As such, it was reasonable for the court to find that Beaulieu failed to provide proof that the workers in this case lawfully secured their workers’ compensation obligations for their employees, and, therefore, failed to exempt itself from having them included in the plain-tiff’s premium audit. Because the trial court was in the best position as the fact finder to assess the credibility of the witnesses at the hearing in damages and draw inferences therefrom, we, as the reviewing court, defer to the court’s finding in this regard and find no error.

ZALMA OPINION

Beaulieu should consider itself lucky that it was only required to pay the additional premium required for the employees and workers who were covered under the CNA policy. In states like California, avoiding premium by misclassifying or failing to report employees to a workers’ compensation is a felony that could result in the employer facing five years in state prison. Since the evidence in this case even included one person who was paid as an employee and received a W-2 at the end of the year it was clear that Beaulieu was attempting to avoid paying appropriate premium.

For example, it is a felony in California to “Make or cause to be made a knowingly false or fraudulent material statement or material representation for the purpose of obtaining or denying any compensation…”

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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No Third Party Direct Action in Kentucky

Clear Exclusion Defeats Coverage

The intent of commercial general liability policies is to protect against the unpredictable and potentially unlimited liability that can result from accidents causing injury to other persons or their property. A commercial general liability policy does not cover the insured’s obligations under a workers’ compensation policy or bodily injury to the insured’s employees arising out of the employment.

Bonnie Pryor appealed the trial court’s decision that granted Colony Insurance Company’s motion for summary judgment. In its decision, the trial court determined that the language in the commercial general liability insurance policy excluded coverage for Glenn Pryor’s death. The Kentucky Court of Appeal resolved the issue in Bonnie Pryor v. Colony Insurance, No. 2012-CA-000227-MR (Ky.App. 02/01/2013).

FACTUAL BACKGROUND

Greg Rucosky owns and operates an excavating, hauling, and logging business called Newcastle Hauling, LLC (hereinafter “Newcastle Hauling”). On November 4, 2009, Glen Pryor was hauling timber for Newcastle Hauling on a farm, which is owned by Melvin and Linda Seiter. He was operating a skidder, which rolled over and crushed him to death. Although Glenn Pryor’s status in performing this work is disputed, it is acknowledged that he was not an employee of Newcastle Hauling.

To provide insurance coverage for Newcastle Hauling, Rucosky had purchased a commercial general liability (hereinafter “CGL”) insurance policy from Colony Insurance Company (hereinafter “Colony Insurance”). The main liability coverage language in the insurance policy included an “employer’s liability” exclusion, which precludes coverage for liability arising out of injuries to employees. Later, after the initial procurement of the insurance policy, Colony Insurance broadened the policy’s exclusion by the addition of a “contractors coverage limitations” endorsement. This endorsement expressly barred coverage for liability arising out of injury to anyone “performing duties related to the conduct of the insured’s business.”

The widow, Bonnie Pryor, individually, and as executrix of his estate, instituted a lawsuit against Newcastle Hauling, Greg Rucosky, Melvin and Linda Seiter, and Colony Insurance. In the complaint, she alleged that Glenn Pryor was working as an independent contractor for Newcastle Hauling to haul timber away from the Seiters’ farm when he was killed in the accident. The lawsuit alleges two types of claims. First, it seeks to impose liability in tort against Rucosky, Newcastle Hauling, and the Seiters. Additionally, Pryor asks for a declaration that Colony Insurance owes coverage, not to her, but to Rucosky and Newcastle Hauling.

Colony Insurance filed a motion for summary judgment asserting that Pryor’s suit was an impermissible direct action, the claims were barred by a “no action” clause in the policy, and coverage was precluded by the “contractors coverage limitations” endorsement. The trial court granted Colony Insurance’s motion for summary judgment. Based on the language in the “contractors coverage limitations” endorsement, the trial court decided that, even applying a liberal construction to the pertinent language, the incident, which is the subject of this action, is not covered under the policy. Further, in making this decision, the trial court determined that the exclusionary language in the “contractors coverage limitations” endorsement was dispositive and did not address whether it was an impermissible direct action or whether the claims were barred by the policy’s “no action” clause.

ISSUES

On appeal, Pryor maintains that the trial court erred in its decision because the “employer’s liability exclusion” language is deceptive, susceptible to two interpretations, and ambiguous; and also, the trial court erred because it did not consider Glenn Pryor’s status as an independent contractor in the context of the “employer’s liability” exclusion, failed to note that an independent contractor cannot be an employee under Kentucky law, and hence, did not properly interpret the ramifications of the “employers’ liability” exclusion as it relates to an independent contractor. In essence, she contends that an independent contractor is not analogous to a temporary worker as defined in the “employer’s liability” exclusion and, since Glenn Pryor was an independent contractor, he was covered by the CGL policy.

Colony Insurance issued to Rucosky and Newcastle Hauling a CGL policy that had a standard “employer’s liability” exclusion that precluded coverage for liability arising out of injuries to employees. In addition, according to Colony Insurance, the “employer’s liability” exclusion was broadened by a “contractors coverage limitations” endorsement, which was later added to the policy. The plain meaning of the language in the endorsement provides that it prevails over the language in the original policy. Does the language in the endorsement broadening the “employer’s liability” exclusion and its definition of “temporary worker” exclude coverage for Glenn Pryor based on his status and the services rendered by him? Significantly, in answering that question, the court of appeal noted that the language of the endorsement expressly barred coverage for liability arising out of injury to anyone “performing duties related to the conduct of the insured’s business” and that the definition of “temporary worker” is modified by a new clause “not an ‘employee’ or ‘volunteer worker.'”

While it is true that an independent contractor under Kentucky workers’ compensation jurisprudence is not an employee, but he is also not relegated to the status of a member of the public. The plain meaning of the language in the “contractors coverage limitations” endorsement provides that coverage is not available for one “performing duties related to the conduct of any insured’s business.”

This language is not ambiguous or deceptive nor does it render the CGL policy meaningless.  Generally, a CGL policy protects the insured from tort liability for physical injury to the person or property of others. That is the purpose of Colony Insurance’s CGL policy, and Pryor’s assertion that no one is covered by Colony Insurance’s policy is unsound.

To ascertain the meaning of an insurance contract a court must begin with the text of the policy itself. The words employed in insurance policies, if clear and unambiguous, should be given their plain and ordinary meaning.

The language and its meaning are clear in the endorsement. Pryor is a temporary worker; that is, he was not an “employee” or “volunteer worker,” and he was “performing duties related to the conduct of any insured’s business.”

DIRECT ACTION

The trial court ascertained that because the language of the insurance contract excluded coverage for Glenn Pryor, it did not need to address the two remaining issues. Nonetheless, since the courts review was de novo and because Colony Insurance raised the argument, the court found it necessary to address whether Kentucky jurisprudence allows direct action by an injured third party against an alleged tortfeasor’s insurance company.

A third party cannot make a claim under state unfair claims statutes for the purpose of establishing coverage. Therefore, Pryor cannot avail herself of a bad faith action in order to establish that insurance coverage was available.

ZALMA OPINION

Tragic facts often result in creative lawsuits that attempt to change the reading of the law and provide a poor widow with the proceeds of an insurance policy. Mrs. Pryor, and her creative lawyers, tried to get to Colony in two ways – by suing directly claiming bad faith and by attempting to find an ambiguity in a clear and unambiguous exclusion. Both efforts failed because Kentucky does not allow third party claimants to sue the tortfeasor’s insurer directly (regardless of how the cause of action is drafted) and because the Kentucky courts, like those across the country, will not create an ambiguity where none exists just because they feel sorry for Mrs. Pryor’s loss.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Fraud Continues and Destroys Insurer

Zalma’s Insurance Fraud Letter February 1, 2013

Continuing with the third issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the February 1, 2013 issue on the state of Rhode Island removed the license of an insurance agent and broker who was involved in fraudulent activities; on the success of a New Mexico insurance official’s whistleblower lawsuit against the then insruance commissioner; how the death master database continues to balance California’s budget; how an insurer was bankrupted as a result of fraud; and a report from the NICB about the movement of organized crime into insurance fraud.

ZIFL notes that health insurance fraud convictions are meager so far this year and can express no reason for the lack of successful prosecutions.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    Contract Terms Must Be Honored
•    Life Insurance Investment Fraud Fails
•    Mental Gymnastics Not Allowed to Find Ambiguity
•    Failure to Appear For EUO — Prejudice Required
•    Statute Trumps Contract
•    Insurance is Not A Government Benefit
•    Clear and Unambiguous Exclusion Must be Enforced
•    Non-Trucking Use Coverage
•    Copyright Not Given Up by Performance
•    Another Brilliant and Short Opinion From New York

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

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

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

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

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

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Contract Terms Must Be Honored

 

Insurance Proceeds to Owner of Crashed Airplane

McCraw Materials, LLC, Mayfield McCraw, and Brenda McCraw (collectively “McCraw”), appealed the trial court’s entry of a Partial Summary Judgment that awarded DivLend Equipment Leasing, LLC (“DivLend”), a $403,750 insurance payment and attorney’s fees. In Mccraw Materials, LLC, Mayfield Mccraw, and Brenda Mccraw v. Divlend Equipment Leasing, L.L.C, No. 07-12-00215-CV (Tex.App. Dist.7 01/28/2013) McCraw asked the appellate court to reverse the summary judgment.

Background

McCraw Materials and DivLend entered into an equipment lease in June of 2008. The lease covered an agricultural spray airplane that was valued at approximately $425,000. The lease was for a five-year term. After McCraw Materials made a down payment of $42,500, monthly payments were to be made throughout the term of the lease but the amount of these monthly payments would vary based on the income McCraw Materials was able to produce from the airplane.

The lease required McCraw Materials to obtain insurance on the airplane. The lease further required that DivLend be named as “Owner/Lessor” of the airplane on the policy. McCraw Materials obtained insurance on the airplane. However, it had itself listed as the loss payee and DivLend listed as a lienholder.

On April 13, 2011, the airplane was destroyed in a crash. The insurance carrier declared the airplane a total loss and issued a check in the amount of $403,750, payable to McCraw Materials, DivLend, and Platinum Bank. DivLend requested McCraw indorse the check over to DivLend, but McCraw refused. Consequently, DivLend filed suit against McCraw in July of 2011. By order of the trial court, the insurance check was placed in the Registry of the Court pending disposition by the trial court.

In December of 2011, DivLend filed a motion for summary judgment. By this motion, DivLend sought an order turning over the insurance check to DivLend, a judgment against McCraw for $425,000, and an award of attorney’s fees. McCraw filed a response to DivLend’s motion. The trial court signed a partial summary judgment that awarded DivLend the insurance payment that was held in the Registry of the Court, and attorney’s fees in the amount of $18,330.50. After the trial court severed DivLend’s remaining claims into a separate cause number, McCraw appealed.

Ambiguity

McCraw’s first issue on appeal contends that the trial court erred in granting summary judgment because the lease agreement is not a valid, enforceable contract because it is ambiguous. Whether a contract is ambiguous is a question of law that is reviewed by an appellate court de novo.  Whe a court construes a written contract, the primary concern of the court is to ascertain the true intentions of the parties as expressed in the instrument. To achieve this objective, courts must consider the entire writing with the goal of harmonizing and giving effect to all the provisions of the contract so that none will be rendered meaningless. Courts must give contract terms their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense.

Contract Terms

In the present case, the provision of the lease agreement that addresses entitlement to insurance payments provides that, “[t]he proceeds of such insurance payable as a result of loss or damage to any item of the Equipment shall be applied to satisfy Lessee’s obligations as set forth in Paragraph 5 above, and Paragraph 9 below.” Paragraph 5 of the lease agreement identifies rent and other rent-related obligations under the lease. Paragraph 9 of the lease agreement identifies the terms of McCraw’s option to purchase equipment covered by the lease. Undisputed evidence was presented to the trial court that, as of July 25, 2011, the remaining rent-related obligations under the lease were $386,060. Further, undisputed evidence was presented to the trial court that, as of February of 2011, exercise of the option to purchase would be $363,532.71, which appears to reflect payoff of the remaining rent related obligations under the lease plus a $42,500 purchase option.

The lease provided that insurance payable as a result of loss of the airplane shall be applied to satisfy McCraw’s remaining rent-related obligations under the lease, which undisputed evidence established to be at least $386,060, and the cost of McCraw’s exercise of the option to purchase, which undisputed evidence established to be at least $42,500. As such, the undisputed evidence establishes that DivLend was entitled to at least $428,560.

Decision

The Texas appellate court concluded that the lease agreement was not ambiguous. Further, the lease agreement as a matter of law and the undisputed evidence of the minimum amount due under the lease agreement, the trial court did not err in awarding DivLend the $403,750 insurance payment that had been held in the Registry of the Court.

McCraw challenged the trial court’s ability to grant summary judgment in favor of DivLend. Specifically, McCraw contended that they did not materially breach the lease agreement, and DivLend’s claims of money had and received and fraudulent inducement do not support summary judgment. Because the appellate court determined that the trial court did not err in granting summary judgment in favor of DivLend under the unambiguous terms of the lease agreement, it had no reason to address the additional grounds charged by McCraw.

ZALMA OPINION

Insurance is a contract of personal indemnity. The lease agreement in this case required the lessee, McCraw, to name the lessor, DivLend, as the owner/lessor and insured. It failed to do so and then had the unmitigated gall to refuse to allow the lessor to receive the benefits of the insurance contract it promised to buy for it.

This was an easy decision for the court but should have been avoided by DivLend before the plane crashed by reviewing the policy as issued and then insisting that it be changed to what was required by the lease. Both parties, by their sloth, brought about an unnecessary lawsuit and appeal.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Life Insurance Investment Fraud Fails

Long Sentence Affirmed

Christian M. Allmendinger appealed his conviction and sentence for several crimes relating to an investment scheme that resulted in nearly $100 million dollars in losses for investors. In United States of America v. Christian M. Allmendinger, No. 11-5162 (4th Cir. 01/23/2013) he asked the Fourth Circuit to reverse his conviction.

FACTS

Allmendinger built a business permeated by fraud in which the principals, instead of paying the premiums immediately or putting the money in escrow, placed them in an account that they used as their own piggy bank. Of course, the very reason that the principals lied about this system is that if the investors knew the truth, they would know that the premiums would actually be paid only if the money was available when the premiums became due and the fraudsters handling the money decided to use it to pay the premiums. Not only was it reasonably foreseeable that the premiums might never be paid under this system, but hiding this potentiality was the whole point of the co-conspirators’ lies that they were prepaying the premiums.

In January 2010, Allmendinger was interviewed by federal prosecutors and law enforcement agents and informed that he would be indicted based on his involvement with A&O. In the following weeks, Allmendinger began to hide his assets. His father opened a bank account in February 2010, and more than $676,000 in funds that Allmendinger had previously held with his father in a joint account was deposited into the new account. His father then used some of those funds to pay more than $300,000 of Allmendinger’s credit card debt.

At the close of the government’s case, Allmendinger moved for a judgment of acquittal on all counts. During the hearing on that motion, the district court observed that no evidence of Allmendinger’s involvement in the A&O scheme after August 31, 2007, had been presented. In light of that fact, notwithstanding that the court had denied Allmendinger’s pre-trial motion to strike, the government suggested striking the indictment language concerning post-sale events and the sham nature of the sale of A&O. Allmendinger maintained that PCI’s fraud was not foreseeable and that he should not be held responsible for the losses attributable to the bond fraud.  The court overruled Allmendinger’s objections and determined the loss amount to be $93,920,635.46, which reflected the total amount lost by the 825 investors during the entire scheme less the amount that had been recovered in the related A&O bankruptcy as of the date of the sentencing.

As the trial court noted, Allmendinger lied about “the structure and size and soundness of the company, the extent of its reach, and the kind of activities in which it engaged, the kind of success it had had, the yields that it had had,” and lied when he claimed that investors’ money would be placed in escrow or would be used to prepay the policy premiums. The court found that even as Allmendinger sold his share, “he knew that Abdulwahab at least was going to continue in the business even though he didn’t know Abdulwahab was going to end up being one of the owners.”  The court concluded that “when you are operating a business that is based on fraud, you are charged with the knowledge that you potentially put at risk everybody’s money that you’ve got and you’ve stolen and inveigled them to part with.”  The court further found that it was reasonably foreseeable to Allmendinger that those continuing the business “were going to engage in exactly the same kind of conduct.”

Because the court determined that the loss from the conspiracy exceeded $50 million, the court applied a 24-level increase to Allmendinger’s base level under the Sentencing Guidelines. In this case, the government, by limiting its case to events occurring while Allmendinger was an owner of A&O, simply proved a more narrow conspiracy than was charged in the superseding indictment. By limiting its case to events occurring while Allmendinger was an owner of A&O, the government proved a conspiracy that was shorter in duration (and therefore caused fewer losses to investors) than the charged conspiracy. The conspiracy proven by the government nonetheless shared the same purpose as the charged conspiracy and was premised on the same fraudulent representations alleged in the indictment. Since the charges were narrowed rather than broadened, Allmendinger’s constitutional rights were not abridged.

A defendant charged with participating in a conspiracy can be held accountable only for the reasonably foreseeable acts of others that are taken in pursuit of the criminal activity he agreed to join. The court found that the scheme and artifice to defraud “was to make abundant misrepresentations to people to secure their money, to use, as he saw fit, in his company.” The court found that Allmendinger agreed with his co-conspirators to lie in a variety of ways, including about the structure and size and soundness of the company, the extent of its reach, and the kind of activities in which it engaged, the kind of success it had had, the yields that it had had, and Allmendinger agreed to perpetuate these lies by written communications in documents that were distributed with his auspices and approvals, as well as by emails and other electronic communications, and to structure it in such a way that he could treat the money in A&O as his personal piggy bank.

The co-conspirators in this case were all eventually convicted, and they received a wide range of sentences: Abdulwahab, 60 years; Oncale, 10 years; Mackert, 188 months; and White, five years. As for the two co-conspirators most similarly situated to Allmendinger, Allmendinger received a sentence shorter than Abdulwahab’s but much longer than Oncale’s.

Allmendinger’s crimes involved frauds of unthinkable scope that financially devastated hundreds of people. Indeed, victim impact testimony established the crushing effect that the conspiracy had on many people’s lives. There is certainly precedent for imposing a comparably stiff sentence for a fraudulent scheme of this magnitude.

ZALMA OPINION

“Chutzpah” is a Yiddish word meaning unmitigated gall. It is best expressed by the plea of a person of murdering his parents who asks the court for mercy because he is an orphan.

Allmendinger, after living the life of Riley on the money he defrauded from innocent investors, had the Chutzpah to argue that his sentence was too severe because he sold out his interest in the fraud while his ex-partners continued to defraud for more. The court, correctly found, that a person who defrauds innocents of over $93 million deserves the most serious sentence a court could impose.

This case also teaches that investors should be wary of life insurance investments based on the early death of those insured. Modern medicine is keeping people alive much longer than expected, the payment of the premium can exceed the profit to be made when the insured finally dies and, as always, if it appears too good to be true, it probably is.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Mental Gymnastics Not Allowed to Find Ambiguity

Rhode Island Refuses to Stretch the Imagination to Read Ambiguity Where None Exists

The Supreme Court if Rhode Island was asked to resolve a dispute between Jessica Ahlquist (Ahlquist or defendant) and her insurer Allstate Insurance Company (Allstate or plaintiff). Ahlquit argued that the trial justice erred in ruling that an insurance policy issued to Cheryl Crook (Cheryl) – the mother of the underinsured tortfeasor – did not cover the injuries she sustained when she was struck from behind by a vehicle operated by Cheryl’s son, Jared Crook (Jared). In Allstate Insurance Company v. Jessica Ahlquist., No. 2012-16-Appeal. (R.I. 01/25/2013) Ahlquist further contended that the trial justice erred in holding that an exclusion contained in the Allstate policy applied to this case.

