Never Volunteer

ALWAYS OWN UP TO YOUR MISTAKE

The New Jersey Superior Court, Appellate Division was called upon to resolve a dispute that arose from a trial court decision that ARI Mutual Insurance Company (ARI Mutual) was obliged to reimburse AIG Centennial Insurance Company (AIG) for personal injury protection (PIP) medical expense benefits paid to AIG’s insured.  In AIG Centennial Insurance Company v. Gregory R. Thompson D/B/A Thompson Trucking, No. A-4358-11T2 (N.J.Super.App.Div. 11/19/2012) AIG attempted to recover money it paid in error from a tortfeasor’s insurer.

FACTS

The dispute between the insurers grew from an automobile accident that occurred on September 11, 2006. On that date, Dorothy Davis was the driver of a private passenger automobile owned by Sherman Harris, AIG’s named insured. According to a police report, Davis’s vehicle was struck by a dump truck operated by William H. Kanauss, III, a driver for Thompson Trucking.

At the time of the accident, Thompson Trucking’s liability insurer was ARI Mutual. Because the dump truck was a commercial vehicle there was no PIP coverage provided by ARI Mutual’s Business Auto Policy, except for injuries suffered by pedestrians. Harris, however, had procured from AIG a basic automobile insurance policy that provided PIP medical expense coverage of $15,000 per person, per accident.

By letter dated September 18, 2006, AIG mistakenly notified Davis that Harris’s policy provided her with PIP coverage of $250,000. After submitting her written application for PIP benefits to AIG on September 25, 2006, Davis relied on AIG’s $250,000 representation and obtained medical treatment costing far in excess of the basic automobile insurance policy’s $15,000 PIP medical expense limitation. AIG eventually realized that it had mistakenly advised Davis about the policy’s limit of liability and declined to provide further PIP benefits beyond what it had already expended. ARI Mutual reimbursed AIG $15,000 pursuant to New Jersey Statutes.

Davis filed a personal injury lawsuit against Kanauss, Gregory Thompson, and Thompson Trucking (the Thompson defendants) in August 2008. ARI Mutual provided a defense to the Thompson defendants pursuant to its Business Auto Policy.

In December 2009, Davis commenced a separate action against AIG, ARI Mutual, and the Thompson defendants, which sought, among other things, a declaration that “AIG is to afford coverage for any medical and/or hospital expenses up to $250,000 under the policy it issued and defendant AIG should be estopped from denying PIP benefits in excess of $15,000.” The complaint also sought a judgment “declaring that defendant AIG’s policy is reformed to include PIP coverage in the amount of $250,000.”

Although AIG and ARI Mutual were co-defendants in Davis’s declaratory judgment action, they did not file cross-claims against each other relating to the ultimate responsibility for PIP payments under the statute.

In October 2010, Davis settled her personal injury lawsuit against the Thompson defendants for $225,000. In March 2011, Davis’s claims against ARI Mutual and the Thompson defendants in the declaratory judgment action were dismissed. In like vein, but on a date not disclosed in the record, Davis separately settled her dispute with AIG, wherein AIG agreed to pay for all of Davis’s requested PIP expenses. The record is silent about the specific details concerning that settlement. AIG refers to having “reformed” the insurance contract, but it does not appear that Harris was a party to the “reformation” of his basic automobile insurance policy.

On April 28, 2011, AIG demanded reimbursement from ARI Mutual for the PIP benefits paid on Davis’s behalf in excess of $15,000, a sum totaling $75,634.29. On May 4, 2011, ARI Mutual declined to reimburse AIG for any amounts in excess of the $15,000 it had already paid.

AIG filed the present lawsuit seeking (1) money damages against the Thompson defendants and (2) reimbursement or arbitration of AIG’s dispute against ARI Mutual. After consideration of the parties’ motions for summary judgment, the trial court dismissed all of AIG’s claims against the Thompson defendants. In denying ARI Mutual’s motion, the court granted AIG’s application to not cap reimbursement at $15,000, and directed the insurers “to submit [AIG's] claim for reimbursement to binding arbitration.”