The trial justice, having determined that defendant failed to produce evidence demonstrating a material question of fact on either issue, granted summary judgment in favor of Allstate.  Ahlquist appealed.

FACTS

On June 1, 2008, Jared was driving a 2006 Cadillac CST – which was leased for him by his father, Calvin Crook (Calvin) – when he collided with Ahlquist’s vehicle at the intersection of Harris Avenue and Atwells Avenue in Providence, Rhode Island. As a result of that accident, Ahlquist’s car was seriously damaged and she sustained severe personal injuries.

The Cadillac was insured by Calvin through a policy issued by Allstate. That policy had a $100,000 per person and $300,000 per occurrence liability limit. After Allstate paid the policy limits, Ahlquist sought to recover additional compensation through another Allstate insurance policy issued to Cheryl, Calvin’s former wife. It is this policy that is in dispute in this case. The policy was issued for Cheryl’s vehicle, a Ford Escape; Cheryl was the named insured, and she and Calvin were covered drivers. Under the policy’s “Driver(s) Excluded” category, “[n]one” was listed. However, the policy also provided that a non-owned automobile would be insured if it was used by the policyholder or a resident relative with the owner’s permission, but it further provided that the automobile “must not be available or furnished for the regular use of an insured person.”

The Litigation

Allstate filed an action seeking a declaratory judgment that Cheryl’s insurance policy did not apply to the accident. Allstate moved for summary judgment, arguing that, under the unambiguous terms of the policy, Jared’s operation of the Cadillac was not covered by the policy because the Cadillac was furnished for his regular use. The defendant filed a cross-motion for summary judgment, countering that Cheryl’s policy covered the accident because Jared, who resided with his mother, was not excluded as a driver under the policy and that, therefore, the policy provisions were ambiguous and the ambiguity should be resolved in her favor. The defendant further argued that Calvin was negligent in leasing the vehicle for Jared’s use and that because Calvin was a named driver under the policy, there should be coverage. Finally, defendant asserted that the exclusion was contrary to public policy and that Allstate should not benefit because, according to defendant, Allstate’s agent improperly wrote the insurance policies for Calvin and Cheryl.

Trial Court Decision

The trial justice stated that the following facts were undisputed:

1.    Cheryl did not own the Cadillac driven by Jared;
2.    Jared was a resident relative of Cheryl’s;
3.    Jared was insured to drive the Cadillac; and
4.    the Cadillac was available to Jared and furnished for his regular use.

In light of these undisputed facts, the trial justice was satisfied that the exclusion applied and that the accident in which Ahlquist was injured and the claims arising from it were not covered by Cheryl’s insurance policy. The trial justice also found that the non- owned vehicle exclusion did not conflict with the declaration that there were no excluded drivers under Cheryl’s policy. Finally, the trial justice held that the exclusion did not violate public policy. Accordingly, the trial justice granted summary judgment in Allstate’s favor and denied defendant’s motion for summary judgment.

The Supreme Court

It is well settled that, when examining an insurance policy, courts must apply the rules for construction of contracts. In Rhode Island the court’s analysis is limited to the four corners of the policy, viewing it in its entirety, affording its terms their plain, ordinary and usual meaning. Furthermore, the court must refrain from engaging in mental gymnastics or from stretching the imagination to read ambiguity into a policy where none is present. The test to be applied is not what the insurer intended but what the ordinary reader and purchaser would have understood the language to mean.

The terms of Cheryl’s policy provide that a non-owned automobile will be covered if it was used by the policyholder or a resident relative with the owner’s permission, but it also provides that the automobile “must not be available or furnished for the regular use of an insured person.” Jared’s use of the Cadillac clearly falls within this exclusion: as a “resident-relative,” Jared is considered an insured person per the definition under the policy; however, he used the vehicle on a regular basis. The policy language excluding vehicles furnished for the regular use of an insured person applied. The exclusion does not, as defendant contends, conflict with the declarations page of the policy, which declares that there are no specific drivers excluded under the policy. It is the vehicle that is excluded, not the driver.

Having examined the policy in its entirety, and applying the plain and ordinary meaning of the policy language, the Supreme Court concluded that the exclusion provision is not ambiguous. Defendant’s construction of the policy perceives an ambiguity in the provision where none exists and it, therefore, affirmed the decision of the trial court.

ZALMA OPINON

Lawyers, seeking more money for their clients, continue to attempt to create an ambiguity in an insurance policy where none exits hoping that the severity of the plaintiffs’ injury will convince the court to help the poor injured person and find an ambiguity to cause the insurer to pay whether it owes or not.

Insurance is not an eleemosynary organization. Charity has nothing to do with a profit making business. Charity has nothing to do with the interpretation of contracts. Insurance contracts must be read in their entirety and courts must interpret the contract of insurance based on its terms not on the need of one party or another.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Failure to Appear For EUO — Prejudice Required

Prejudice Requirement – An Invitation to Commit Fraud

As a justice of the California Supreme Court once said: “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, 40 Cal. 3d 870, 221 Cal. Rptr. 509(December 31, 1985).]

The Supreme Court of the state of Washington fell into the trap that Justice Kaus  pointed out in White when it was required to examine an insured’s duty to cooperate with an insurer’s claim investigation. The petitioner, John Staples, had his insurance claim denied for failure to cooperate-namely, failure to submit to an examination under oath (EUO). In John Staples v. Allstate Insurance Company, No. 86413-6 (Wash. 01/24/2013), Staples sued his insurer for bad faith and related causes of action. The trial court dismissed the case on summary judgment and Staples appealed.

FACTS

On or around August 18, 2008, a 1992 Ford Econoline van belonging to John Staples was stolen from a parking lot in Redmond, Washington. In the back of the van, Staples had stored a large collection of tools. Staples reported the theft to the police, telling them the tools were worth around $15,000. The police report says, “Staples told me that it would cost $15,000 to replace the tools and equipment stored in the van.” The report describes the van as a “work truck” and says that it was a “mobile workshop for the business that Staples contracted with.”

Two weeks later, Staples submitted a claim for loss of the tools to Allstate under his homeowner’s policy. He told Allstate that the tools were worth between $20,000 and $25,000 and that they were for his personal use (although they “could be used” for work).

Based on these apparently inconsistent statements, Allstate transferred Staples’ claim to its special investigation unit. Allstate requested documents from Staples, including proof of ownership, a sworn statement in proof of loss, an authorization to release information, and three years of tax returns. Allstate took two recorded statements from Staples, neither of which was under oath (despite Staples’ claims that he believed they were).

Over the next few months, Staples failed to provide the requested documentation despite several written requests from Allstate. It was not until December 11, 2008, nearly three months after the loss, that Staples submitted his sworn statement in proof of loss and authorization to release information.

On January 15, 2009, Allstate requested by letter that Staples appear for an EUO on January 29, also requesting documentation related to the loss by the following day, January 16. This gave Staples only one day to produce the requested documents. The letter said, “If there are legitimate reasons which make attendance [at the EUO] on this day impossible, please advise immediately so that the examination can be rescheduled if appropriate.”     On January 23, Allstate sent a letter to Staples stating that his EUO was canceled because he had not produced the requested documentation. The letter also said, “If the materials are provided, we will contact you to reschedule the exam.”

This suggests Allstate would only reschedule the exam once the documents were produced, although the record is unclear on this point. The letter was mailed on the same day as a letter from James Sullivan, an attorney Staples had recently hired, who informed Allstate that Staples could not attend an EUO on January 29.

Upon receiving Staples’ letter, Allstate requested that Staples contact Allstate to reschedule the EUO, also reiterating its request for documentation. This time, Allstate did not indicate that it would only reschedule the EUO after Staples produced the requested documents. The record is unclear whether this was in fact a condition that Staples would need to meet before he would be permitted to reschedule his EUO.

Staples hired attorney Daniel Fjelstad, who immediately began accusing Allstate of delay and of violating the Insurance Fair Conduct Act (IFCA). Allstate responded by reiterating its request for Staples to provide documentation and reschedule the EUO.

Staples did neither, instead accusing Allstate of making “burdensome” and “vexatious” requests constituting “harassment.” Staples demanded a justification for Allstate’s documentation request, and Allstate responded that the records were necessary to evaluate whether Staples had filed a false claim.

When Staples did not attempt to reschedule, Allstate denied his claim on April 30, 2009.The parties dispute whether Staples provided the documents Allstate requested, but it appears Staples provided many of the documents substantiating the value of his stolen tools.

Three and a half months after Allstate denied his claim, Staples’ attorney wrote a letter to Allstate saying that Staples was “willing to appear at an EUO” if Allstate would agree to extend the contractual time limit for filing suit (which was about to expire). Allstate responded that it was “unwilling to extend the one year suit limitation . . . .”

On August 24, 2009, Staples sued Allstate in King County Superior Court, alleging breach of contract, bad faith, and violation of the IFCA. Three months later, Allstate moved for summary judgment, seeking to dismiss the claims. Staples opposed the summary judgment motion, but in the alternative asked the court to grant a continuance to allow him to conduct discovery.

ISSUES

(1) Must an insurer’s request for an EUO be reasonable or material to the insurer’s claim investigation?

(2) Did the insured in this case, John Staples, substantially comply with Allstate’s request for an EUO?

(3) Must an insurer show prejudice before denying a claim for failure to submit to an EUO?

Analysis

Most insurance policies contain cooperation clauses requiring the insured to cooperate with the insurer’s handling of claims. Typically, an insured that “substantially and materially” breaches a cooperation clause is contractually barred from bringing suit under the policy if the insurer can show it has been actually prejudiced. The burden of proving non-cooperation is on the insurer.

Cooperation is essential to the insurance relationship because that relationship involves a continuous exchange of information between insurer and insured interspersed with activities that affect the rights of both. The relationship can function only if both sides cooperate.

Staples’ homeowner’s policy with Allstate is a first-party policy containing specific, enumerated cooperation duties including the requirement that Staples submit to an EUO:

3. What You Must Do After A LossIn the event of a loss to any property that may be covered by this policy, you must:d) give us all accounting records, bills, invoices and other vouchers, or certified copies, which we may reasonably request to examine and permit us to make copies. . . . .

Under the policy, Allstate has no duty to provide coverage if Staples does not comply with his duties and Allstate is prejudiced:

We have no duty to provide coverage under this section if you, an insured person, or a representative of either fail to comply with items a) through g) above, and this failure to comply is prejudicial to us.

Failure to comply also precludes Staples from suing Allstate:

12. Action Against Us

No one may bring an action against us in any way related to the existence or amount of coverage, or the amount of loss for which coverage is sought, under a coverage to which Section I Conditions applies, unless:

a) there has been full compliance with all policy terms; and

b) the action is commenced within one year after the inception of loss or damage.

Based on this language, Allstate denied Staples’ claim. The parties dispute whether this decision was correct and whether summary judgment was appropriate. Staples raises three duty to cooperate issues, and we address each in turn.

Issue 1: Must an insurer’s request for an EUO be reasonable/material to the insurer’s claim investigation?

Given the quasi-fiduciary nature of the insurance relationship, the Supreme Court held that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it. However, in this case, it appears that Allstate was within its rights to request an EUO. Although it appears an EUO was justified given the discrepancies between the police report and Staples’ insurance claim, we cannot be sure because Allstate never explained what information it was seeking from the EUO that Staples had not already provided. Staples had already given two recorded interviews, produced documents, and signed a broad authorization allowing Allstate to obtain records from other sources.  It is not clear what additional information Allstate hoped to uncover by conducting an EUO.

Issue 2: Did Staples substantially comply with Allstate’s request for an EUO?

Breach of a cooperation clause in Washington state is measured by the yardstick of substantial compliance.

Here, there are unresolved fact issues regarding substantial compliance. Staples does not dispute that no EUO took place. However, he did appear for two scheduled interviews, giving Allstate ample opportunity to examine him. Staples also offered to appear for an EUO if Allstate would extend the deadline for filing suit and signed a broad authorization allowing Allstate access to a wide range of financial documents. These facts on their own do not prove substantial compliance, but at the summary judgment stage they do not need to because we are required to view all facts in a light most favorable to Staples. It is enough that the record demonstrates a genuine question of material fact.

Given this, Allstate should have rescheduled the EUO. But it did not.

Issue 3: Must an insurer demonstrate prejudice before denying a claim for failure to submit to an EUO?

In the first-party insurance context non-cooperation does not absolve an insurer of liability unless the insurer was actually prejudiced. A showing of prejudice is still required by the clear terms of Staples’ policy.

Allstate has not met its summary judgment burden of showing actual prejudice. A claim of actual prejudice requires affirmative proof of an advantage lost or disadvantage suffered as a result of the breach, which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability. Prejudice is an issue of fact that will seldom be established as a matter of law.  Prejudice will be presumed only in extreme cases.

CONCLUSION

Even though Allstate was within its rights to ask for an EUO, the Supreme Court found that there are fact issues about whether Staples substantially complied with Allstate’s request. Further, the trial court should have required a showing of prejudice, and there are fact issues about whether Allstate in fact suffered prejudice. It may well be that Staples did not substantially comply and that Allstate was sufficiently prejudiced to justify denying Staples’ claim. The Supreme Court concluded that on the record before it material issues of fact preclude summary judgment.

The Dissent:

An insurer suffers prejudice, as a matter of law, when its insured fails to provide it with the financial records it reasonably needs in order to complete an investigation into the question of whether the insured’s claim was fraudulent. The majority holds an insured individual with a questionable claim frustrates the company’s claim investigation for months by refusing to submit to an EUO as required by the insurance policy may still bring suit against the insurance company for denying his claim based on his non-cooperation. “Today’s decision invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”

ZALMA OPINION

Allstate’s first problem is the wording of its policy when it added “prejudice” to its EUO clause.

The right to an EUO has existed as a condition precedent to indemnity since the first New York Standard Fire Insurance policy was issued in the 19th Century. Adding a requirement to show prejudice for failure is an invitation to those intent on committing fraud to simply spend his time and energy accusing the insurer of wrongful conduct and refuse to appear for EUO until the claim is denied.

Allstate gave the court an opening by refusing to schedule the EUO after the insured agreed to appear after the claim was denied. I have often done so without withdrawing the denial so that the information would be available.  EUO is a tool and should always be used if offered. By refusing to do so it gave the Supreme Court the hook on which to allow the case to go forward and allows future claimants to present fraudulent claims and then avoid the insurer raising a defense by obfuscation.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Statute Trumps Contract

No Negligence – No Coverage

The Minnesota Supreme Court was asked to determine whether Appellant L.H. Bolduc Company, Inc. (“Bolduc”) is obligated under an insurance policy and an indemnification provision in a construction contract to reimburse respondent Engineering and Construction Innovations, Inc. (“ECI”) for expenses ECI incurred in repairing a damaged sewer pipeline. Bolduc, the subcontractor of ECI, damaged a sewer pipe during the course of a construction project. After ECI repaired the damage, it sought reimbursement from Bolduc’s insurer, The Travelers Indemnity Company of Connecticut (“Travelers”), under an endorsement to Bolduc’s commercial general liability policy naming ECI as an additional insured for liability “caused by acts or omissions” of Bolduc. Travelers denied coverage. ECI then sued Bolduc and Travelers for negligence and breach of contract to recover the costs ECI paid to repair the pipe.

A jury found that Bolduc was not negligent, and awarded ECI zero dollars in damages. Following trial, the district court granted summary judgment in favor of Travelers and Bolduc on ECI’s breach of contract claims, concluding that Travelers and Bolduc had no obligation to reimburse ECI for damages not caused by Bolduc. The court of appeals reversed, determining that ECI was entitled to coverage as an additional insured without regard to Bolduc’s fault. The court of appeals also concluded that Bolduc was required to indemnify ECI, and that the subcontract between ECI and Bolduc did not violate Minn. Stat. § 337.02 (2012), which prohibits indemnification for the fault of others in construction contracts. In Engineering & Construction Innovations, Inc v. L.H. Bolduc Co., Inc, No. A11-0159 (Minn. 01/23/2013) the Supreme Court resolved the dispute.

The Project

The Metropolitan Council Environmental Services (“Met Council”) hired Frontier Pipeline, LLC (“Frontier”) as the general contractor on a construction project involving the installation of an underground sewer pipeline in Hugo. After Frontier installed the pipeline, Frontier subcontracted with ECI to install a lift station and force main access structures at specified locations along the pipeline. An access structure provides access to points where two sections of pipeline meet, and is built to allow sections of the pipe to be connected and to provide manhole access to the pipeline.

The Subcontract

In order to excavate pits to construct the access structures without danger of the walls of the pits collapsing, ECI subcontracted with Bolduc to build “cofferdams,” a shoring system created by driving metal sheeting into the ground to act as walls for the pits during excavation and construction. The sheets are driven separately but eventually interlock to form a rectangle shape, and provide lateral support to the walls of the pit.

In January 2007 ECI and Bolduc entered into a subcontract (the “subcontract”) drafted by ECI, which provided that Bolduc would “[f]urnish, drive, and remove six . . . sheeting cofferdam[s]” over the pipeline at six locations. Under the subcontract, Bolduc was to drive the sheets “per ECI location.”

The subcontract also imposed insurance and indemnification obligations on Bolduc. Bolduc obtained commercial general liability insurance from Travelers, which provided coverage during the time period at issue in the amounts required by the subcontract. Bolduc’s insurance policy specified that Travelers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy excluded coverage for bodily injury or property damage based on the insured’s assumption of liability for such damages in a contract.

In December 2007 ECI discovered the damage to the underground pipeline that gave rise to this dispute. At one of the cofferdam locations, one of Bolduc’s metal sheets caused damage because it was driven through the edge of the pipe. All parties involved agree that Bolduc drove a sheet into the pipe, and that contact between the sheet and the pipe caused the resulting damage. At the site of the damage, ECI had provided the template and markings designating where Bolduc was to drive the sheeting cofferdams as required by the subcontract.

Travelers refused to reimburse ECI, claiming that Bolduc was not the cause of the damage, and therefore ECI’s claim did not fall within the coverage provided by the additional insured endorsement.

The Trial

After a 3-day trial, the jury returned a special verdict using a form that had been proposed by Bolduc, and not objected to by ECI. The jury answered two questions. In response to the question “Was [Bolduc] negligent?” the jury answered “No.” The special verdict form also asked “What sum of money will fairly compensate [ECI] for its loss resulting from damage to the pipe?” to which the jury answered “$0.”

Bolduc brought a motion for summary judgment, arguing that the indemnity provision in the subcontract was unenforceable because any obligation to indemnify ECI violated Minn. Stat. § 337.02 (2012). Under Minn. Stat. § 337.02, indemnity of a party to a construction contract other than for liability arising from the promisor’s own wrongful conduct is not enforceable.

The district court granted the motions of Bolduc and Travelers in their entirety, dismissing ECI’s claims with prejudice.

Insurance Coverage

It is well-established that the burden of proof rests upon the party claiming coverage under an insurance policy. In order to recover from Travelers, ECI must show that it is an insured under the policy. The language of the additional insured endorsement at issue provides that ECI is an additional insured under the policy: “Only with respect to liability for “bodily injury”, “property damage” or “personal injury”; and If, and only to the extent that, the injury or damage is caused by acts or omissions of [Bolduc] in the performance of “[its] work” to which the “written contract requiring insurance” applies. [ECI] does not qualify as an additional insured with respect to the independent acts or omissions of [ECI].”

The language of the additional insured provision indicates that ECI’s coverage under the additional insured endorsement cannot be divorced from the concept of fault.

The insurance policy contains a specific exclusion for contractual liability, stating that “[t]his insurance does not apply to . . . ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The exclusion does not apply, however, to contractual agreements under which the insured “assume[s] the tort liability of another party.” Additional insured clauses do not enlarge the insurance coverage as defined in the policy, but merely cause the insurance to cover persons other than the named insured within the limits of the policy coverage.

The Supreme Court concluded that the additional insured endorsement is plainly a vicarious liability provision. Of the three ways in which ECI could become liable for property damage, only one is covered under the additional insured provision and the remainder of the policy. If ECI is directly liable for the property damage, the additional insured provision excludes coverage. If ECI is liable for damage through the assumption of contractual liability for Bolduc’s acts or omissions, coverage is also excluded under other provisions of the policy.

Therefore, the additional insured endorsement, only provides coverage if ECI is vicariously liable for property damage caused by acts or omissions of Bolduc. ECI can only be vicariously liable if Bolduc itself is liable. Because a jury found that Bolduc was not negligent, and that finding has not been appealed, ECI cannot be vicariously liable for Bolduc’s conduct in hitting the pipe, and ECI is not entitled to insurance coverage.

Indemnification

Bolduc argued that under the plain language of the statute, because it was not at fault for the damaged pipe, requiring Bolduc to indemnify ECI in this situation would run afoul of the prohibition in the plain language of section 337.02, an agreement is unenforceable, unless “the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor.”

Because Bolduc was not at fault for the pipeline damage, any obligation by Bolduc to indemnify ECI would violate Minn. Stat. § 337.02 unless that obligation was accompanied by a coextensive insurance agreement under Minn. Stat. § 337.05. Having already determined that no insurance coverage is available to ECI under the Travelers’ policy with respect to the pipe damage, any indemnification obligation in the contract is not saved by Minn. Stat. § 337.05, subd. 1, because any such obligation is not, based on the Supreme Court’s conclusion in the first section of its opinion, coextensive with an obligation to insure.

ZALMA OPINION

Risk transfer is a key to the operation of the construction business. Owners transfer the risk of loss to the general contractor, the general contractor transfers risk to the subcontractors by contracts of indemnity and requirements for additional insured endorsements. States like Minnesota have enacted statutes that limit the ability of one to transfer the risk to another.

When entering into such contracts it is imperative that the contracting parties are sure that their contracts comply with the conditions set by state law and read and understand the additional insured provisions of the subcontractor’s policy.

In this case the contractor lost because a jury found it was solely responsible for the injury and that its contract with Bolduc and Travelers did not comply with the state statute.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Insurance is Not A Government Benefit

Proof Of Fraud Needed to Rescind Insurance in South Carolina

Insurance is a contract of utmost good faith. Every insurer insurance company is entitled to determine for itself what risks it will accept, and therefore to know all facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. Materiality must be determined solely by the probable and reasonable influence which the admittedly undisclosed information
would have had upon the insurer’s decision to issue the policy. This is a subjective test; the critical question is the effect truthful answers would have had on the insurer, not on some “average reasonable” insurer.

Shenandoah Life Insurance Company brought an action to void an insurance policy it issued on the life of Lorenzo Smallwood.  The circuit court granted partial summary judgment to Shenandoah, and thus narrowed the issue for trial to whether Lorenzo intended to defraud the insurance company when he did not disclose information related to his medical history on the insurance application. At trial, the court granted Shenandoah’s motion for a directed verdict. Lakeisha Smallwood appealed the directed verdict.  In Shenandoah Life Insurance Company v. Lakeisha E. Smallwood, No. 5076 (S.C.App. 01/23/2013) the South Carolina Court of Appeal was asked to determine if there was sufficient evidence to support a directed verdict on fraud.

Facts

Lorenzo Smallwood joined the U.S. Marine Corps following the 9/11 terrorist attacks and served tours of duty in both Afghanistan and Iraq.  He was honorably discharged from the Marines in 2004.  On October 2, 2006, Lorenzo visited the emergency department of William Jennings Bryan Dorn Veteran’s Medical Center in Columbia.  He complained to nurse Pamela O’Toole about not being able to sleep well in the two years since his return from his tours overseas and stated he believed he suffered from post-traumatic stress disorder (PTSD).  O’Toole noted on her medical assessment, “[p]atient admits to drug and alcohol use.”

Later in the afternoon, Lorenzo saw Nirav Pathak, M.D., who recorded in his notes Lorenzo “cannot sleep well,” “feels depressed,” and “thinks that he suffers from PTSD since he came home 2 years ago from Iraq/Afghanistan.”  Dr. Pathak also noted, “alcoholic, 12 pack beer every day.”  In his assessment, Dr. Pathak wrote, “Substance Abuse (Alcohol) – current; Cocaine Abuse – current.”

When Dr. Pathak later testified, he explained that this assessment of Lorenzo “was based upon what [he] had talked to [Lorenzo] about.”  Though neither Dr. Pathak’s notes nor his testimony reveal exactly what Lorenzo told him, Dr. Pathak testified that his notes showed Lorenzo expressed his understanding of the assessment. However, Dr. Pathak could not confirm, nor is it clear from the record, that Lorenzo agreed because, by the time of trial, Dr. Pathak also had no independent recollection of treating Lorenzo.  Dr. Pathak referred Lorenzo for a mental health consultation, which was scheduled for November 24, 2006, but Lorenzo did not show up for the appointment.

A year later, on November 19, 2007, Lakeisha Smallwood sought an insurance policy through Shenandoah on the life of her husband Lorenzo.  She initially consulted Lorenzo’s aunt, Gayle Smallwood, who sold insurance for Shenandoah.

Gayle asked her colleague, Laura Haynes, an independent insurance agent representing Shenandoah, to write the policy.  Haynes met Lorenzo and Lakeisha at their home to fill out the insurance application.  While seated at the kitchen table, Haynes asked Lorenzo the application questions and recorded his answers on the application.  Lakeisha and Gayle were present at the home when the application was being filled out but were primarily in another room with Lorenzo’s and Lakeisha’s children.  Haynes testified she told Lorenzo to answer the application questions truthfully, and that both Lorenzo and Lakeisha had an opportunity to review the application before they signed it.  The application contained a number of questions regarding Lorenzo’s medical history, particularly, “Within the last 10 years, have any persons proposed for coverage been diagnosed or treated by a member of the medical profession for . . . mental or nervous disorder, alcohol or drug dependency? Within the past 5 years, have any persons proposed for coverage . . . [u]sed cocaine?”

Lorenzo answered “No” to each of these questions.  Shenandoah issued the policy.

On September 18, 2008, Lorenzo was shot to death.  The shooter was found guilty of voluntary manslaughter and sentenced to eighteen years.  Shenandoah denied Lakeisha’s claim on the policy on the ground that Lorenzo provided false statements on the application regarding his medical history.

Analysis

While there is certainly a circumstantial inference that [Lorenzo] made the misrepresentations with the intent to defraud the plaintiff, the evidence presented to the court is also susceptible of the inference (at least at this stage) that he made the misrepresentations to hide his alcohol and drug abuse and his mental health issues from his wife.

The trial court granted Shenandoah’s motion for a directed verdict after the close of all evidence.  The trial court stated: “This is another of those rare cases in which the undisputed facts can reasonably give rise to only one inference, namely, that the policy was procured by fraud.”

The court of appeal noted that there was not much evidence in the record of Lorenzo’s intent, as is to be expected in cases where the applicant is deceased.  The intent with which misrepresentations are made on a life insurance application is usually shown by circumstantial evidence, since the direct evidence is “locked up in the heart and consciousness of the applicant.”  The lack of evidence of intent works against the party who bears the burden of proof.

Shenandoah presented evidence from which a jury could reasonably conclude, based on the clear and convincing evidence standard, that Lorenzo made the misrepresentations with the intent to defraud the insurance company.  However, the question we must answer is whether there is evidence in this record from which a jury could reasonably reach the opposite conclusion—that Shenandoah failed to prove by clear and convincing evidence that Lorenzo intended to defraud the insurance company.

There are several plausible explanations for Lorenzo’s failure to disclose the requested information. Ordinarily, the question of fraud in a case of this kind is for the jury.

Shenandoah presented no evidence that Lorenzo, at age twenty-six, associated his alcohol or cocaine use with any increased medical risk.  The medical records from Lorenzo’s visit to Dorn Medical Center reveal that he admitted “drug and alcohol use” to a nurse, and that a doctor assessed it as alcohol and cocaine “abuse.”  However, neither the nurse nor the doctor remembered at trial what Lorenzo said that led them to write what they wrote in the records.  Viewed in the light most favorable to the non-moving party, Dr. Pathak’s used the term “abuse” to refer to isolated cocaine and alcohol use.  As to any mental disorder, the record contains nothing more than Lorenzo’s suspicion he had PTSD.  These facts support a reasonable inference that Lorenzo’s failure to disclose the information was not fraudulent.
The appellate court held that the evidence Shenandoah presented was insufficient to support a conclusion that it proved Lorenzo’s fraudulent intent clearly and convincingly as a matter of law. In South Carolina the burden on Shenandoah was to prove fraud by clear and convincing evidence. Clear and convincing evidence is that degree of proof which will produce in the mind of the trier of facts a firm belief as to the allegations sought to be established.

Sending the case back to the trial court the Court of Appeal assuaged its collective conscience by stating it did not condone Lorenzo’s misrepresentations but found a jury could have reasonably concluded Shenandoah failed to prove Lorenzo made the misrepresentations with the intent to defraud the insurance company and the trial court should not have directed a verdict in favor of Shenandoah.

ZALMA OPINION

The South Carolina court seems to have forgotten the maxim that insurance is a contract of utmost good faith where neither party will do anything that will deprive the other of the benefits of the contract. A person who drinks a twelve pack of beer daily and imbibes in banned substances might just get drunk enough to place himself in the type of situation where he would be, as Lorenzo was, shot to death. In addition, such abuse clearly increased the chance of an early death.

When an insured lies on an application for insurance with knowledge of the lie and with the intent to deceive the insurer, he is committing fraud. That he may have had other reasons than defrauding the insurer to lie the fact of the lie was obvious. The insurer was deceived. Had it known the true facts it would never have insured Lorenzo.

A requirement that an insurer prove actual fraud before it rescinds a policy of insurance is making insurance a benefit akin to a government entitlement than a contract of insurance. In California and other states that follow the ancient Marine Rule a contract of insurance may be rescinded if the insured misrepresents or conceals material facts, whether done intentionally or innocently, since the insurer is deceived and to allow the contract to continue would be unfair.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Clear and Unambiguous Exclusion Must be Enforced

Insurer Meets Burden of Proof

The Washington Court of Appeal was asked to resolve an insurance coverage dispute that arose from a lawsuit that alleged that the insureds were liable for injuries caused by the unlawful transmission of text messages in Oregon Mutual Insurance Company v. Rain City Pizza, L.L.C., A Washington Limited Liability Company, No. 67471-4-I (Wash.App.Div.1 01/14/2013).

Facts

Seattle PJ Pizza, L.L.C. is a Washington company that operates 21 Papa John’s pizza stores in the Seattle and Peninsula areas of Washington State and is owned by Kevin Sonneborn and Edward Taliaferro. In March and April of 2010, Sonneborn gave a third party marketing company, On Time 4 U, L.L.C., certain lists of Seattle PJ Pizza’s customers. Sonneborn compiled call lists of the names and telephone numbers of individuals who had ordered pizza from the Papa John’s stores operated by Seattle PJ Pizza. Some of this information came from records of telephone orders and other information came from computer records of orders that were placed online. On Time 4 U used these call lists to send text messages to customers on behalf of Seattle PJ Pizza, advertising Papa John’s stores operated by Seattle PJ Pizza.

In May 2010, a class action lawsuit was filed in King County Superior against Sonneborn and Taliaferro, alleging violations of federal and state laws by the unlawful transmission of text messages to advertise pizza products.

The complaint alleged five counts against the defendants:

  1. violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227;
  2. violations of RCW 19.190.060 (prohibiting unsolicited commercial text messages);
  3. violations of RCW 80.36.400 (prohibiting use of automatic dialing and announcing devices for commercial solicitation);
  4. violations of Washington’s Consumer Protection Act, chapter 19.86 RCW; and
  5. negligence by permitting the sending of the messages.

The Complaint for Declaratory Relief

Oregon Mutual Insurance Company (Oregon Mutual) brought an action in King County Superior Court seeking a declaratory judgment that it had no duty to defend its insureds, the defendants in this lawsuit. Oregon Mutual claimed that coverage was barred by the policy’s exclusion for claims arising out of the distribution of information in violation of any statute that prohibits the distribution of material or information. Oregon Mutual further contended that the claims alleged against the defendants did not fall within the policy’s liability coverage for claims of “personal and advertising injury” and “property damage” because the complaint alleged neither a privacy violation nor an injury caused by an “occurrence” as defined by the policy.

The trial court denied Oregon Mutual’s claim on summary judgment, agreeing with the defendants that the exclusion does not apply because it covers only acts or omissions of the defendants and there were no allegations that the defendants (other than Seattle PJ Pizza and Sonneborn) participated in the text messaging campaign. The court further concluded that the complaint alleged personal and advertising injuries and injuries caused by an “occurrence” that were covered by the policy. Oregon Mutual appealed.

Analysis

In disputes over coverage or the duty to defend, the insured bears the burden of proving that coverage or a defense obligation exists, while the insurer bears the burden of proving that an exclusion applies. Insurance policies must be liberally construed in favor of coverage.  Exclusions are strictly construed against the insurer.

Oregon Mutual contended that coverage was precluded by the policy exclusion for claims alleging damages arising from the unlawful distribution of materials.

The policy contains the following exclusion for Business Liability Coverage:

This insurance does not apply to: ….

s. Distribution Of Material In Violation Of Statutes

“Bodily injury,” “property damage,” or “personal and advertising injury” arising directly or indirectly out of any act or omission that violates or is alleged to violate:

(1) The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law; or

(2) The CAN-SPAM Act of 2003, including any amendment of or addition to such law; or

(3) Any statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating or distribution of material or information.

The defendants noted that there is no allegation that any of the defendants committed the acts; rather, the complaint only alleges that Sonneborn and On Time 4 U committed the acts. The defendants argue in the alternative that the language is ambiguous about to whose acts or omissions the exclusion applies and must therefore be construed in favor of coverage. Oregon Mutual countered that the policy language is unambiguous as it clearly states that it applies to “any” act or omission, not just those of the defendants.

The Court of Appeal concluded that the policy language states “any” act or omission and therefore does not limit the acts to those of a particular actor; rather, it applies to any acts that violate the statutes, which would include those committed by someone other than the insured. The additional language barring coverage for injuries “arising directly or indirectly out of any act or omission” is consistent with this interpretation as it contemplates the situation where the insured may be responsible for an act or omission committed by another, such as negligent supervision or vicarious liability, which is what is alleged against the defendants here.

At the very least the claims alleged injuries arising indirectly from the violation of statutes prohibiting the transmission of information – the complaint alleges that the defendants were responsible for the injuries caused by the text messages because they negligently allowed them to be sent and/or were vicariously liable for their transmission. Therefore, the Court of Appeal concluded, the claims are precisely those to which the exclusion applies and that the trial court therefore erred by denying Oregon Mutual’s motion for summary judgment.

ZALMA OPINION

Insurance policies can, contrary to the opinion of many plaintiffs’ lawyers, be written in clear an unambiguous language. The words: “any act or omission” could not be more clear. “Any” includes every and eliminates none.

The Washington state court had the courage to reverse the trial court and find that the acts or omissions alleged in the lawsuit were “any act or omission” that violated the laws specified in the contract of insurance. More insurers should work to write their exclusions as clearly and without ambiguity as did Oregon Mutual.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Non-Trucking Use Coverage

Limited Coverage for Trucker Enforced

The Wisconsin Court of Appeal was asked to resolve an insurance coverage dispute arising out of a multi-vehicle accident that took place on February 27, 2009 in Brian Casey v. Ronald Smith, John Zeverino, Taylor Truck Line, Inc, No. 2012AP667 (Wis.App. 01/15/2013).

One of the vehicles involved was a semi-tractor owned and operated by John Zeverino, but leased to Taylor Truck Line, Inc. Taylor had a commercial automobile policy through Great West Casualty Company, and Zeverino had a non-trucking use automobile policy through Acceptance Casualty Insurance Company. The circuit court determined the Acceptance policy provided coverage for claims stemming from the accident, and the Great West policy did not, because Zeverino was not acting “in the business of” Taylor at the time of the accident.

BACKGROUND

On October 10, 2006, Zeverino leased a Freightliner semi-tractor he owned to Taylor, pursuant to an “Independent Contractor Equipment Lease Agreement.” The agreement provided that Zeverino would use the tractor “to transport, load and unload on behalf of [Taylor] … such traffic as [Taylor] may from time to time make available to [Zeverino.]” The agreement further specified that Taylor would have “exclusive possession, control and use” of the tractor and would “assume complete responsibility to the public for the operation of [the tractor]” during the term of the lease. It also provided that Zeverino would be responsible for “[m]aintaining the [tractor] in the state of repair required by all regulations” and would bear all repair and maintenance expenses.

In addition, Taylor and Zeverino each agreed to maintain certain insurance, which was to provide coverage for the tractor depending on how it was being used. Taylor agreed “to provide and maintain insurance coverage for the protection of the public from damage to persons and property[.]” However, Taylor’s insurance would be in effect only when the tractor was “being operated in the exclusive service of [Taylor] and while actually engaged in transportation for [Taylor.]” Zeverino, in turn, agreed to “indemnify and hold [Taylor] harmless from all claims relating to [Zeverino’s] bobtailing of the equipment[.]”

In trucking industry parlance, “bobtailing” means driving a tractor without an attached trailer. Zeverino also agreed to carry “so-called bobtail liability insurance coverage with respect to public liability or property damage … as concerns all equipment hereunder when not used in performance of a trip under this agreement.” Bobtail insurance is another name for non-trucking use insurance, which generally covers a tractor when it is not being used for trucking purposes.

In January 2009, Zeverino drove the tractor to FABCO, a Caterpillar dealership in Eau Claire, Wisconsin, to have its electronic control module adjusted. While performing the adjustment, FABCO damaged the tractor’s grille. FABCO ordered a new grille, and called Zeverino when it arrived. Instead of making an appointment to replace the grille, FABCO instructed Zeverino to stop by whenever it was convenient. In addition, Zeverino had previously ordered a new oil filler tube for the tractor after the existing tube broke off at the engine block. FABCO offered to install the new tube at the same time it replaced the grille.

On February 27, 2009, Zeverino had the day off work. He set out from his home and began driving his tractor to FABCO to have the grille replaced. He planned to return home after FABCO completed the work. No one from Taylor knew that he was going to FABCO, and he was not doing so pursuant to any orders or instructions from Taylor. He did not consider himself to be acting “in the business of Taylor” at the time, and he was not pulling a trailer or any other freight. However, while driving to FABCO, Zeverino’s daily driver’s log reflected that he was “driving,” rather than “off duty.”