ANALYSIS

PIP reimbursement to a PIP carrier is strictly governed by statute in New Jersey.

ARI Mutual recognizes its responsibility to reimburse AIG for the $15,000 PIP medical expense benefit provided in Harris’s basic automobile insurance policy pursuant to statute. ARI Mutual objected to paying more simply because of AIG’s initial mistake and subsequent unilateral settlement with Davis.

While acknowledging its error, AIG argues that ARI Mutual nevertheless should be responsible for reimbursing PIP medical expense amounts in excess of the basic automobile insurance policy limit because if AIG had hewed to the $15,000 limit, ARI Mutual would have been exposed to Davis’s claim for the difference as part of the personal injury action. That may theoretically be true, but the appellate court cannot be engaged in an equitable redistribution divorced from the Legislature’s intent. Instead, it must be involved with a purely statutory reimbursement scheme between insurers.

AIG’s payment of up to $250,000 was not made within the confines of the basic automobile insurance policy covering Davis. Instead, it was an ad hoc adjustment that suited AIG’s litigation strategy.

The appellate court concluded that the payment was not made “pursuant to” or “in accordance with” the PIP reimbursement statute. The payment was made because AIG was potentially estopped from doing otherwise after providing representations to Davis for up to $250,000 in PIP benefits, upon which Davis reasonably relied. The appellate court also found that ARI Mutual was not involved in perpetrating the mistake; it was an operational gaffe made by AIG alone in the administration of its insurance business. If AIG’s argument is applied the result would be unreasonable and abruptly increase the exposure of ARI Mutual to compensate AIG for its own error.

The legislative intent of PIP benefits is clear. They enable persons injured on our streets and highways to get medical treatment and payment quickly, within the coverage limits designated in the policy, and without regard to fault. Furthermore, the Legislature ensured that carriers could obtain reimbursement from a tortfeasor’s insurer directly, to facilitate cost containment, rather than endure a cumbersome subrogation process. The Legislature never indicated, let alone enacted a statute, that a tortfeasor’s insurer should also be exposed to liability due to one-sided errors made by the injured’s insurer.

A court should never presume that the Legislature intended something other than that which it clearly and plainly expressed in plain language. To do otherwise would be tantamount to rewriting the Legislature’s written enactment by judicial fiat. Therefore, from a public policy standpoint, allowing AIG to recover the amount in question from ARI Mutual would condone sloppiness by insurers and increase the cost of insurance in direct contravention of our no fault laws.

ZALMA OPINION

When a West Point student errs he or she is required to respond: “No excuse, sir” and accept the punishment the error deserves. When a mistake is made by an insurer that causes it to pay more than it owes the insurer should result in the same response. Since AIG admitted that the error was made and was made by it alone it should have accepted the loss caused by the error and avoided this contumacious litigation.

Rather, AIG, showing a remarkable amount of “chutzpah” made an error that cost it $250,000. Rather than accepting responsibility for its error it had the unmitigated gall to seek reimbursement of its erroneous payment from another insurer who had nothing to do with the error.

Courts should not, and in this case clearly would not, honor the claims of a volunteer who pays a claim it does not owe by passing that error to another.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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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Serious Injuries Make Interesting Law

UIM and Auto Liability Aggregate

Under Arkansas law, a Church, as a charitable institution, is immune from tort liability. To protect their reputation and to protect the congregants, Arkansas churches buy liability insurance and uninsured motorist (UM) and underinsured motorist (UIM) coverage. When there is a serious accident causing multiple serious injuries the church and its insurer will often dispute the availability of the limits for the injuries incurred. In Argonaut Great Central Insurance Company v. Jerry Casey, et al., No. 12-1221 (8th Cir. 11/13/2012) the Eighth Circuit Court of Appeal was called upon to resolve a dispute between a church and its insurer concerning whether the insured could aggregate two different coverages to increase the amount of limits available to pay the injured.