At his deposition, Zeverino testified he “needed to get [the grille] repaired” because it was “already starting to fall apart and fall off on the highway.” He stated the repairs were necessary for the tractor to operate “the way [he] needed it to … as an owner, operator for [Taylor.]” However, he conceded the broken grille and oil filler tube did not prevent him from hauling loads on Taylor’s behalf. He also admitted the tractor was never placed out of service because of these defects.

On the way to FABCO, Zeverino was involved in an accident with three other vehicles, including one driven by Brian Casey. At the accident scene, a Wisconsin state trooper conducted a “Level I” inspection of Zeverino’s tractor, the most comprehensive type of post-accident inspection, and completed a “Driver/Vehicle Examination Report.” The report noted that no violations were discovered during the inspection of the tractor. The trooper crossed off the portion of the form requiring certification that “all Out of Service defects … have been repaired and the vehicle has been restored to safe operating condition.”

At the accident scene, Zeverino logged himself as “on duty (not driving)” on his driver’s daily log. Following the accident, he drove the tractor to FABCO, where the grille and oil filler tube were replaced as planned. Casey subsequently sued Zeverino and several other defendants, asserting personal injury claims.

A dispute arose between Great West and Acceptance as to which of their policies covered Casey’s claims. Both insurers agreed that one, but not both, of their policies afforded coverage. They also agreed that resolution of the coverage issue turned on whether Zeverino was operating the tractor “in the business of” Taylor at the time of the accident. If so, Great West’s commercial automobile policy provided coverage; if not, there was coverage under Acceptance’s non-trucking use policy.

DISCUSSION

The court’s goal in interpreting an insurance policy is to give effect to the parties’ intent. If the policy language is unambiguous it is simply enforced as written.

The Acceptance Policy

Acceptance does not dispute that the non-trucking use policy it issued to Zeverino makes an initial grant of coverage for Casey’s claims. However, Acceptance argues the policy’s exclusions apply. Acceptance first contends Exclusion 14(b) precludes coverage for Casey’s claims. Exclusion 14(b) states that the insurance provided by the policy does not apply to “a covered ‘auto’ … [w]hile used in the business of anyone to whom the ‘auto’ is rented[.]” It is undisputed that Zeverino’s tractor constitutes a “covered ‘auto'” under the policy and that the tractor was rented to Taylor. Thus, the dispositive issue is whether the tractor was being used “in the business of” Taylor at the time of the accident.

If the owner/operator could have continued hauling loads for the lessee without obtaining the repairs, then the repairs did not further the lessee’s commercial interests. The facts in this case establish that the repairs to the tractor’s grille and oil filler tube were not necessary for Zeverino to continue operating the tractor in Taylor’s business. He admitted these defects did not prevent him from hauling loads on Taylor’s behalf. He conceded the tractor was never taken out of service because of the broken grille and oil filler tube. These facts establish that Zeverino could have continued operating his tractor in Taylor’s business without first repairing the grille and oil filler tube. Consequently, the repairs did not further Taylor’s commercial interests, and Zeverino was not acting “in the business of” Taylor at the time of the accident.

The Great West Policy

In addition to determining that Casey’s claims were covered under the Acceptance policy, the trial court also concluded the Great West policy did not provide coverage.

Since the appellate court had already determined that Zeverino was not acting in the business of Taylor when the accident occurred he was not an insured under the Great West policy, and the policy does not make an initial grant of coverage for Casey’s claims. As a result, those claims are not covered under the Great West policy.

ZALMA OPINION

This case is evidence that insurance companies must be careful when suing another insurance company. The undisputed facts of this case should have been clear to Acceptance that its policy applied and there were no facts that indicated that Great West provided coverage for the accident. The money to litigate the issue would have been better spent by providing the driver with a vigorous and effective defense to the suit by Casey.

Bad facts always makes bad law. This could have been resolved by the two insurers had they done a thorough investigation before starting the coverage suit.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Copyright Not Given Up by Performance

Happy Birthday Martin Luther King, Jr.

When I was a 21-year-old young man I was moved by the “I Have a Dream” speech as were almost every person in the United States. I can only wish more people today agreed with Dr. King. On this holiday celebrating his birth, I move from my typical insurance law summaries to talk about a case dealing with the “I Have a Dream” speech that worked to protect Dr. King’s estate’s right to the speech.

The Estate of Martin Luther King, Jr., Inc. brought a copyright infringement action against CBS, Inc. after CBS produced a video documentary that used, without authorization, portions of civil rights leader Dr. Martin Luther King’s famous “I Have a Dream” speech at the March on Washington on August 28, 1963. The district court granted summary judgment to CBS on the ground that Dr. King had engaged in a general publication of the speech, placing it into the public domain. In Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., 194 F.3d 1211, 52 U.S.P.Q.2d 1656 (11th Cir. 11/05/1999), the 11th Circuit Court of Appeal resolved the dispute with one concurring justice arguing that there was no publication but just a performance.

FACTS

The facts underlying this case form part of our national heritage and are well-known to many Americans. On the afternoon of August 28, 1963, the Southern Christian Leadership Conference (“SCLC”) held the March on Washington (“March”) to promote the growing civil rights movement. The events of the day were seen and heard by some 200,000 people gathered at the March, and were broadcast live via radio and television to a nationwide audience of millions of viewers. The highlight of the March was a rousing speech that Dr. Martin Luther King, Jr., the SCLC’s founder and president, gave in front of the Lincoln Memorial (“Speech”). The Speech contained the famous utterance, “I have a dream …,” which became symbolic of the civil rights movement. The SCLC had sought out wide press coverage of the March and the Speech, and these efforts were successful; the Speech was reported in daily newspapers across the country, was broadcast live on radio and television, and was extensively covered on television and radio subsequent to the live broadcast.

On September 30, 1963, approximately one month after the delivery of the Speech, Dr. King took steps to secure federal copyright protection for the Speech under the Copyright Act of 1909, and a certificate of registration of his claim to copyright was issued by the Copyright Office on October 2, 1963. Almost immediately thereafter, Dr. King filed suit in the Southern District of New York to enjoin the unauthorized sale of recordings of the Speech and won a preliminary injunction on December 13, 1963.

For the next twenty years, Dr. King and the Estate enjoyed copyright protection in the Speech and licensed it for a variety of uses, and renewed the copyright when necessary. In 1994, CBS entered into a contract with the Arts & Entertainment Network to produce a historical documentary series entitled “The 20th Century with Mike Wallace.” One segment was devoted to “Martin Luther King, Jr. and The March on Washington.” That episode contained material filmed by CBS during the March and extensive footage of the Speech (amounting to about 60% of its total content). CBS, however, did not seek the Estate’s permission to use the Speech in this manner and refused to pay royalties to the Estate.

DISCUSSION

Under the regime created by the 1909 Act, an author received state common law protection automatically at the time of creation of a work. This state common law protection persisted until the moment of a general publication. When a general publication occurred, the author either forfeited his work to the public domain or, if he had complied with federal statutory requirements beforehand, converted his common law copyright into a federal statutory copyright. In order to soften the hardship of the rule that publication destroys common law rights, courts developed a distinction between a “general publication” and a “limited publication.” Only a general publication divested a common law copyright.  A general publication occurs when a work was made available to members of the public at large without regard to their identity or what they intended to do with the work. A non-divesting limited publication was one that communicated the contents of a work to a select group and for a limited purpose, and without the right of diffusion, reproduction, distribution or sale.

It appears from the case law that a general publication occurs only in two situations. A general publication occurs if tangible copies of the work are distributed to the general public in such a manner as allows the public to exercise dominion and control over the work.  Even if a performance were regarded as a copy of the work being performed, the act of publication would not occur merely by virtue of viewing the performance since an audience does not thereby gain such dominion over the copy as to warrant the Conclusion that the work has been surrendered to the public.

A general publication may occur if the work is exhibited or displayed in such a manner as to permit unrestricted copying by the general public.

The case law indicates that distribution to the news media, as opposed to the general public, for the purpose of enabling the reporting of a contemporary newsworthy event, is only a limited publication. The Eleventh Circuit believed that the authority granted to the press in the instant case-extensive news coverage including live broadcasts-is analogous to a case where authority was granted to the host of an educational television program to broadcast on television. In this  case, authority was granted to the press for extensive news coverage, also including broadcasts on television. In both cases, the authority was granted to a limited group for a limited purpose.

At trial, CBS may well produce evidence that brings its republication of the speech outside copyright protection. The Eleventh Circuit concluded CBS did not do so at summary judgment, reversed the trial court and concluded there existed genuine issues of material fact as to whether a general publication occurred.

One justice argued that there was no publication, general or limited,  because Dr. King’s delivery of his “I Have A Dream” speech was a mere performance of that work, and performance simply cannot constitute a publication regardless of (1) the size of the audience involved, or (2) efforts to obtain widespread contemporary news coverage under circumstances that may have allowed the copying of the work.

ZALMA OPINION

I too, have a dream, that people in the United States will be judged by the content of their character not the color of their skin. To me, it is still a dream not yet fulfilled.

Since this is an insurance blog an interesting question arises as to whether CBS was insured under a personal injury cover for the defense and indemnity.

After this case was decided CBS and the King Estate reached a settlement before proceeding further in the courts. My guess is that the insurer for CBS decided it was best to cut its losses and paid the royalties to which the estate was entitled.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Another Brilliant and Short Opinion From New York

Fraud in Inducement Voids Contract

The New York Supreme and/or Appellate Courts Appellate Division, First Department in an extremely brief and clear headed decision found in MBIA Insurance Corporation v. Credit Suisse Securities (Usa), LLC, et al, No. 9003 603751/09 (N.Y.App.Div. 01/15/2013):

Order, Supreme Court, New York County (Shirley Werner Kornreich, J.), entered October 13, 2011, which, to the extent appealed from, upon renewal, struck plaintiff’s demand for a jury trial, unanimously reversed, on the law, without costs, and the jury demand reinstated.

The complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim. Thus, the provision of the agreement that waives the right to trial by jury does not apply (see Ambac Assur. Corp. v DLJ Mtge. Capital, Inc., __ AD3d __ [1st Dept 2013], Appeal No. 9002, decided simultaneously herewith; Wells Fargo Bank, N.A. v Stargate Films, Inc., 18 AD3d 264, 265 [1st Dept 2005]). It is of no consequence that the complaint does not contain the word “rescission” or expressly state that it challenges the validity of the insurance agreement (see Leon v Martinez, 84 NY2d 83, 87- 88 [1994]).

ZALMA OPINION

Some lawyers and some courts have forgotten the meaning of the word “brief.” New York’s Supreme Court, Appellate Division has not. This was a simple decision – the complaint alleged fraud in the inducement of a contract – and as such was sufficient to be brought to trial to determine if the fraud is proved and the contract should be declared void. If the contract is void, because of the fraud, the contract terms concerning right to trial by jury have no effect.

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Tri-Partite Relationship Bars Discovery of Privileged Communications

Insurer is Also Client of Lawyer Appointed by it to Litigate For Insured

In Bank of America, N.A., et al v. the Superior Court of Orange County, No. G046829 (Cal.App. Dist.4 01/15/2013) the California Court of Appeal was asked to resolve a question of attorney client privilege and attorney work product protection when a Title insurer retained counsel to defend its insured. Bank of America and its insurer claimed privilege and that a tripartite attorney-client relationship existed among the insurer, insured, and counsel. As a consequence, confidential communications between either the insurer or the insured and counsel are protected by the attorney-client privilege, and both the insurer and insured are holders of the privilege. In addition, counsel’s work product does not lose its protection when it is transmitted to the insurer.

FACTS

Fidelity is the insurer and B of A is the insured under a lender’s title policy insuring a deed of trust. When B of A made a claim under the policy, Fidelity retained the law firm of Gilbert, Kelly, Crowley & Jennett LLP (GKCJ) to prosecute, on B of A’s behalf, the underlying lawsuit for equitable subrogation, injunctive relief, declaratory relief, and fraud. Defendant Pacific City Bank (PCB) served subpoenas duces tecum on Fidelity’s parent company and Lawyers Title Insurance Company (Lawyers Title), requesting production of documents, including communications between GKCJ and Fidelity regarding the litigation. B of A moved to quash or modify the subpoenas on the ground they sought confidential communications and documents protected by the attorney-client privilege or attorney work product doctrine. The respondent court denied the motions to quash or modify, and B of A and Fidelity brought this petition for writ of mandate or prohibition to challenge the court’s order.

STANDARD OF REVIEW

The standard of review for a discovery order is abuse of discretion. The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason. When two or more inferences can reasonably be deduced from the facts, the reviewing court has no authority to substitute its decision for that of the trial court.

DISCUSSION

The nature of the tripartite attorney-client relationship in the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party’s claim.

“The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose – the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity – the defense team – arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena.”

Assuming for purposes of analysis the reservation of rights in this case did create a disqualifying conflict, PCB’s argument fails for two fundamental reasons. First, the right to invoke the conflict would belong solely to B of A.  PCB, as B of A’s adversary, cannot assert B of A’s right to Cumis counsel in order to create a waiver of the attorney-client privilege and attorney work product doctrine as to communications between GKCJ and the insurer, Fidelity.

The Court of Appeal concluded that a tripartite attorney-client relationship exists among Fidelity, B of A, and GKCJ; they are a unitary whole and share a common purpose lasting during the pendency of the claim or litigation. As a consequence, B of A and Fidelity are joint clients of GKCJ.

Confidential communications between lawyer and client are broadly protected from disclosure. The party claiming the privilege has the burden of establishing the preliminary facts necessary to support its exercise, i.e., a communication made in the course of an attorney-client relationship. Once that party establishes facts necessary to support a prima facie claim of privilege, the communication is presumed to have been made in confidence and the opponent of the claim of privilege has the burden of proof to establish the communication was not confidential or that the privilege does not for other reasons apply. B of A met its burden.

Material that includes an attorney’s analysis and legal assessment constitutes attorney work product.

The Court of Appeal granted the petition for writ of mandate or prohibition.

ZALMA OPINION

The Court of Appeal took more than 100 numbered paragraphs to reach this decision which is almost as old as liability insurance. When an insurer hires a lawyer to defend or pursue an action on behalf of its insured the insured and the insurer are clients of the lawyer and confidential communications and work product of the lawyer may not be discovered.

The case is important only because it applies the tri-partite relationship to title insurance and to cases where the insurer retains a lawyer to represent the plaintiff to pursue the insurer’s right of subrogation.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Collateral Estoppel Establishes Damages

A Clairvoyant Court

The Connecticut Court of Appeals, defying Einstein’s theory of relativity, issued its opinion dated January 22, 2013 on January 17, 2013. In Roberto Marques v. Allstate, No. (AC 34169) (Conn.App. 01/22/2013) Marques appealed from the summary judgment rendered by the trial court in favor of Allstate Insurance Company, in this action to recover underinsured motorist benefits under an automobile insurance policy issued by Allstate for injuries he claims to have suffered in a collision between his automobile and that of an underinsured motorist.

FACTS

The record revealed that on July 31, 2006 Marques, while insured by Allstate under an automobile insurance policy affording him up to $50,000 in underinsured motorist coverage, was struck and injured while operating his motor vehicle by another motor vehicle operated by Scott E. Oshinski, whom the plaintiff claims to have been an underinsured motorist. Oshinski also had an automobile insurance policy with Allstate, with a liability limit of $20,000 per occurrence.

Following the collision, the plaintiff instituted a negligence action against Oshinski in the Danbury Superior Court which the parties subsequently submitted to binding arbitration. Prior to the arbitration hearing, which was held on December 9, 2010, the parties executed a “confidential high/low award range arbitration agreement.” At the conclusion of the hearing, the arbitrator issued an award in favor of the plaintiff on the issues of liability and damages. On the issue of damages, the arbitrator found, more particularly, that the sum of $20,000 constituted “fair, just and reasonable compensation for the plaintiff’s damages.” Because the damages, so determined, fell within the range of damages to which the parties agreed in their confidential high/low arbitration range agreement, the arbitrator’s award was unaffected by that agreement.

In compliance with the award, Allstate, as Oshinski’s insurance carrier, paid the plaintiff $20,000 as full compensation for all injuries and losses he had suffered as a result of the automobile collision.

Thereafter, on March 18, 2011, Marques commenced the present action against the defendant to recover underinsured motorist benefits under his automobile insurance policy with Allstate, alleging that because his actual damages resulting from the subject collision exceeded the $20,000 limit of Oshinski’s liability coverage, which had been exhausted, he was entitled to recover all damages in excess of that amount up to the limits of his underinsured motorist coverage under his policy. Allstate filed a motion for summary judgment on the ground of collateral estoppel, which the court granted.

On appeal, the plaintiff argued that the trial court improperly found that there is no genuine issue of material fact that his underinsured motorist claim in this case is barred by the doctrine of collateral estoppel.

ANALYSIS

Collateral estoppel, or issue preclusion, prohibits the relitigation of an issue when that issue was actually litigated and necessarily determined in a prior action. For an issue to be subject to collateral estoppel, it must have been fully and fairly litigated. The doctrine of collateral estoppel is based on the public policy that a party should not be able to relitigate a matter which it already has had an opportunity to litigate.

Collateral estoppel may be invoked against a party to a prior adverse proceeding or against those in privity with that party. The doctrine may be invoked offensively, in support of a party’s affirmative claim against his opponent, or defensively, in opposition to his opponent’s affirmative claim against him. The present case involves the defensive use of collateral estoppel, which occurs when a defendant in a second action seeks to prevent a plaintiff from relitigating an issue that the plaintiff had previously litigated in another action against the same defendant or a different party. In Connecticut it is well established that privity is not required in the context of the defensive use of collateral estoppel.

In order to recover underinsured motorist benefits under his policy with the defendant, it was incumbent upon the plaintiff to prove that his total compensatory damages resulting from the collision at issue exceeded the coverage available to compensate him for those damages under Oshinski’s liability policy. Because the issue of the plaintiff’s total compensatory damages resulting from the collision was actually litigated and necessarily determined in the binding arbitration hearing in his prior action against Oshinski, where the amount of such damages was found to be exactly $20,000 – an amount precisely equal to, and thus not exceeding, the limit of liability coverage under Oshinski’s automobile insurance policy – the defendant properly raised the doctrine of collateral estoppel defensively to prevent the plaintiff from relitigating that issue in this case.

As the moving party seeking summary judgment, it was incumbent upon Allstate to show that the judgment in the prior action could not have been rendered without deciding the issues upon which the present action was predicated. Allstate bore the burden of demonstrating that the issue raised in the present action, the amount of damages to which the plaintiff was legally entitled, was litigated and thus determined in the plaintiff’s prior arbitration with Oshinski. Because the defendant satisfied its burden of establishing the applicability of collateral estoppel and the lack of any genuine issue of material fact related thereto, we conclude that the court properly rendered summary judgment in favor of the defendant.

ZALMA OPINION

I am certain that Mr. Marques would like to go back in time rather than back to the future in this case. He tried his damages case and was awarded $20,000 and amount equal to the other party’s insurance coverage. He then sued his own insurer to recover more claiming that the $20,000 finding was not sufficient. Since the issue had been litigated the court correctly — albeit prematurely — affirmed the summary judgment.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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What is Physical Evidence of Loss?

Duty of Insurer to Prove Exclusion Applies

Burglary and theft are usually easy to prove: there is a broken window or door, full shelves are empty, cases are broken, debris is left by the burglars, or there are holes drilled in safes. Missing property, with little or no physical evidence of criminal activity is more difficult. When two packages of jewelry were not entered into inventory after delivery and could not be located a claim was made to National Grange Mutual Insurance Company and The Main Street Insurance Group (collectively “NGM”) who denied coverage for lack of physical evidence of theft. NGM appealed from a trial court grant of summary judgment in favor of Elegant Slumming, Inc (“Elegant Slumming”), its insured, in a property insurance coverage dispute over the application of an exclusion requiring physical evidence of loss in National Grange Mutual Insurance Company and v. Elegant Slumming, Inc. , No. 278, 2012 (Del. 01/09/2013).

The Supreme Court of Delaware was faced with NGM’s contention that the trial court erred in finding that the property insurance policy at issue requires only “some evidence,” rather than “physical evidence,” to show what happened to lost property.

FACTS

Elegant Slumming is a jewelry store specializing in selling precious jewelry, gold, platinum, gemstones, fashion jewelry and costume jewelry, owned by Phillip Livingston. The store has three fulltime employees, one of whom is Benjamin Killebrew.

Merchandise would often arrive at the store via the mail. Such packages contained very valuable items, so would need to be signed for by one of the three full time employees. When received, the packages would be placed under what was called the “wrap desk.” The packages would be opened later and the jewelry placed in a safe until they could be inventoried.

On the morning of June 24, 2010, Elegant Slumming received two packages. Delivery receipts signed by Killebrew indicate the packages contained jewelry worth $141,640. Killebrew placed the package under the wrap desk. Livingston remembers seeing the packages under the wrap desk on the day in question.

That day was a busy and stressful one for the employees of Elegant Slumming. Killebrew testified at his deposition he was particularly frustrated with the performance of a part-time employee. While closing up shop that afternoon, Killebrew began cleaning out trash located near the wrap desk.

Livingston realized two days later that the two packages for which he signed had not been inventoried. He then searched for the packages to no avail. Livingston called Killebrew, who initially stated he did not remember the packages, but offered to come into the store to assist in the search.

On his way to Elegant Slumming, Killebrew remembered his hasty disposal of the trash near the wrap desk. He made the connection, and it became clear to him that he had thrown away the packages by accident. Killebrew explained to Livingston that there were open and empty boxes right next to the wrap desk, and he threw away closed boxes along with the empty ones. Killebrew is “100%” sure he threw the two boxes away. The boxes have never been located.

Livingston submitted a claim to his property insurance carrier, NGM, which is a subsidiary of the Main Street America Group. The claim was denied. NGM denied the claim based on the following coverage exclusion in Elegant Slumming’s insurance policy: “We will not pay for loss or damage to property that is missing but there is no physical evidence to show what happened to it, such as shortage disclosed on taking inventory.”

Elegant Slumming brought suit in the Superior Court and the parties filed cross-motions for summary judgment. The trial court denied NGM’s motion and granted Elegant Slumming’s motion, finding that the coverage limitation only “requires some evidence of what happened to the missing property.” After further briefing and a hearing on damages, the trial court awarded Elegant Slumming $141,640 as payment for the lost jewelry.

IS THERE PHYSICAL EVIDENCE?

NGM first claims the trial court erred in finding that the insurance policy requires only “some evidence,” rather than “physical evidence,” to show what happened to lost property. The policy states “physical evidence” is required to “show what happened” to the lost property.

DECISION & ANALYSIS

The Delaware Supreme Court agreed with NGM that the trial court erred in concluding that verbal testimony satisfies the physical evidence requirement because it is not physical evidence.

Clear and unambiguous language in an insurance policy should be given its ordinary and usual meaning. When the language of an insurance contract is clear and unequivocal, a party will be bound by its plain meaning because creating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities, and duties to which the parties had not assented. To find that a requirement of “physical evidence” is satisfied exclusively by testimonial evidence would be contrary to the plain and ordinary meaning of the term. “Physical evidence” means any article, object, document, record or other thing of physical substance. The Supreme Court concluded that testimonial evidence, by itself, is insufficient to constitute the “physical evidence” intended by the coverage exclusion.

The Supreme Court’s holding that testimonial evidence, by itself, does not constitute “physical evidence” did not end its analysis. Since it was dealing with an exclusion the burden was upon NGM to demonstrate that the policy exclusion applies. Elegant also presented “physical evidence” – as the court defined the term –  by introducing the purchase order invoices, the shipping receipts for the jewelry, photographs of the wrap desk area where the jewelry packages were placed upon arrival and photographs showing the close proximity of the trash bins to this area. These items of physical evidence, together with the testimony explaining their relevance, show what happened to the property and, therefore, the trial court’s judgment was affirmed for different reasons than stated in its judgment.

ZALMA OPINION

This is an odd decision because it turned photographs that do not show what happened but describe a scene and invoices showing receipt of the product, is physical evidence of the loss is reasoning backwards from an desire to indemnify the insured rather than to apply the wording of the policy of insurance. The jewelry packages could just have easily been taken by a customer during a busy day, by the less than effective part-time employee, or tossed away in the trash. The exclusion should be read to mean that there must be physical evidence, as defined by the court, that shows there was a loss by an insured cause of loss.

I would suggest revising the wording to read:

We will not pay for loss or damage to property where the loss is a result of:

  1. Unexplained or mysterious disappearance.
  2. Shortage found upon taking inventory.
  3. Shortage of property claimed to have been shipped when the package is received by the consignee in apparent good condition with the seals unbroken.
  4. Property that is found missing from the last place it was seen and where  there is no physical evidence showing it was taken as a result of theft or robbery.
  5. Property that is missing where there is no physical evidence to show what happened to it.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Go Directly to Jail – Fraud Fails

Zalma’s Insurance Fraud Letter 

January 15, 2013

Continuing with the second issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the January 15, 2013 issue reports on how a hidden – in a location only known to law enforcement – vehicle Identification Number (VIN) on a Harley helped convict a person who falsely reported it stolen; a macabre insurance fraud scheme from South Africa used defraud life insurers; how an illegal rebating scheme cost a California insurer $1.25 million; why an adjuster’s license was revoked for fraud; and why National Union Fire Insurance was required to pay $6 million in penalties to the state of California.

Although insurance fraud continues to be the orphan child of the criminal justice system this month’s issue of ZIFL gives hope that the tide is turning and that more people who attempt fraud will be prosecuted, convicted and affirmed on appeal.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    One Event – One Occurrence
•    Adjuster’s License Revoked for Fraud
•    Care Needed When Dealing With Public Adjuster
•    Never Give Up Good Tort Claim for Poor Bad Faith Claim
•    Absolute Immunity
•    Duty to Defend Potential Advertising Injury
•    If You Can Work You Are Not Totally Disabled
•    Private Limitation of Action
•    Assumtion Of Risk — A Broad Defense
•    “Public Policy” Can Rewrite an Insurance Policy

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

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

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

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

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

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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One Event – One Occurrence

Multiple Injuries Do Not Create Multiple Occurrences

Insurance companies, like everyone else, hate to be sued. They have no compunction, however, to sue another insurance company to avoid or limit their exposure to a serious incident. When 13 people died and 29 more were injured in a single accident the primary insurer claimed that its single occurrence limit applied and the excess insurer was obligated for any damages in excess of the primary limit. The multi-party suit was eventually settled and the excess insurer sought a second limit from the primary claiming there was more than one limit. The trial court disagreed and the Illinois Court of Appeal was asked to resolve the dispute in Jean Ware, As Personal Representative of the Estate of v. First Specialty Insurance Corporation, 2012 IL App 113340 (Ill.App. Dist.1 01/11/2013).

FACTS

At approximately 12:30 a.m. on June 29, 2003, a three-story porch located at the rear of the property at 713 West Wrightwood in Chicago, Illinois collapsed during a party, resulting in the deaths of 13 individuals and injuries to 29 more. The defendants assigned their rights against First Specialty Insurance Corporation (First Specialty) after reaching a settlement. Plaintiffs then filed this declaratory action against First Specialty, arguing that because the porch collapse constituted more than one occurrence, First Specialty was liable to them for the aggregate limit of the relevant insurance policy, $2 million, rather than the $1 million per occurrence limit that First Specialty had already paid. After the trial court granted the insurer’s summary judgment motion the plaintiffs appealed.

On the evening of June 28, 2003, the residents of the second- and third-floor apartments hosted a party. At approximately 12:30 a.m. on the morning of June 29, 2003, while all of the plaintiffs were standing on either the second or third floor, the third floor of the porch suddenly collapsed onto the second floor of the porch, which immediately collapsed onto the first floor of the porch.

The parties agree that “[t]here are no intervening acts or circumstances which could have or did contribute to and/or cause the deaths, injuries and/or mental conditions” suffered by the plaintiffs.

THE POLICY

At the time of the accident, Pappas’ property was insured by a policy issued by defendant First Specialty from February 1, 2003 to February 1, 2004. The policy’s “Coverage A Bodily Injury and Property Damage Liability” coverage unit had an “Occurrence Limit of $1,000,000 and a General Aggregate Limit of $2,000,000, subject to a $5,000 per occurrence deductible.”

The policy’s “Limits of Insurance” section provided that the most it would pay in any one occurrence was $1 million regardless of the number of persons injured.

THE CONSOLIDATED LITIGATION AND SETTLEMENT

Plaintiffs filed various complaints against the aforementioned insureds, which were later consolidated for discovery purposes only (hereinafter the Consolidated Litigation). The general thrust of those complaints was that the insureds’ failure to inspect the porch and maintain it in a reasonably safe manner was the cause of the plaintiffs’ deaths and injuries. First Specialty provided representation to the insureds and other defendants in the Consolidated Litigation, subject to a reservation of rights that the consolidated litigation “arose out of one accident or ‘occurrence’ and that First Specialty’s liability in connection with the Consolidated Litigation under no circumstances would exceed the Policy’s $1,000,000 Each Occurrence Limit.”

On March 11, 2010, the parties to the Consolidated Litigation, as well as Philadelphia Indemnity Insurance Company (Philadelphia), the insureds’ excess insurance carrier, entered into a settlement agreement resolving the litigation. As part of the agreement, all actions comprising the Consolidated Litigation were dismissed with prejudice.

On March 16, 2010, plaintiffs initiated the instant action against First Specialty, seeking a declaratory judgment stating that First Specialty was obligated to pay out an additional $1 million under the policy because the collapse constituted more than one occurrence. First Specialty denied these allegations, arguing that plaintiffs’ injuries all stemmed from one occurrence, the collapse, and therefore it was not required to pay an additional $1 million.

The trial court concluded that: “[T]here was simply one source of all Plaintiffs’ injuries and resulting deaths. The porch collapse, and only the porch collapse, was the dangerous condition causing harm to the Plaintiffs.”

ANALYSIS

The Illinois Court of Appeal was required  to interpret relevant provisions of the policy in order to determine whether the porch collapse and resulting injuries and deaths constituted a single occurrence under the policy language.

The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In light of this language, the appellate court could  see nothing in the policy which would support plaintiffs’ contention that the collapse constituted multiple occurrences under the policy. It was presented with two theories it could follow: the time and effect theory or the cause theory.

Under the effect theory, the fact that more than one person was injured and three claims were filed would mean that there were three ‘occurrences’ for purposes of determining liability coverage, absent specific policy language to the contrary. Under the cause theory, on the other hand, the fact that the damage to all of the persons injured resulted from the same conditions and was inflicted as part of an unbroken and uninterrupted continuum would yield the conclusion that there was only one occurrence.

Under the cause theory, the time at which injuries manifest themselves is irrelevant to a determination of the number of occurrences. The only relevant question is how many separate events or conditions led to a party’s injuries.

Applying the cause theory to the facts of this case leads to the inescapable conclusion that the collapse constituted only one occurrence under the policy. Because the parties are in agreement that the porch collapse was the single cause of all of plaintiffs’ injuries, there can be no question that, under the cause theory, the collapse constituted only one occurrence under the policy and, therefore, the trial court did not err in granting summary judgment in favor of First Specialty.

Plaintiffs, however, contend that Court of Appeal inquiry must go beyond the cause theory and apply the “time and space test” which, they alleged, requires a reversal of summary judgment in favor of First Specialty.  The time and space test is inapplicable in this case. The Illinois Court of Appeal found that the cause theory is controlling because it is undisputed that the injuries suffered by plaintiffs all arose from a discrete incident: the collapse of the porch. Because the plaintiffs’ losses all emanate from that single cause there is but one occurrence.

Moreover, even if the court was to apply the time and space test to the case at bar it would still reach the same result. The trial court in this case was presented with more than sufficient evidence to conclude that the cause of plaintiffs’ injuries was so closely linked in time and space as to be considered by the average person as one event. All of the Plaintiffs’ deaths and injuries can be directly traced to one cause: the porch collapse.

ZALMA OPINION

The insurers in this case were not governed by the usual greed found in cases where there is an assignment from the defendant the right to sue its insurer. See Never Give Up Good Tort Claim for Poor Bad Faith Claim. This was an coverage dispute and the parties agreed to protect the insured and then resolve their dispute over the primary’s aggregate limit in a single suit limited to the $1,000,000.  Although one million dollars is a good reason to litigate it is best to do so in a case where there is a good probability of winning.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Adjuster’s License Revoked for Fraud

 No License for Fraudster

Michael Bresette sought relief from a final order of the Rhode Island Department of Business Regulation that permanently revoked his insurance claim adjuster’s license in Michael Bresette v. State of Rhode Island and Providence Plantations Department of Business, No. KC 12-0390 (R.I.Super. 01/07/2013) claiming that he did not receive proper notice of the administrative hearing that he did not attend. Prior to the hearing Bresette had been charged with five felony counts of insurance fraud and other criminal activities and multiple complaints for improper activities as an insurance adjuster.

Facts

The Department of Business Regulation (“Department”), is the administrative agency charged with regulating the practice of insurance adjusters in the State of Rhode Island. Bresette held a Rhode Island resident insurance adjuster’s license from March 5, 2009 until January 9, 2012. In December 2011, the Department – acting upon numerous customer complaints and information that Bresette had been indicted on eight felony counts of larceny and insurance fraud – decided to initiate administrative action against Bresette.

Bresette did not appear at the order to show cause hearing, where counsel for the Department appeared before a hearing officer and submitted evidence concerning the eight-count felony indictment and the consumer complaints that had been investigated prior to that date. Also presented was the evidence that notice of the hearing had been delivered to Bresette’s residence. The hearing officer who presided over the hearing prepared a written document that included findings of fact and conclusions of law based on evidence presented at the hearing. This document recommended that Bresette be defaulted based on his failure to appear and defend the administrative action, and that his insurance adjuster’s license be permanently revoked.

Bresette filed a motion to reconsider with the Department, along with an affidavit indicating that Bresette was out of the country and that he never received a copy of the hearing notice. The Department issued an order (“Order”) denying the motion to reconsider, based in part on Bresette’s failure to file this motion promptly after entry of the Department’s final Decision. The Order went on to state that even if the Motion to Reconsider had been timely filed, Bresette had not established good cause for the Hearing Officer to reconsider the matter. The Order concluded that the Department had effectuated service pursuant to its regulations and Bresette had not satisfied his burden of showing excusable neglect for failing to appear or otherwise respond.

Bresette filed a Complaint in Superior Court appealing the Department’s Decision, which permanently revoked Bresette’s insurance adjuster’s license.

Analysis

Pursuant to Rhode Island General Laws the Department of Business Regulation has authority over insurance claims adjusters and the power to suspend or revoke an insurance claim adjuster’s license “upon proof . . . that the interests of the insurer or the interests of the public are not properly served under the license, or for cause.”

Bresette seeks relief from the Decision issued by the Department, a designated administrative agency. The Decision, which permanently revoked Bresette’s insurance adjuster’s license, was based on the recommendations of the Department’s Hearing Officer, following a hearing on the matter held on January 9, 2012. These recommendations were then approved by the Director of the Department, who issued the Decision. Finding that review of the Department’s final orders will provide an adequate remedy.

On appeal, Bresette maintains that he never received notice of the administrative hearing and seeks relief from the Department’s default Decision permanently revoking his insurance adjuster’s license after Plaintiff failed to appear. In addition to not being served in person, Plaintiff submits an affidavit stating that he never received notice of the hearing at his mailing address when he returned. Although Plaintiff’s affidavit does not mention whether he received the notice sent by certified mail, Plaintiff argues in his brief that even if he had received notice sent by certified mail “purportedly left at his residence on January 7,” such notice does not constitute “reasonable notice” for a hearing.

Here, the record reflects that notice was sent to Bresette in accordance with the statute and the Department’s Rules. Notice of the hearing was mailed to Bresette’s home address – the address provided by Bresette and on file with the Department – by both regular and certified mail, although service by only one of these modes was necessary. The statement contained in the Decision claiming that Bresette was served notice of the hearing on December 29, 2011 is not in error, since the Rules clearly allow service to be considered effectuated upon the date of mailing.

The Rhode Island Supreme Court has established a two-part test for setting aside a default judgment on the basis of accident, mistake, unforeseen cause or excusable neglect. The person seeking relief must convince the trial justice of the adequacy of the reason given for his failure to respond to the court’s process and he must state a defense which is prima facie meritorious. Moreover, the moving party must make a “factual showing” in regard to this two-prong standard.

In Rhode Island, notice sent by regular mail to a person’s address of record and usual place of abode creates a presumption of receipt. As to certified mail, receipt of notice constitutes actual delivery as a notice by [certified] mail is considered to have reached a recipient when it is delivered where he normally receives mail. Bresette offered no explanation for his alleged failure to receive two separate forms of notice while receiving all other correspondence from the Department, including the Decision, Order and seven customer complaints which Bresette responded to in writing and are included in the record. Moreover, the mailed notices were never returned as undeliverable to the Department, thus reinforcing the presumption that the notices reached their final destination.

The record reflects that the Department mailed, and thus served notice upon Bresette on – twelve days in advance of the scheduled hearing date and more than the ten day notice provided for in the statute.  Prior to this date, Bresette had already been indicted and formally charged with eight felony counts, all stemming from events occurring while in his capacity as an insurance adjuster, an occupation regulated by the Department. These eight felony counts, which also served as the basis for the Department bringing sanctions against Bresette, had already been brought to Bresette’s attention by the Department well in advance of the show cause hearing. In fact, the record reflects that the Department, upon receiving each customer complaint which served as the basis of the respective felony charge, forwarded the complaint to Bresette and demanded a written response explaining the occurrence. These detailed explanations to the Department – individually written by Bresette within days of receiving each complaint – date back to 2010 and are contained in the record.

Thus, based on the facts of this case – including the severity of the criminal charges, Bresette’s prior knowledge of the allegations, and the Department’s authority to take immediate action to guard against any further harm to the public – this Court finds that the notice provided to Bresette of the show cause hearing was reasonable.

At the show cause hearing held on January 9, 2012, the hearing officer heard testimony and considered evidence concerning the five felony counts of insurance fraud and three felony counts of obtaining money under false pretenses that Bresette was indicted upon and later charged with by the Rhode Island State Police. Also considered by the hearing officer were seven consumer complaints against Bresette from different individuals, with dates of loss ranging from January 2010 to January 2011, each alleging improprieties relative to his conduct as an insurance claims adjuster. Based on such evidence submitted, the hearing officer further found that it would be in the public interest to immediately and permanently revoke Bresette’s insurance adjuster’s license.