FACTS

A bus owned by the First Baptist Church of Bentonville (the “Church”) was involved in a single-vehicle accident caused by the driver’s negligence, resulting in two fatalities and scores of serious injuries. At the time of the accident, the Church was insured by two policies issued by Argonaut Great Central Insurance Company (“Argonaut”), a Commercial Auto Policy (the “Policy”) providing $1 million liability insurance and $1 million uninsured and UIM insurance – the subject of this appeal – and a Commercial Umbrella Policy providing an additional $1 million excess coverage for auto accidents.

THE LITIGATION

Recognizing that personal injury claims would greatly exceed the policies’ combined coverages, Argonaut commenced a diversity interpleader action, naming known claimants as defendants and seeking to deposit $2 million into the court’s registry, $1 million for the combined limits under the Policy, and $1 million for the Umbrella Policy’s limit. The claimants asserted counterclaims against Argonaut pursuant to an Arkansas sttute alleging that the Policy limits include an additional $1 million from the UIM coverages. The trial court granted summary judgment for the claimants, ordered Argonaut to pay $2 million under the Policy into the court’s registry (plus an additional $1 million under the Umbrella Policy), and directed entry of final judgment permitting immediate appeal of the issue.

Argonaut appealed, arguing the Policy unambiguously precludes aggregating its liability and UIM coverages.

THE INSURANCE

It is undisputed that Argonaut provided the Church both liability and UIM coverages – liability coverage because they are tort victims of the Church’s agent – and UIM coverage because they are insured parties injured by a negligent driver (again, the Church’s agent) whose insurance coverage was less than the sum of their claims. The trial court held that the Policy unambiguously allowed aggregate recovery of the limits of both coverages.

Argonaut argued that three provisions limit the claimants’ recovery to the higher of either the liability or the UIM coverage, that is, to $1 million.

ANALYSIS

The law regarding construction of an insurance contract is well settled. If the language of the policy is unambiguous, the court must give effect to the plain language of the policy without resorting to the rules of construction. On the other hand, if the language is ambiguous, the court will construe the policy liberally in favor of the insured and strictly against the insurer. Language is ambiguous if there is doubt or uncertainty as to its meaning and it is fairly susceptible to more than one reasonable interpretation.

The “Coverage” section of the UIM endorsement provides:

“A. Coverage
“1. We will pay all sums the ‘insured’ is legally entitled to recover as compensatory damages from the driver of an ‘underinsured motor vehicle’. . .
“2. With respect to damages resulting from an ‘accident’ with an ‘underinsured motor vehicle,’ we will pay under coverage only if a. or b. below applies:
“a. The limit of any applicable liability . . . policies have been exhausted by payment of judgments or settlements; or
“b. A tentative settlement has been made . . .
“However, this Paragraph b. does not apply if the ‘underinsured motor vehicle’ is insured by us for Liability Coverage.”

Two aspects of this provision are significant to the issues before the court. First, the first clause confirms what Argonaut has conceded in this case – the definition of “underinsured motor vehicle” includes a vehicle that has liability coverage provided in the same policy as the UIM endorsement. In other words, Argonaut provides UIM coverage, for example, to passengers in the auto of its own insured if the limits of liability coverage provided by Argonaut does not cover their claims. Second, Argonaut will pay under its UIM coverage only after the “limit of any applicable liability . . . policies have been exhausted.”

Argonaut’s UIM coverage is explicitly additional or sequential to any liability coverage that may apply, including its own. With the UIM coverage so clearly stated as an aggregate coverage, it would take a contrary limiting provision of the utmost clarity to render the liability and UIM coverages mutually exclusive.

The “Two or More Coverage Forms” provision appears in Section IV of the Business Auto Coverage Form:

“If this Coverage Form and any other Coverage Form or policy issued to you by us or any company affiliated with us apply to the same ‘accident’, the aggregate maximum Limit of Insurance under all the Coverage Forms or policies shall not exceed the highest applicable Limit of Insurance under any one Coverage Form or policy.”

The UIM endorsement provides:

“Regardless of the number of covered ‘autos’, ‘insureds’, premiums paid, claims made or vehicles involved in the ‘accident’, the most we will pay for all damages and resulting from any one ‘accident’ is the Limit of Insurance for Uninsured and Underinsured Motorists Coverage shown in the Declarations.