The hearing officer found that Plaintiff committed the following violations: “(3) violating any insurance laws, or violating any regulation, subpoena, or order of the Department or of another state’s insurance commissioner;” “(5) improperly withholding, misappropriating, or converting any monies or properties received in the course of doing insurance business;” “(6) having been convicted of a felony;” “(7) having admitted or been found to have committed any insurance unfair trade practice or insurance fraud;” “(8) using fraudulent, coercive or dishonest practices; or demonstrating incompetence, untrustworthiness or financial irresponsibility in this state or elsewhere.”

Zalma Opinion

People who commit, and for many years, get away with insurance fraud have such unmitigated gall as to make Cyrano DeBergerac blush. The best defense Bresette was able to come up with was that he did not get notice and it was unfair to send him notice by mail. He made no comment about his violation of insurance laws, insurance fraud, and converted monies belonging to his clients. The court took his license and gave him the opportunity to present his argument before a court and an appellate court, treated his arguments with courtesy and then properly affirmed the revocation of the license of a person who gave the profession of insurance adjusting a bad name. In so doing he breached the code of conduct of the National Association of Public Insurance Adjusters, including those that provide: “The members shall conduct themselves in a spirit of fairness and justice to their clients, the Insurance Companies, and the public; Members shall refrain from improper solicitation; No misrepresentation of any kind shall be made to an assured or to the Insurance Companies; Commission rates shall be fair and equitable, and strictly in accordance with the prevailing custom in the locality, and must, where laws or regulations of insurance departments exist, comply fully with such laws or regulations.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Care Needed When Dealing With Public Adjuster

Cancel P.A. Contract At Your Own Risk

Public adjusters are often necessary when dealing with a major claim because they have the time and talent necessary to properly present a claim to an insurer on behalf of the insured. Most do a good job and comply with the Rules of Conduct promulgated by the National Association of Public Insurance Adjusters (NAPIA). In International Risk Control, LLC v. Seascape Owners Association, Inc, No. 14-12-00016-CV (Tex.App. Dist.14 01/08/2013) the Texas Court of Appeal was asked to reverse a summary judgment that made a public adjuster contract void because of technical errors and because public adjusting was an illegal practice of law.

BACKGROUND

Seascape Owners Association, Inc. (“Seascape”) is the managing corporation of a large condominium complex on Galveston Island. In September 2008, following the torrent of Hurricane Ike, many units on the property sustained extensive damage from water and wind. Seascape tried to assess the damage in the aftermath of the storm and collect the sums that it believed were due under its various insurance policies. When Seascape encountered difficulties in the collection process, it engaged the services of International Risk Control, LLC (“IRC”), a firm of licensed public insurance adjusters. The parties executed a written contract, providing for IRC’s assistance in the preparation and presentation of Seascape’s multiple insurance claims. In return for these services, Seascape agreed to pay IRC an eight percent commission on any amounts received or collected in settlement.

Pursuant to their agreement, IRC assessed the damaged properties, estimated the costs of repairs, and presented several insurance claims on Seascape’s behalf. The claims were only partially paid by Seascape’s carrier, the Texas Windstorm Insurance Association (“TWIA”). Of the amounts that were received, Seascape timely paid IRC its bargained-for commission. Seascape’s remaining share was still too low, however, for it to cover the projected costs of reconstruction. Seascape decided that more claims needed to be pursued, so it retained a local law firm in the hopes of maximizing any additional recovery.

Counsel, finding IRC’s work inadequate, informed IRC that its relationship with Seascape had been terminated. IRC was also advised that all monies owed to it had been paid and that IRC would receive no further compensation.

After severing ties with IRC, Seascape sued TWIA, asserting numerous causes of action, including fraud, breach of contract, and violations of the Texas Insurance Code. TWIA agreed to settle the dispute outside of court for a substantial sum of money. Believing that the settlement was achieved as a result of its own work product, IRC demanded its fair share of the proceeds. Hoping to end the dispute, Seascape sued IRC, seeking declaratory relief that IRC was not entitled to any additional compensation under the contract. IRC filed a counterclaim, asserting damages for breach of contract.

The trial court granted summary judgment in Seascape’s favor. In its final modified order, the court concluded that the contract between the parties was unenforceable, agreeing with the first and third bases of Seascape’s motion, but expressing no opinion on the contract’s illegality. The court ordered that IRC take nothing on its counterclaims, concluding that the settlement proceeds did not constitute a “claim” for which it could legally recover. The court also ordered IRC to pay Seascape reasonable attorney’s fees. IRC timely filed an appeal, challenging every basis for summary judgment that was argued in Seascape’s motion, including the award of attorney’s fees.

SUMMARY JUDGMENT

Seascape’s first argument is that the contract is unenforceable because it fails to comply with a Texas regulatory provision. The regulation sets forth specific requirements that must be complied with in contracts executed by public insurance adjusters. The requirements include statutory notices that must be printed on each contract, a statement explaining the method for calculating the adjuster’s compensation, and, as relevant to this appeal, a condition that the contract contains the name, address, and license number of the public insurance adjuster negotiating the contract.

Seascape contended that, without the license number, the contract is invalid and unenforceable. The Court of Appeal was guided, it claimed, by the rule described in American National Insurance Co. v. Tabor, 111 Tex. 155, 23 S.W. 397 (1921). In that case, the supreme court held that, unless a contract is declared by law to be void or unenforceable, a court should not refuse to enforce a contract simply because it is in contravention of a statute.

Following Tabor, the Court of Appeal noted that there is no legal provision, either statutory or regulatory, declaring a contract void or unenforceable because the contract fails to adhere to the requirements of the regulation. The legislature created an alternative in lieu of suspension or revocation, providing that an agent who contravenes a rule or regulation may be assessed an administrative penalty in an amount not to exceed $2,000 per violation if the commissioner determines that that action better serves the purposes of the statute.

The legislature only allowed for voidance of a contract by a public adjuster not licensed by the state but did not prescribe any other circumstance in which a contract may be avoided. Although the contract may be in contravention of the regulations, its technical deficiency is one that the court believed should be addressed administratively, rather than by avoidance.

Illegality and Public Policy

The trial court did not address Seascape’s argument regarding the legality of the contract, but because the argument is so closely tied to Seascape’s contention that the contract violates public policy, we consider them both together. Seascape argued in its motion that the contract was illegal, and therefore unenforceable, because its performance required IRC to engage in the unauthorized practice of law, which is prohibited by both statute and regulation.

The legislature has defined the “practice of law” to mean “the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court.” The contract neither implicates the use of legal skill or knowledge, nor requires IRC “to represent” Seascape in a “cause of action” or other sort of legal capacity.

Seascape has also suggested that IRC engaged in the practice of law because “IRC and McGonigal sent demand letters to TWIA, ‘plugged in damage figures’, advised Seascape of the types of damages it was entitled to under the law, and gave TWIA representatives evaluations of Seascape’s claim.” The issue, as framed by Seascape’s motion, is whether the contract is unenforceable because its performance required IRC to engage in the unauthorized practice of law. Based on a plain reading of the contract it does not.

THE PUBLIC ADJUSTER CONTRACT

The contract is short, only two pages in length, and worded simply. In addition to several boilerplate provisions, it consists of just the following clauses: “Seascape Condominium Association [sic] (hereinafter “insured”) hereby engages International Risk Control, LLC (hereinafter “IRC”) to assist with the preparation and presentation of their insurance claims arising from loss and damages occurring on or about: September 13th and arising from Hurricane Ike (hereinafter “Claim”). Insured agrees to pay IRC for its claim services and hereby assigns eight (8%) percent of the amount received for Claim. The amount of IRC fee to insured can never exceed the eight percent of the amount of the Claim settlement.”

NOT A CLAIM

Seascape’s final argument was that IRC is barred as a matter of law from receiving any share of the settlement proceeds. Seascape essentially contends that IRC is limited in the types of “claims” from which it can recover, and the settlement is not one of them.

To prevail on this argument that IRC was not entitled to any share of the settlement proceeds, Seascape had to establish as a matter of law that the proceeds exclusively represented damages from its legal causes of action.

TWIA agreed to pay the settlement sum not because it was admitting its liability-it continued to deny liability, in fact-but “to avoid further costs and risks associated with continued litigation.” The agreement plainly states that the sum is being paid “in full and final settlement of all claims and causes of action” (emphasis added). Seascape’s insurance claims are necessarily included in that release.

Whether IRC is entitled to a share of the settlement proceeds is a factual determination the Court of Appeal did not consider. It limited its decision to conclude that Seascape has not carried its burden of showing, as a matter of law, that IRC is precluded from any sort of recovery.

ZALMA OPINION

If, after hiring a public insurance adjuster it is prudent to ask the public insurance adjuster to agree that its contract has been fulfilled. This is especially important when the insured intends to retain the services of a lawyer to obtain benefits the public insurance adjuster was unable to obtain.

If not the insured will, as did the Seascape Condominium Association, find that it must pay a fee to the adjuster and the lawyer for the work only done by the attorney. A public adjuster contract is a contract that can be amended, negotiated or modified just like any other contract.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Never Give Up Good Tort Claim for Poor Bad Faith Claim

No Coverage – No Bad Faith

Litigants faced with a defendant whose insurer refuses to defend or indemnify will invariably seek a stipulated judgment from the defendant and assignment of its claim against the insurer. The reason being the plaintiff can collect both the stipulated amount of damages plus tort damages for breach of the covenant of good faith and fair dealing. However, a prudent plaintiff will first obtain the advice of competent coverage counsel advising that there is a viable cause of action against the insurer and also check the assets of the defendant to determine if it is capable of paying a judgment without use of insurance funds.

FACTS

The California Court of Appeal was called upon to resolve an an insurance dispute between Federal Insurance Company (Federal) and its insured Abigail Abbott Staffing Services, Inc. (Abbott). Abbot sought coverage for defense and indemnity of a claim of liability arising out of Abbott’s negligent referral of an employee who later embezzled money from Abbott’s client. In Newport Harbor Lutheran Church v. Federal Insurance Company, No. G046509 (Cal.App. Dist.4 01/03/2013), the court of appeal noted that after Federal denied coverage to Abbott, Abbott stipulated to a judgment in favor of the client, Newport Harbor Lutheran Church (the church), and assigned its claims against Federal to the church. The church sued alleging Federal had breached its obligations to Abbott under the policies when it denied Abbott coverage in connection with the church’s underlying claim and that Federal had acted in an unreasonably precipitous manner in doing so.

THE POLICIES

Federal issued both a commercial general liability (CGL) policy and a separate “commercial umbrella” policy to Abbott, covering the period October 1, 2001 to October 1, 2002. When Federal quoted a price to Abbott for these policies, it also offered Abbott the option of purchasing “Staffing Errors and Omissions” coverage for an additional premium. Abbott, acting through its authorized insurance broker, expressly declined the additional errors and omissions coverage.

Federal was obligated to provide Abbott with a defense against third party claims for “bodily injury or property damage” which occurred during the policy period and was caused by an accident. Federal was also obligated to indemnify Abbott against damages it became legally obligated to pay on account of such a claim.

The policy also specified a series of exclusions to coverage, including one entitled Standing alone, the “Professional Services” exclusion contained in the body of the policy excluded coverage for claims arising out of any professional services other than staffing and staffing placement services. However, one of a series of separate endorsements appended to the policy, entitled “Professional Liability,” stated without exception that “[t]his insurance does not apply to [injury or damage] arising out of the rendering or failure to render professional services or advice, whether or not that service or advice is ordinary to the insured’s profession . . . .” (emphasis added)

The separate umbrella policy like the CGL policy carried a similar endorsement.

CLAIM INVESTIGATION AND DECISION

On October 3, 2008, six years after the policy period ended, the church filed suit against Abbott, alleging causes of action for breach of contract, negligence and negligent misrepresentation. Although the church relied on Abbott to scrutinize the integrity and qualifications of any candidate it recommended, Abbott allegedly failed to make reasonable efforts to do that and consequently recommended the church hire Cheryl Granger, a woman with a history of criminal conduct. The church hired Granger and over a period of approximately three years spanning December 2002 to December 2005, she allegedly embezzled a total of nearly $400,000 from the church.

After obtaining nothing more than a copy of the complaint from Abbott, after several requests, Federal sent a letter explaining it was declining coverage for the loss claimed by the church because the church’s claim was based on the embezzlement of money, the church’s financial loss had occurred outside of the policy period and because the claim arose out of Abbott’s performance of professional services, which were excluded from coverage.

After Abbott contested the denial Federal hired coverage counsel and on September 21, 2009, that counsel sent a lengthy letter to Abbot’s defense counsel reaffirming and explaining Federal’s decision to deny coverage for the church’s claim. Thereafter, Abbott agreed to entry of a stipulated judgment in favor of the church. Specifically, Abbott and the church stipulated “Granger stole not less than $323,870.70″ from the church” and further stipulated to entry of a judgment in favor of the church, and against Abbott, in that specific amount. Abbott and the church also agreed that in exchange for the church’s covenant not to record the stipulated judgment against Abbott, or to execute the judgment against Abbott or any person associated with it, Abbott assigned to the church any claims it had against its insurers arising out of the insurers’ failure to defend and/or indemnify Abbott in the case and gave up the opportunity to recover from Abbott’s own funds.

TRIAL COURT DECISION

The trial court ordered summary judgment in Federal’s favor. The court’s formal order explained summary judgment was appropriate for several reasons:

  1. There was no evidence the church suffered any loss during the policy period because the first of the checks forged by Granger was dated September 30, 2002 but was not processed by the bank until October 2, 2002, one day after the policy period of the Federal Policies expired;
  2. The laptop that was stolen by Granger was not purchased until September of 2005 well after the policy period;
  3. There was no coverage because professional placement services and/or advice provided by Abbott was the alleged cause of the church’s loss; and
  4. The professional liability exclusion contained in the endorsement to the Federal general liability policy prevails over any conflict with the professional liability exclusion in the main body of the policy.
  5. The court concluded that a permanent loss of property caused by a conversion does not qualify as a “loss of use” of that property for purposes of the “property damage” definition contained in the policies.

DISCUSSION

The net effect of the professional services exclusion, if considered in the abstract, was to provide coverage for most errors or omissions Abbott committed in the course of providing staffing or staffing placement services, while excluding coverage for liability arising out of any other professional service it provided. That exclusion did not exist in the abstract. Instead, it must be read in the context of the policy as a whole, which included a series of separate endorsements – one of which stated, without exception, that the insurance would not apply to injury or damage arising out of the rendering of or failure to render professional services or advice, whether or not that service or advice is ordinary to the insured’s profession.

In California, as explained in Aerojet General Corp v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 50, fn. 4 (Aerojet), “‘[i]f there is a conflict in meaning between an endorsement and the body of the policy, the endorsement controls.'”

As Aerojet explains, insurance policies fall into two general categories: “standard” policies, which are described as those policies issued on standard forms containing terms and conditions drafted by the insurer and “manuscript” policies, which are entirely nonstandard and drafted for the particular risk undertaken. But the terms of “standard” policies are frequently altered because often, the insurer is willing to modify or change the standard forms by endorsements.  The very purpose of an “endorsement” is to alter what are otherwise standardized provisions included in the body of a form policy to suit the particular needs of the parties.

The policy issued to Abbott also included a separate “Professional Liability” endorsement that represents an agreement to modify or change an otherwise standard term of the 27-page form.

The undisputed evidence demonstrates Federal offered Abbott the option of purchasing “errors and omissions” coverage, and Abbott expressly rejected that option. Having done that, Abbott could not reasonably argue it was entitled to coverage for its professional errors and omissions under the policy Federal issued. And because the church stands in the shoes of Abbott for purposes of this case, it cannot claim that either.

ZALMA OPINION

This case is a perfect example of greed overcoming good sense. If Abbott, who was able to retain independent counsel, had sufficient assets to pay the judgment the Church would have been more prudent to get a judgment against Abbott and collect it. Abbott, if it thought it had a case against Federal it could have sued.

Because the Church saw an opportunity to get payment from an insurer, including damages in excess of its loss, received nothing from its effort. Had the Church hired competent insurance coverage counsel before agreeing to the stipulated judgment and assignment it would have learned how effective the endorsement was and would have pursued the tortfeasor. Instead, it funded two separate lawsuits and an appeal to recover nothing.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Absolute Immunity

Insurance Criminal May Not Sue State Officers

States are called upon to enforce sanctions against insurance agents and brokers who violate the law and defraud the public. In doing so they act as both police agencies and administrative agencies dealing with licenses to practice insurance. Because criminals and those who violate insurance laws and regulations to defraud the public are less than reasonable and honorable persons, public officials must be protected from vexatious individuals so that they can carry out their duties without fear of multiple lawsuits.

An investigation into the questionable business practices of Alan D. Knowlton’s (“Knowlton”) employer, Bankers Life and Casualty Co. (“Bankers Life” or “the Company”), eventually led the Maine Bureau of Insurance (“the Bureau”) and the Maine Attorney General’s Office (“the AG’s Office”) to Knowlton’s front door. Knowlton accepted responsibility for his own unlawful conduct and Judith Shaw, Glenn Griswold and Andrew Black (collectively, “the state officials”), representing the Bureau and the AG’s Office agreed to take no further action against Knowlton. That promise turned out to be short-lived, however, when they agreed to Knowlton’s termination in a separate agreement with Bankers Life. Knowlton sued the state officials and lost and the First Circuit Court of Appeal, in Alan D. Knowlton v. Judith Shaw; andrew Black; Glenn Griswold, No. 12-1251 (1st Cir. 01/04/2013), was asked to resolve the dispute and allow Knowlton to continue to work.

BACKGROUND

In or around 2001, the Bureau began investigating Bankers Life’s improper marketing practices targeting elderly consumers. Shaw, the Bureau’s Deputy Superintendent, became involved and initiated a parallel investigation into Bankers Life’s sales practices. Griswold, Director of the Consumer Healthcare Division of the Bureau, led that investigation. In or around January 2005, after finding that Bankers Life had engaged in improper sales practices in Maine, Assistant Attorney General Black, Shaw and Griswold began negotiating with Bankers Life to resolve those claims.

Bankers Life was not the only one on the state officials’ radar, however. Shaw, Griswold and Black quickly turned their attention to Knowlton, the Company’s Branch Sales Manager in Bangor, Maine, after learning about his November 2004 sales recruitment meeting. At that meeting, he distributed materials representing that Bankers Life had an “A” rating by A.M. Best Company, when its rating was actually a “B++.” In response to an attendee’s comment that he was pleased about the “A” rating, Knowlton said he hoped to see it improve.

On the heels of the investigation into Knowlton’s actions, Knowlton entered into a consent agreement with the AG’s Office and the Bureau to resolve licensing violations associated with the sales recruitment meeting and his conversation with the potential recruit. In the agreement, Knowlton admitted that he violated the Maine Insurance Code by distributing materials containing a misleading representation about Bankers Life’s financial condition and by acknowledging the attendee’s comment about the A.M. Best Company rating. In addition to accepting responsibility for those violations, he agreed to submit to a 60-day suspension of his insurance producer license and a 270-day period of license probation, pay a civil penalty of $750.00, and comply with other requirements regarding recruiting materials and the reporting of consumer complaints. In exchange, the Bureau and the AG’s Office agreed to “forgo pursuing further disciplinary measures or other civil or administrative sanctions against [him] for the violations” described in the agreement.

Not one week passed before the Bureau and the AG’s Office entered into a separate consent agreement with Bankers Life to resolve the claims against it. During their negotiations, the Bureau accepted Bankers Life’s proposal that the branch managers of its South Portland and Bangor branch offices (which included Knowlton’s position as the Bangor branch manager) be terminated. Thus, the agreement called for Bankers Life to “relieve the managers of its South Portland and Bangor branch offices of their positions as branch managers.” Bankers Life terminated Knowlton’s position as branch manager on April 14, 2005.

Knowlton’s complaint asserts claims against Shaw, Black and Griswold in their individual capacities for violations of 42 U.S.C. § 1983 and 42 U.S.C. § 1985(2). Specifically, the complaint alleges that by agreeing to Bankers Life’s termination of Knowlton’s position as branch manager, the appellees deprived Knowlton of continued employment with the Company without due process under § 1983. The complaint added that Shaw, Black and Griswold violated his rights under § 1985(2) by participating in a conspiracy with the Bureau and Bankers Life to deprive him of his rights to challenge the termination provision in the consent agreement.

The state officials moved to dismiss the complaint on several grounds, including absolute immunity for the § 1983 claim. In granting the motion, the district court agreed that absolute immunity protected the state officials from liability. The court further concluded that Knowlton failed to plead a plausible claim.

DISCUSSION

Absolute Immunity

Absolute immunity is not available to either prosecutors or agency officials whose actions are primarily administrative or investigative in nature and unrelated to their functions as advocates in preparing for the initiation of a prosecution or for judicial proceedings. In considering whether absolute immunity attaches to an official’s conduct, the First Circuit employs a functional approach where the availability of absolute immunity turns on a functional analysis which looks to the nature of the function performed, not the identity of the actor who performed it.

Shaw and Griswold, as representatives of the Bureau, have the duty and authority to enforce Maine’s insurance laws, and through the AG (Black), may invoke the aid of the Superior Court through proceedings to enforce any action taken by the Bureau or pursue criminal prosecution based on violations of the Code. An enforcement petition need not, however, reach an administrative proceeding or even the courthouse door. The Bureau may decide to execute consent agreements that impose penalties or fines authorized by law to resolve a complaint or investigation without further proceedings. The decision to resolve the violations before pursuing further proceedings not only arose directly from their roles as the State’s advocates in enforcing Maine’s insurance laws, but was inextricably related to the judicial process. Absolute immunity promotes effective government, where officials are freed of the costs of vexatious and often frivolous damages suits that may result from their decisions.

While no administrative proceeding was initiated in this case (only a petition to enforce was issued), we see no meaningful difference between the nature of an agency official’s decision to pursue an administrative proceeding and that of her decision to resolve a violation before reaching that step. In both instances, the agency official acts as the State’s advocate, exercising the broad discretion in deciding whether a proceeding should be brought and what sanctions should be sought. The discretion officials exercise in deciding which cases should move forward to further legal proceedings and which may be resolved with consent agreements might be distorted if their immunity from damages arising from that decision was less than complete.

The state officials’ decision to agree to the termination provision, however, need not be put in the framework for adversarial testing and judicial supervision, for absolute immunity to apply.

The state officials carried their burden in establishing they are entitled to absolute immunity for entering into the consent agreements with Knowlton and Bankers Life and the First Circuit affirmed the district court’s dismissal of Knowlton’s claims against the state officials.

ZALMA OPINION

The first circuit should be commended for providing the officials with absolute immunity from Knowlton’s action. Knowlton should have been happy with the deal he made with the state since his acts were clearly wrong and in violation of his promises when he was licensed.

That the state gave him a minor suspension of his license and allowed him to return to work should have been enough. Bankers Life was obviously upset that he, and others, had put them into trouble with the state and did not want to keep Knowlton on the payroll. To sue the state for agreeing that Bankers Life could fire him was, in my opinion, an act of unmitigated gall. Knowlton is still licensed in Maine and can work if he wishes. He is not entitled to keep a job, especially after putting his employer in a position to be sued by those to whom he lied.

The mercy shown to Knowlton by the state was rewarded with a lawsuit rather than Knowlton losing his license or spending time in jail.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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DUTY TO DEFEND POTENTIAL ADVERTISING INJURY

USE OF ADVERTISING IDEA

The Wisconsin Court of Appeal was asked to resolve a dispute regarding an insurance company’s duty to defend under a commercial general liability (CGL) policy against allegations of advertising injury based on use of another’s “advertising idea” in Air Engineering, Inc v. Industrial Air Power, LLC, Christopher Klemz and Matthew, No. 2012AP103 (Wis.App. 01/03/2013). In the underlying lawsuit, Air Engineering, Inc. sued Industrial Air Power, LLC alleging various causes of action based on Industrial’s alleged misappropriation and use of Air Engineering’s website source code and site content and an internet advertising system that was designed to place advertisements for the company on potential customers’ computers. Acuity, Industrial’s insurer, intervened and moved for a declaratory judgment that it had no obligation to defend, and therefore, no obligation to indemnify, Industrial against Air Engineering’s claims in the underlying action. The circuit court granted declaratory judgment in favor of Acuity, concluding that the complaint did not allege facts that, if true, would give rise to a duty to defend against allegations of advertising injury.

BACKGROUND

The complaint described four systems that Air Engineering claims Industrial misappropriated and used in its own marketing: the Parts Purchasing System, the Customer Database System, the Internet Advertising System, and the Website Source Code. Air Engineering refers to the first three systems collectively as the Proprietary Systems. For our purposes, the most important of these is the Internet Advertising System.

Air Engineering buys air compressor replacement parts and related products and sells them to end-user customers. Air Engineering maintains a website for which it created source code, the Website Source Code. Air Engineering also developed a system of targeting potential customers based on their online searches. As alleged in the complaint, the Internet Advertising System allowed Air Engineering to gain customers.

Air Engineering has kept the Proprietary Systems and the Website Source Code confidential. The Proprietary Systems and the Website Source Code have great economic value to Air Engineering and are essential to Air Engineering’s business success and profitability because they allow Air Engineering to make its products more attractive to, and give Air Engineering enhanced access to, customers and potential customers through Google searches and in other respects.

Christopher Klemz and Matthew Kraus were both employees of Air Engineering, were familiar with the Proprietary Systems and Website Source Code, and were advised that the systems were confidential. Klemz registered a website name for and incorporated Industrial while he was employed by Air Engineering.

As further alleged in the complaint, much of Industrial’s website source code and content are identical to Air Engineering’s Website Source Code and content. Shortly after Klemz and Kraus left Air Engineering two customers with whom Air Engineering had long-term relationships quit buying replacement parts from Air Engineering and started buying the same parts from Industrial – at lower prices.

Acuity agreed to defend Industrial, reserving its right to deny coverage for uncovered claims. Acuity moved for declaratory judgment, asking the circuit court to declare that it had no duty to defend and therefore no duty to indemnify Industrial against Air Engineering’s claims. The circuit court granted declaratory judgment, and Industrial appeals.

DISCUSSION

The Wisconsin Court of Appeal determines whether there is a duty to defend by comparing the allegations in the complaint with the terms of the policy, sometimes called the four corners rule, where the duty to defend is basely solely on the four corners of the complaint; no extrinsic facts or evidence are considered. The insurer has a duty to defend when the allegations, if proven, give rise to the possibility of recovery under the terms of the policy.

Industrial argued that Acuity had a duty to defend under the advertising injury portion of the Acuity CGL policy. The Court, in reaching its decision had to answer three questions:

  1. Does the complaint allege a covered offense under the advertising injury section of the policy?
  2. Does the complaint allege that Industrial engaged in advertising activity?
  3. Does the complaint allege a causal connection between Air Engineering’s alleged injury and Industrial’s advertising activity?

Acuity’s CGL policy provides, in relevant part, as follows.

1. Insuring Agreement                

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

   * * *
SECTION V – DEFINITIONS
        
1. “Advertisement” means a notice that is broadcast or published to the general public or specific market segments about your [Industrial’s] goods, products or services for the purpose of attracting customers or supporters….

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

    * * *
        
f. The use of another’s advertising idea in your [Industrial’s] advertisement ….

Coverage of Offenses Alleged

Section (f) of the Acuity policy defines an advertising injury as the use of another’s advertising idea in the insured’s advertisement. The facts alleged are that Air Engineering developed the Proprietary Systems, including the Internet Advertising System, to enable it to provide information about its products to potential purchasers. Further, the facts allege Industrial’s use of the Proprietary Systems without Air Engineering’s consent to market Industrial’s products and services and to solicit business.

We must decide whether the alleged facts describe the “use of another’s advertising idea in your advertisement.” “Advertising idea” is not defined in the policy. An “advertising idea” is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales or patronage.

Air Engineering alleges that it developed the Internet Advertising System to advertise its products to the public in order to facilitate sales. Industrial used that information to do the same. Air Engineering’s system recognizes relevant terms in a potential customer’s online search and strategically directs select advertisements to that customer, including purchased domain name links to product information. Air Engineering’s system is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities, in this case, suitability to the customer’s needs, to increase sales or patronage. Industrial’s use of the Internet Advertising System, as described in Air Engineering’s complaint, is “use of another’s advertising idea.”

Industrial’s Advertising Activity

The complaint alleges that Industrial used information contained in the Proprietary Systems, including the Internet Advertising System, and the Website Source Code to create and operate its business, market its products and services, and solicit business, including business from Air Engineering’s present and prospective customers. By comparing the allegations to the CGL policy definition of advertisement: “a notice … broadcast … to the general public or specific market segments about your goods, products or services for the purpose of attracting customers” the appellate court concluded that using the Internet Advertising System to place ads is advertising activity.

Causal Connection Between Advertising Activity and Advertising Injury

Finally the appellate court needed to determine if the complaint alleged a causal connection between Industrial’s advertising activity and Air Engineering’s advertising injury. The complaint alleged that Industrial used the Proprietary Systems, including the Internet Advertising System, to market products and services to potential customers. It further alleged that shortly after Kraus left Air Engineering for Industrial, two long-term customers left Air Engineering and entered into contracts with Industrial. The advertisement does not need to be the only cause of the injury to trigger the duty to defend. Air Engineering contends that Industrial used its advertising ideas to draw past and potential customers away, thus causing business loss to Air Engineering. Assuming Industrial used Air Engineering’s advertising system to target potential customers, it is reasonable to infer that such usurped techniques did draw customers away from Air Engineering and concluded that the causal connection requirement was met.

Knowing Violation of Rights Exclusion

Acuity also  argued that the “knowing violation” exclusion bars coverage. The CGL policy includes the following exclusion: “Personal and advertising injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury.”

The exclusion failed because the maxim of insurance interpretation requires that if even one covered offense is alleged in the underlying complaint, the insurance company has a duty to defend. Air Engineering stated potentially covered claims that do not base liability on a showing of a knowing violation of another’s rights and infliction of advertising injury.  There may be other exclusions in the policy that apply to these claims, and there may be other claims that could be proven without showing knowledge or intent. The inclusion in the complaint of an allegation of willful and malicious conduct does not relieve Acuity of its duty to defend.

ZALMA OPINION

In a four corners state like Wisconsin it is almost impossible to avoid a duty to defend if there are allegations that potentially come within the promises made by an insurance policy. That there was a use of advertising or advertising idea was clear from the facts alleged in the complaint. Since the insurer was not allowed to bring in extrinsic evidence the court was able to use the allegation of the complaint to make insurance coverage exist where none was intended.

The best solution for insurers in such a situation is to provide the defense under a strict reservation of rights, take the case to trial, and when the real causes of action are proved, sue the insured to get the money back.

The prudent plaintiffs’ lawyer in a four corners state will always include allegations that will bring – at least one – cause of action within the coverage of a standard CGL to get an insurer’s deep pocket available for a quick settlement.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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If You Can Work You Are Not Totally Disabled

Test Is Abuse of Discretion

A trial court granted judgment to Connecticut General after concluding that it had not abused its discretion in terminating the disability benefits owed to Dennis Siegel.  In Dennis Siegel v. Connecticut General Life Insurance Company; Group Long Term Disability For Salaried Employees of Lockheed Martin Corporation, No. 12-1897 (8th Cir. 01/02/2013) the Eighth Circuit Court of Appeal was asked to reverse the finding and continue Siegel’s benefits.

FACTS

Siegel worked as a software developer for Lockheed Martin Corporation (previously Martin Marietta Corporation). Lockheed had a disability benefit plan through Connecticut General which provided long term benefits to disabled employees. Under the 1994 policy that governed the plan, an employee would receive benefits if he became unable to perform the essential duties of his occupation due to an illness or injury. If the employee’s disability was due to mental illness, he would stop receiving benefits after the first two years unless he was “totally disabled.” That was defined as being unable to perform the essential duties of any occupation for which the employee was or could reasonably become qualified.

Siegel first applied for benefits in 1995, stating that he had developed severe depression in 1993 which had required him to take leaves of absence from Lockheed in 1993 and 1995. Siegel also submitted a claim form filled out by his psychiatrist indicating that his client had severe depression. Connecticut General approved Siegel’s claim in October 1995. In November 1997 it reapproved his claim for continued benefits, concluding that he was incapable of employment in “any occupation.” Connecticut General requested and received periodic updates from Siegel’s doctors regarding his condition.

In 2002 Lockheed and Connecticut General executed an agreement entitled “Employee Welfare Benefit Plan Appointment of Claim Fiduciary” (claim fiduciary appointment). The agreement stated that Connecticut General’s sister company Life Insurance Company of America (LINA) would be appointed as “claim fiduciary” and would have responsibility for adjudicating all claims and appeals for benefits under the Lockheed plan. LINA was expressly given authority “in its discretion” to “interpret the terms of the plan” and “decide questions of eligibility.” Lockheed advised plan beneficiaries in a summary plan description in 2005 that its insurance carrier would have “full discretionary authority to interpret and construe the terms of the Plan [and] to decide questions related to the payment of benefits.”

THE REQUEST TO DO LIGHT WORK

Siegel sent a letter to LINA in 2006 asking whether he could obtain part time employment without losing his disability benefits. Siegel described his family’s tightening budget and asked “the number of hours [he] could potentially work and/or the amount of income allowed.” LINA informed Siegel of the relevant provisions of the plan which allowed totally disabled beneficiaries to pursue “rehabilitative work” for a limited time.

THE INVESTIGATION

LINA opened an investigation into Siegel’s continued eligibility and requested that he complete a questionnaire about his daily activities. Siegel reported that he used a computer daily, watched television for five to six hours, did laundry, attended religious services, volunteered two days a week for one hour, and could drive a “couple hundred miles with breaks.” Siegel explained that he was unable to return to work due to a “lack of concentration and inability to plan and follow through.”

LINA then sought records and questionnaires from each of Siegel’s physicians related to his ability to work. Dr. James Beeghly, Siegel’s psychiatrist, indicated that he suffered from “[p]ersistent and unremitting depressed mood and pessimistic outlook,” “poor ability to focus,” “poor ability to maintain pace,” and “poor ability to apply self-discipline.” Dr. Beeghly reported that Siegel’s memory, thought process, and judgment were normal. In one of his office notes obtained by LINA, Dr. Beeghly expressed frustration that Siegel had not been seeing a therapist as he had recommended. Siegel’s other physicians reported only minor conditions and either declined to perform a disability assessment or did not report that he was disabled.

TERMINATION OF BENEFITS

LINA informed Siegel in September 2007 that his benefits would be terminated, explaining that it had concluded he was no longer incapable of employment. Siegel was invited to provide additional medical opinions and supporting documentation if he disagreed with LINA’s conclusion. Siegel responded with additional documentation in March 2008. A form filled out by his primary care physician indicated that Siegel was disabled, but it did not give any further information as to his medical history, diagnosis, or treatment. Several sections were left blank. A report by a neuropsychologist who had examined Siegel concluded that he likely had “relatively severe, presumably treatment-resistant depression” but that there was “no evidence for neuropsychologically based intellectual or memory impairment.”

Two experts retained by LINA conducted an independent review of Siegel’s file. After reviewing Siegel’s medical documentation, psychologist Dr. Nick DeFilippis concluded that he retained several functional capabilities. These included “ability to focus and concentrate,” “higher level executive functioning,” and social skills. Based on Dr. DeFilippis’ findings, vocational rehabilitation specialist Ginny Schmidt identified three entry level occupations in which Siegel could work: repair order clerk, production clerk, and mail sorter. LINA informed Siegel in September 2008 that after reviewing his entire file, it had concluded he was capable of employment and therefore no longer disabled.

THE ADMINISTRATIVE APPEAL & TRIAL

Siegel filed an administrative appeal with LINA in June 2009. Siegel submitted additional reports from his psychiatrist Dr. Beeghly, his neuropsychologist Dr. John Bayless, and two other physicians who had subsequently examined him. LINA then retained another psychiatrist, Dr. Jack Greener, to review Siegel’s records. Dr. Greener concluded that the reports from Drs. Beeghly and Bayless did not objectively support a finding of total disability. In October 2009 LINA affirmed its decision to terminate Siegel’s benefits, and it ceased payments to him.

The parties agreed to have a court trial limited to the administrative record. Each side then moved for judgment in its favor. The district court granted LINA’s motion for judgment, concluding that LINA had not abused its discretion because it had conducted a full and fair review and there was substantial evidence to support its decision. Siegel appeals, arguing that the district court should have applied de novo review, but that even under an abuse of discretion standard LINA’s decision should be overturned.

ANALYSIS

The standard of review for a denial of benefits when challenged under is de novo, unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. If there has been a valid grant of discretionary authority, the administrator or the fiduciary’s decision is reviewed for abuse of discretion.

With the consent of the parties the case was subsequently assigned to a magistrate judge who determined that the 1994 policy governed Siegel’s claim. Since the 1994 policy did not require that amendments be “endorsed on or attached to” it, the magistrate judge concluded that the claim fiduciary appointment had been a valid amendment and that LINA’s decision would be reviewed for abuse of discretion.

The Eighth Circuit agreed with the district court that LINA did not abuse its discretion in terminating Siegel’s benefits. To be “totally disabled” under the plan’s definition, Siegel must have been unable to perform the essential duties of “any occupation for which [he is] or may reasonably become qualified.” There was substantial evidence from which LINA could reasonably conclude that Siegel was able to work. Siegel expressed an interest in part time work and had asked LINA how much he could work and earn without losing his disability benefits.

Although Siegel’s treating physicians indicated that he suffered from depression and lack of motivation, they did not identify any specific impairments or deficiencies. Only Dr. Beeghly was willing to certify that Siegel was disabled, and even he expressed some doubt on the subject. The experts retained by LINA all agreed that while Siegel exhibited symptoms of severe depression, he was not totally incapable of employment. The Eighth Circuit concluded that on this record, it was not an abuse of discretion to terminate Siegel’s benefits.