“No one will be entitled to receive duplicate payments for the same elements of ‘loss’ under this Coverage and any Liability Coverage Form or Medical Payments Coverage Endorsement attached to this Coverage Part.”

The dual-coverage issue in this case only arises if a claimant is both covered by the negligent driver’s liability insurance policy and is an “insured” for purposes of the same policy’s UIM endorsement. This case illustrates why organizations whose members or employees frequently travel in covered autos (particularly charities) need this type of aggregate commercial auto coverages so that they insure against the organization’s risk of liability and provide UIM protection for passengers who may be injured due to the negligence of the organization’s driver as well as negligent drivers of other vehicles.

ZALMA OPINION

This case is limited by local law which gives a church immunity from tort liability thereby limits the injured persons to the coverages purchased by the church. The insurer thought it had written the policy so that the UIM and the Auto liability coverages did not aggregate. The Eighth Circuit concluded that it failed in that effort because of the use of language in the policy.

If it wished to limit its coverage to just the auto liability plus the umbrella it only needed to add an endorsement that said:

“Regardless of any other language in this policy if coverage applies due only to the negligence of the named insured there is no coverage available under the UM/UIM coverage.”

Or, it could have added an endorsement to its UM/UIM policy to state:

“This insurance does not apply if the uninsured or underinsured motorist is the named insured or an employee, agent or servant of the named insured.”

Litigation and visits to trial courts and the courts of appeal can be avoided by careful draftsmanship in the creation of a policy of insurance and careful reading of the policy in effect at the time the loss occurs. Insurance coverage lawyers who are retained by insurers to advise it of its rights, duties, and obligations should always look at the dispute as if it were sitting as a court of appeal more interested in protecting the injured than the insurer. In so doing it will avoid a great deal of expense and reduce the initial earnings of counsel but would increase the goodwill of the insurer to the coverage lawyers.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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 READ POLICY NO EXCUSE

Wasteful Litigation 

Insurance is, and has always been a contract. In modern practice insurance policies are written in easy to read language that requires nothing more than a fourth grade education to understand. Regardless, the public still believes they are difficult to read and understand. Insurance agents and brokers are also obligated to read the policy as issued to determine that they have obtained for the insured the coverage ordered and promised. Because everyone failed to do their due diligence with regard to a policy unnecessary litigation followed.

Sometimes, as this case shows, an insured will claim that the failure to read the policy as issued binds the insurer to the wording of a sample form which was broader than the policy as issued; failure to provide a policy as ordered; and failure to explain the coverages available will lead an insurer to wrongfully deny a claim and lead to unnecessary litigation.

Because of a series of errors the Supreme Court of Appeals of West Virginia was asked to resolve the dispute between the insurer New Hampshire Insurance Company (“New Hampshire”) and RRK, Inc. (“RRK”). New Hampshire contended that the circuit court’s order wrongfully reforms the subject policy and that it is against public policy in New Hampshire Insurance Company v. RRK, Inc., D/B/A Showboat Marina, No. 11-1099 (W.Va. 11/09/2012).

FACTUAL BACKGROUND

At about the same time the property was purchased, RRK sought insurance coverage for the property from a local insurance agent, Insurance Systems, Inc. (“Insurance Systems”). Insurance Systems then solicited an application for insurance and dealt directly with an Ohio insurance agency, Norman Spencer Agency, Inc. (“Norman Spencer”). Norman Spencer, in turn, dealt directly with Maritime General Agency, Inc. (“Maritime”). Maritime performed the underwriting services for the issuing insurer, the petitioner in this case, New Hampshire.

RRK dealt solely with Insurance Systems. During negotiations regarding the coverage sought, RRK requested that Insurance Systems provide it with a copy of the coverage forms of the proposed policy. In response, on September 20, 2007, Insurance Systems sent via facsimile a seventeen page document (“17-page fax”) addressed to Rudy Lee which stated, “Per our phone conversation of this morning, attached you will find the coverage forms you requested.”

It was the understanding of RRK and Insurance Systems that any policy issued would cover the barge and its contents and the two docks. Subsequent to receiving and reviewing the 17-page fax, Rudy Lee completed the application to purchase insurance coverage from New Hampshire and provided payment. The policy was set to be effective from September 28, 2007, to September 28, 2008. Several weeks after purchasing insurance coverage, RRK received in the mail a copy of their insurance policy from Insurance Systems. As with almost every member of the general public, neither of the Lees read the mailed copy.

The content of the mailed policy differed from the 17-page fax. Notably, at the top of the first substantive page of the mailed policy, language was included in boldface and capital 12-point font excluding coverage of property damaged by “wear, tear, and/or gradual deterioration.”

In April of 2008, Insurance Systems realized that New Hampshire had failed to list the barge as covered property under the insurance policy. In an e-mail dated April 28, 2008, an Insurance Systems agent informed New Hampshire of the omission and requested that the barge and its contents be added to the policy. In September of 2008, Rudy Lee and an Insurance Systems agent met to discuss property insurance coverage. It was discussed and agreed upon at the meeting that the insurance coverage should include coverage of the barge and its contents. The agent assured Mr. Lee that he would ensure that the barge and contents were covered under the policy.

On February 23, 2009, after the policy was renewed, the barge sank into the Ohio River. RRK filed a claim with New Hampshire for the barge and its contents. On February 25, 2009, New Hampshire denied RRK’s claim. New Hampshire stated that it denied RRK’s claim because the barge and its contents were not listed in the policy as covered property. On April 3, 2009, Insurance Systems e-mailed New Hampshire confirming that Insurance Systems had represented to RRK that the barge and its contents would be covered property under the policy. After investigation, New Hampshire determined that the barge and contents should have been covered property but renewed its denial because the wear-and-tear exclusion applied.

The trial court granted RRK’s motion for partial summary judgment and found that the barge and its contents were covered under the policy because RRK had a reasonable expectation that they would be covered. It further found that New Hampshire failed to meet its strict burden of proof with regard to the exclusionary language so as to make the wear-and-tear exclusion legally operable.

ANALYSIS

The circuit court’s June 22, 2011, order which granted partial summary judgment in favor of RRK found that RRK “had a Reasonable Expectation of Insurance Coverage for the subject Barge and Contents.” The record demonstrated, without question, that RRK was repeatedly assured that the barge and its contents were covered property under the insurance contract.

However, whether the wear-and-tear exclusion contained in the mailed copies of the policy, but not in the 17-page-fax, is valid is a different situation. This case involves a discrepancy between materials provided to RRK prior to purchasing the policy and the policy that was actually issued. Finding that the doctrine of reasonable expectations applies to this case. The trial court found that the wear-and-tear exclusion was not placed in a way as to allow RRK to reasonably expect the existence of the exclusion. New Hampshire argued the wear-and-tear exclusion was conspicuous, thus making RRK’s reliance on the 17-page fax unreasonable. Exclusionary clauses must be conspicuous, plain, and clear, placing them in such a fashion as to make obvious their relationship to other policy terms, and must bring such provisions to the attention of the insured. The parties did not dispute that the exclusion at issue was conspicuous in the policy. RRK argues, however, that because the wear-and-tear exclusion was not placed in the 17-page fax, it was not placed in such a way as to bring the exclusion to RRK’s attention and ignores the fact that they did not read the policy where the would have seen the exclusion on the first page.

There is no question of fact regarding whether the renewal policy was mailed to and received by RRK. Therefore, the circuit court did not err in finding, as a matter of law, that the renewal policy was mailed to and received by RRK.

CONCLUSION

The appellate court affirmed, in part, the circuit court’s order finding that the barge and its contents were covered property under the insurance contract as a matter of law. It also affirmed the circuit court’s finding that the renewal policy was mailed to and received by RRK. However, it reversed the circuit court’s order with regard to its finding that the wear-and-tear exclusion is invalid, and remanded the case for proceedings consistent with the opinion.

ZALMA OPINION

This case is a comedy of errors. The insurer issued the wrong policy and denied a claim based on its error. When the error was pointed out the insurer accepted coverage and then denied the claim anyway because it concluded the sinking of the barge was caused by wear and tear. The insured was wise enough to seek a draft policy wording before agreeing to insure with New Hampshire yet, as wise as they were, when the policy was delivered they averred that they never read the policy when it was delivered and when it was renewed. Only the insurance agent noted the error and convinced New Hampshire that the barge and contents were covered property only to have the insured claim the exclusion did not exist because it wasn’t part of the form they were provided before the policy was issued.

Professionalism on the part of the insured, the insurer, the brokers and agents would have avoided this litigation had they not acted with sloth, ignorance or lack of diligence.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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’s Insurance Fraud Letter — November 15, 2012

More Fraud

Continuing with the twenty second issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the September 1t, 2012 issue about California’s Special Investigation Unit (SIU) Regulations and possible limitations on the Department of Insurance’s (DOI) ability to assess fines for violations of Regulations that exceed the promise of the statute authorizing the issuance of the SIU Regulations; a report on the affirmation of a conviction for insurance fraud and dealing drugs in Ohio proving that insurance fraud is not a victimless crime; and reports on the funding of the fight against insurance fraud in Contra Costa County, California.

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

•    Additional Insured Owed Defense
•    Public Policy Trumps Policy Wording
•    Happy Veterans Day
•    A Trick or Device Becomes A Robbery
•    Artificially Lowering Payroll to Avoid Premium Fails
•    UIM Insurer May Mount Defense of Underinsured Motorist
•    City Hoist On Its Own Petard
•    Coverage for Disparagement Under CGL
•    Today Is Election Day — Vote
•    No Coverage for Damage by Chinese Drywall

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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Additional Insured Owed Defense

Extrinsic Evidence Available to Prove Summary Judgment

Illinois is a four corners state where the duty to defend is usually established by the allegations of the complaint and the wording of the policy. However, after a declaratory judgment suit is filed parties are allowed to admit extrinsic evidence as part of a summary judgment motion as the parties would be allowed to admit such evidence at trial.

The Illinois Court of Appeal resolved an insurance coverage issue arising out of a personal injury suit where it was alleged that the complaint did not allege sufficient facts to bring coverage within the requirements of the additional insured endorsements attached to the policy. The trial court, in Pekin Insurance Company v. Equilon Enterprises LLC, D/B/A, 2012 IL App 111529 (Ill.App. Dist.1 11/09/2012), denied plaintiff Pekin Insurance Co.’s motion for summary judgment on the question of duty to defend and, instead, granted judgment as a matter of law to defendants Equilon Enterprises, d/b/a Shell Oil Products US, and Shell Oil Company (collectively Shell), as additional insureds under the policy.  Pekin argued that the trial court erred because it relied on evidence presented at the motion for summary judgment that was not alleged in the complaint of the injured plaintiff against the insured and the additional insured.

FACTS

Waldemar Zablocki filed suit for injuries he sustained while lighting a cigarette behind a gas station operated by Summit Shell (Summit), d/b/a Mary’s Station II, Inc. The complaint alleged that Shell and Summit were directly liable for Zablocki’s injuries after an explosion occurred while fuel was being delivered to the station. Shell tendered the Zablocki action to Pekin for defense.

In its motion for summary judgment, Pekin argued that an endorsement to the policy limited coverage to Shell for “negligence in the granting of a franchise” and a second endorsement limited coverage “to liability arising out of [Summit's] operations *** [or its] premises.” According to Pekin, the Zablocki action did not allege negligence in the granting of the franchise or vicarious liability against Shell, which foreclosed a finding that Pekin owed a duty to defend.

Zablocki’s complaint alleged the gasoline filling process released flammable gasoline vapors into the air. Immediately upon exiting the store, Zablocki walked into a public alley behind the station to smoke a cigarette. When he attempted to light the cigarette, the small flame ignited the vapors, causing an explosion that injured Zablocki. The alleged acts of negligence against each defendant were identical.

In its complaint for declaratory judgment Pekin claimed its insurance policy extended coverage to Shell for negligence in the granting of a franchise and to claims of vicarious liability. The Zablocki complaint did not allege that the Shell defendants