ZALMA OPINION

This case teaches disabled workers to be careful about what you asked for because you might just get it. Siegel wanted to earn a little extra money and asked his insurer for permission to do so. Since the ability to do any work is an indication of a lack of total disability the insurer investigated, found he was not totally disabled, and properly stopped the benefits. The appeal failed because there was no abuse of discretion in the trial court who was presented with evidence that was sufficient to prove that Siegel could work.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Private Limitation of Action

Rights Not Exercised Promptly Are Lost

The Ohio Court of Appeal was asked by Geraldine Offill (Offill) to reverse a judgment on the pleadings rendered against her on her complaint, and in favor of State Farm Fire & Casualty Company (State Farm) in Geraldine Offill v. State Farm Fire & Casualty Company, 2012 -Ohio- 6225. (Ohio App. Dist.2 12/31/2012). Offill contended that the trial court erred in granting State Farm’s motion for judgment on the pleadings because her breach of contract claim was brought well within the fifteen-year statute of limitations set forth in Ohio statutes. Offill further contends that even if she was required to start her action against State Farm within one year of the loss of her personal property, she timely started her action when she filed her first complaint against State Farm in 2005. Finally, Offill contends that the trial court erred by not finding that the one-year limitations period in the insurance policy had been waived by State Farm’s actions.

Course of the Proceedings

In August of 2003, Geraldine Offill sustained a loss of personal property due to theft. On January 14, 2004, Offill sustained a loss of personal property due to a fire. On January 14, 2005, Offill commenced an action against State Farm. In her complaint, Offill alleged that State Farm breached a contract of insurance by failing to pay Offill for the losses of personal property she had incurred in 2003 and 2004. State Farm filed an answer to the complaint. On May 27, 2005, Offill filed a notice of voluntary dismissal without prejudice.

On March 7, 2011, Offill again commenced an action against State Farm, alleging that State Farm had breached a contract of insurance with Offill by failing to pay her for losses to her personal property she sustained in August of 2003 and January of 2004. State Farm filed an answer to Offill’s complaint and attached a copy of a renter’s insurance policy. State Farm raised a number of defenses in its answer, including Offill’s alleged failure to comply with the terms of the insurance policy. State Farm also filed a motion for judgment on the pleadings, contending that Offill failed to file her complaint against State Farm within one year after her losses to personal property were incurred, as required by the insurance policy. The provision of the insurance policy on which State Farm relied states: “Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.”

Analysis

In isolation, any word or phrase in the contested policy language may be ambiguous. When considered as a whole, however, the private limitation of action provision in the State Farm policy is unambiguous. That the word “start” is not commonly used to indicate the commencement of a lawsuit does not mean that it refers to something else when it is used in a provision entitled “Suit Against Us.” Similarly, though the word “action” can refer to virtually anything done by a person, there is no reason to think it refers to anything other than a lawsuit when used as part of a two- sentence provision entitled “Suit Against Us.” The fact that the two sentences could have been written more clearly, and they could have, does not mean that they are ambiguous.

Negotiations with State Farm continued after the filing of the suit as well. It is therefore the position of Plaintiff that in the event that the language of the policy was not ambiguous that State Farm waived any one year filing requirement.

The trial court granted State Farm’s motion for judgment on the pleadings.

Offill Failed to Start Her Action Within One Year of Her Loss

Determination of a motion for judgment on the pleadings is restricted solely to the allegations in the pleadings and any writings attached to the complaint. Dismissal is appropriate when, after construing all material allegations in the complaint, along with all reasonable inferences drawn therefrom in favor of the non-moving party, the court finds that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief.

The Supreme Court of Ohio when faced with a virtually identical insurance policy provision, held that the insured must file a complaint against the insurer within one year of the loss that the insured suffered. Offill also contended that “even assuming that the one year period applied, the fact that the Appellee continued to negotiate after the expiration of the one year period constitutes waiver of the alleged limitations period. Offill only made this argument in the trial court in a footnote in her surreply in opposition to State Farm’s motion for judgment on the pleadings. Offill stated that she would seek leave to amend her complaint to make a corresponding allegation to support the waiver argument. However, there is nothing in the record reflecting that she sought leave to do so.

Consequently, there were no allegations in the pleadings of record to support Offill’s contention on appeal that there were negotiations beyond the one-year period after Offill sustained her losses to personal property. Based on the record, there was no error in the trial court’s decision granting State Farm’s motion for judgment on the pleadings.

If the Ohio Court of Appeal was to decline to apply the Supreme Court’s holding based solely on the fact that Offill filed an action in 2005 that she later voluntarily dismissed, then an insured could escape a one-year limitation in an insurance policy by the simple expedient of filing a complaint against the insurer within one year of the loss and then voluntarily dismissing the action, with the intent of re-filing the complaint any time within the remainder of the fifteen-year statute of limitations set forth in Ohio statutes of limitation.

ZALMA OPINION

The California Supreme Court, in Prudential-LMI Commercial Insurance v. Superior Court of San Diego County, 51 Cal. 3d 674, 798 P.2d 1230, 274 Cal. Rptr. 387 (Cal. 11/01/1990) reached a similar result but tolled the private limitation of action provision by stating that the limitation period is tolled from the time the insured reports a claim until the insurer officially denies the claim. From the facts of this case Offill would still find her case barred.

Courts in different states apply the private limitation of action provision differently and it is incumbent and the insurer to ascertain how it is applied in the state where the loss occurred.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Assumtion Of Risk — A Broad Defense

The Bumper Car Rule

I was personally almost strangled while riding on a bumper car because I put on the seat belt incorrectly and my then-teen-aged son was merciless as he drove his bumper car. Regardless, if I was injured I would not have sued my son nor the amusement park for my own stupidity and because inherent in the fun of a bumper car ride is the joy of bumping into the others riding the bumper cars.

Dr. Smriti Nalwaf, who fractured her wrist on a bumper car ride at an amusement park, sued the park owner for negligence in not configuring or operating the bumper car ride so as to prevent her injury. The superior court granted summary judgment for defendant on the basis of the primary assumption of risk doctrine, under which participants in and operators of certain activities have no duty of ordinary care to protect other participants from risks inherent in the activity. The Court of Appeal, concluding the doctrine did not apply to bumper car rides, reversed. The California Supreme Court was asked to resolve the issue in Smriti Nalwa v. Cedar Fair, L.P, No. S195031 (Cal. 12/31/2012).

FACTUAL BACKGROUND

On July 5, 2005, plaintiff, Dr. Smriti Nalwa, took her nine-year-old son and six-year-old daughter to Great America amusement park, owned and operated by defendant Cedar Fair, L.P. In the afternoon, plaintiff and her children went on the park’s Rue le Dodge bumper car ride.

The ride consisted of small, two-seat, electrically powered vehicles that moved around a flat surface. Each car was ringed with a rubber bumper and had a padded interior and seatbelts for both driver and passenger. The driver of each car controlled its steering and acceleration.

Plaintiff rode as a passenger in a bumper car her son drove, while her daughter drove a car by herself. Plaintiff’s son steered while plaintiff sat next to him in the bumper car; they bumped into several other cars during the course of the ride. Toward the end of the ride, plaintiff’s bumper car was bumped from the front and then from behind. Feeling a need to brace herself, plaintiff put her hand on the car’s “dashboard.” According to plaintiff’s son, “something like cracked” and plaintiff cried out, “Oh.” Plaintiff’s wrist was fractured.

In her operative complaint, plaintiff pleaded causes of action for common carrier liability, willful misconduct, strict products liability (in two counts) and negligence, but later dismissed the two products liability counts. The trial court granted defendant’s motion for summary judgment on the remaining causes of action, concluding the primary assumption of risk doctrine barred recovery for negligence because plaintiff’s injury arose from being bumped, a risk inherent in the activity of riding bumper cars. The Court of Appeal reversed in a divided decision, holding that the public policy of promoting safety at amusement parks precludes application of the primary assumption of risk doctrine, and the doctrine is inapplicable to bumper car rides in particular because that activity is “too benign” to be considered a “sport.”

DISCUSSION

Although persons generally owe a duty of due care not to cause an unreasonable risk of harm to others, some activities – and, specifically, many sports – are inherently dangerous. Imposing a duty to mitigate those inherent dangers could alter the nature of the activity or inhibit vigorous participation. The primary assumption of risk doctrine, a rule of limited duty, developed to avoid such a chilling effect. Where the doctrine applies to a recreational activity, operators, instructors and participants in the activity owe other participants only the duty not to act so as to increase the risk of injury over that inherent in the activity.

The primary assumption of risk doctrine is not limited to activities classified as sports, but applies as well to other recreational activities involving an inherent risk of injury to voluntary participants where the risk cannot be eliminated without altering the fundamental nature of the activity.

The primary assumption of risk doctrine rests on a straightforward policy foundation: the need to avoid chilling vigorous participation in or sponsorship of recreational activities by imposing a tort duty to eliminate or reduce the risks of harm inherent in those activities. It operates on the premise that imposing such a legal duty would work a basic alteration – or cause abandonment of the activity. Holding golfers liable for missed hits would only encourage lawsuits and deter players from enjoying the sport. The policy behind primary assumption of risk applies squarely to injuries from physical recreation, whether in sports or nonsport activities. Allowing voluntary participants in an active recreational pursuit to sue other participants or sponsors for failing to eliminate or mitigate the activity’s inherent risks would threaten the activity’s very existence and nature. While inherent risks exist, for example, in travel on the streets and highways and in many workplaces, active recreation, because it involves physical activity and is not essential to daily life, is particularly vulnerable to the chilling effects of potential tort liability for ordinary negligence. And participation in recreational activity, however valuable to one’s health and spirit, is voluntary in a manner employment and daily transportation are not.

The doctrine thus applies to bumper car collisions, regardless of whether or not one deems bumper cars a “sport.” Low-speed collisions between the padded, independently operated cars are inherent in – are the whole point of – a bumper car ride. As plaintiff agreed in her deposition: “The point of the bumper car is to bump – [¶] . . . [¶] You pretty much can’t have a bumper car unless you have bumps.” While not highly dangerous, such collisions, resulting in sudden changes in speed and direction, do carry an inherent risk of minor injuries, and this risk cannot be eliminated without changing the basic character of the activity.

Riders on Rue le Dodge are not passively carried or transported from one place to another. They actively engage in a game, trying to bump others or avoid being bumped themselves.

Any attempt on our part to distinguish between angles of collision that pose inherent risks and those that pose extrinsic risks would ignore the nature of a bumper car ride, an activity that gives its mostly young participants the opportunity to inflict and evade low-speed collisions from a variety of angles.

CONCLUSION

The risk of injuries from bumping was inherent in the Rue le Dodge ride, and under California  precedents defendant had no duty of ordinary care to prevent injuries from such an inherent risk of the activity. The absence of such a duty defeats plaintiff’s cause of action for negligence as a matter of law.

ZALMA OPINION

I understand that some people can’t take responsibility for their own actions and insist on suing for damages caused by their own stupidity. Smokers sue for injuries as a result of their use of “coffin nails”. Drunken patrons of bars sue for injuries they incur because the bar let them get drunk. People who are insured sue because the policy, that they never read, did not provide coverage for a loss neither they nor the insurer expected.

In this case the doctor sued because she was injured when her bumper car was struck by another. She did not sue the operator of the bumper car but sued the operator of the ride for not protecting her from being bumped by a bumper car in a bumper car game. Give me a break! It’s time to stop this type of stupidity and one can only wonder why it went to the California Supreme Court and why Justice Kennard wrote a stinging dissent.

Fortunately for the people of the state of California, and the insurance industry that insures the liability of businesses in the state, the majority ruled for the assumption of the risk doctrine to prevent liability in a case where the amusement activity is inherently dangerous and the danger is in the control of the riders not the park owner.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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“Public Policy” Can Rewrite an Insurance Policy

Bad Facts Make Bad Law

It has been axiomatic that an insurance company is entitled to determine for itself what risks it will accept and that it has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. However, states have enacted mandatory insurance requirements that establish a public policy requiring insurers to provide coverage it is not willing to issue. In American Access Casualty Company v. Ana Reyes, Brigido Jasso, Individually and As Independent, 2012 IL App 120296 (Ill.App. Dist.2 12/28/2012) the Illinois Court of Appeal was asked to reverse the clear agreement made between an insured and an insurer and create insurance where it did not exist.

FACTS

The facts in this automobile-insurance-coverage case are undisputed. In September 2007, plaintiff, American Access Casualty Company, issued an automobile insurance policy to defendant Ana Reyes. The policy’s statement of declarations listed Reyes as the “named insured,” as well as the titleholder to the insured vehicle, a 1999 Chrysler 300M. However, in the policy’s section identifying the “operators” of the vehicle, the policy listed two persons: (1) Reyes, with the notation “EXCLUDED” instead of a driver’s license number; and (2) Jose M. Cazarez, with an “out of country/international” driver’s license number.  Further, Reyes executed an endorsement providing that plaintiff would not afford any coverage under the policy to any claim or suit that occurred as the result of Reyes operating any vehicle. Finally, the policy contained a provision excluding bodily-injury and property-damage liability coverage for “any automobile while in control of an excluded operator.”

On October 30, 2007 (one month after the above policy took effect), Reyes drove her car in Elgin and struck pedestrians Rocio and Sergio Jasso. Rocio was seriously injured and Sergio (a minor) died as a result of his injuries. Rocio and Sergio’s father, Brigido Jasso, sued Reyes, alleging negligence.

Thereafter, in response to the negligence suit, plaintiff filed the instant action, seeking a declaration that, because Reyes was driving at the time of the October 30, 2007, accident, its policy provided no coverage for and no duty to defend any claims and litigation arising therefrom. State Farm (which apparently provided uninsured motorist coverage to the pedestrians) answered plaintiff’s complaint and filed a counter-complaint for declaratory judgment, asking that plaintiff be estopped from excluding coverage for Reyes, because plaintiff’s attempt to “specifically exclude Ana Reyes the titleholder, payer on the insurance policy, [and] resid[ent] at the address of where the vehicle is garaged and located with full access to the vehicle is contrary to law and public policy and cannot be enforced. Ana Reyes’ exclusion would result in no one insured under the policy.”

TRIAL COURT DECISION

On October 20, 2011, the court granted plaintiff summary judgment on its complaint. On February 11, 2012, the court denied State Farm’s motion to reconsider, which raised, for the first time, an allegation that Cazarez is an illegal alien and contended that, by allowing him to be a member of her household, Reyes was in violation of federal law and, moreover, that plaintiff, by providing insurance coverage to Cazarez, was “harboring and shielding from detection an illegal alien.”

State Farm appeals, arguing that the insurance policy between plaintiff and Reyes violates public policy because it excludes Reyes, the only named insured and owner of the insured vehicle.

ANALYSIS

The primary issue presented is whether the exclusion of the only named insured and automobile owner from coverage as a driver under a liability insurance policy contravenes public policy. An insurance policy is a contract, and, therefore, the rules applicable to contract interpretation govern interpretation of an insurance policy.

The Illinois Safety and Family Financial Responsibility Law provides that “[n]o person shall operate, register or maintain registration of, and no owner shall permit another person to operate, register or maintain registration of, a motor vehicle designed to be used on a public highway unless the motor vehicle is covered by a liability insurance policy.”  The insurance mandated by the statute requires  that a motor vehicle owner’s “liability insurance” policy “[s]hall insure the person named therein and any other person using or responsible for the use of such motor vehicle or vehicles with the express or implied permission of the insured.” The statute mandates that a liability insurance policy insure the named insured and permissive users.

The Illinois legislature created the statute for the principal purpose to protect the public by securing payment of their damages. A private limiting agreement may not rewrite a statute that exists for the protection of the public. If the insurance provision conflicts with the law, it will be deemed void and the statute will continue to control.

However, just as public policy demands adherence to statutory requirements, it is in the public’s interest that persons not be unnecessarily restricted in their freedom to make their own contracts. Therefore, an appellate court must sparingly exercise the power to declare a private contract void as against public policy.

In the policy at issue here, Reyes is the the sole named insured. It was argued that Reyes is covered under the policy because it provides Reyes with uninsured-motorist, bodily-injury, property-damage, and medical-payment coverage in the event that she is injured in an accident in which she is not the driver. None of that equates to liability coverage. The policy exclusion operates to deny coverage when Reyes drives the vehicle. The Court of Appeal noted that contrary to the statute’s mandate, the liability insurance policy does not cover the named insured.

Named-driver exclusions have been upheld by Illinois courts and the courts of other states. Generally, public policy is not violated when a claimant must seek relief from his or her own uninsured motorist coverage because an exclusionary provision rendered uninsured the other vehicle. Although some appellate cases establish that named-driver exclusions are permissible, the Court of Appeal contends that they do not hold that a policy may completely exclude the sole named insured and automobile owner without running counter to the statute and, accordingly, public policy.

Insurers may, without running afoul of public policy, legitimately contract to limit the scope of their coverage. Insurers are not required to cover every possible loss and may legitimately limit their risks. Nowhere does the law expressly forbid parties to an insurance contract from excluding certain risks from liability coverage.

There is not a mere restriction or limitation on Reyes’ liability coverage: she has none. The provision constitutes a full exclusion of the named insured from liability coverage, as opposed to an exclusion of coverage only in limited circumstances specified in the insurance contract. The appellate court was not informed why plaintiff and Reyes contracted to exclude her from liability coverage. The reason for the exclusion, however, was irrelevant to its decision because, even if Reyes were excluded for a legitimate reason, the statute requires that the owner’s liability insurance policy cover the named insured and, here, coverage is not merely limited, but completely nonexistent.

The Court of Appeal concluded that there exists sound public policy reasons for requiring coverage over the sole named insured. The state’s interest in protecting the driving public far outweighs an insured’s desire to exclude himself from coverage in order to avail himself of a lower premium. To allow an insured to exclude himself from coverage and drive as an uninsured motorist, runs afoul of the overall purpose and intent of the compulsory insurance law.

The appellate court concluded it could not ignore the statute’s plain language that the liability policy must cover the person named as insured. Instead, it is the role of the legislature to specify, as it did with permissive drivers that named-driver exclusions may include the sole named insured.

The exclusion here is invalid because Reyes, the sole named insured, is not covered by liability insurance.

ZALMA OPINION

This case clearly takes away the unquestioned right of an insurer and insured to create a contract to which both agree. Ms. Reyes owned an automobile. She purchased insurance coverage that protected her from injuries any driver to whom she gave permission to drive her car might cause, it gave her uninsured motorist coverage if she was injured when not driving, and she received a reduction in premium because she agreed to be an excluded driver. She got what she bargained for.

Yet, because she drove the car knowing that she had no coverage she injured two people seriously. The state provided her with coverage for which she did not pay and which she did not ask to obtain.

The result of this decision is that anyone who owns a car but is not eligible for insurance will not be able to protect their investment in their automobile and will be unable to have a chauffeur operate her car. A 90-year-old quadriplegic, incompetent to drive a vehicle, that is owned cannot be insured because the insurer cannot exclude the 90-year-old  quadriplegic.

Public policy must make sense. This case does not make sense to me because it deprives both the named insured and the insurer from writing an insurance policy that makes sense for their needs.

© 2013 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

This story is part of the E-book, “Heads I Win, Tail You Lose — 2011″ which is available as a continuing education course from A.D. Banker at http://adbanker.com or as an E-book for Zalma Books.

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Insurance Fraud Continues Into New Year

Continuing with the first issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the January 1, 2013 reports on how an incompetent arsonist obtained nothing from the effort to make money from an arson-for-profit; a discussion of immunity provided to insurers and their personnel as a result of reporting to the proper authorities that they suspected insurance fraud; a discussion of how insurance fraud professionals and insurance claims professionals are working to reduce the claims fraud statistics; and a report on why insurance fraud is the orphan child of the criminal justice system.

ZIFL also reports on four new E-books from Barry Zalma, Zalma on Diminution of Value Damages – 2013; Zalma on California SIU Regulations;  Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog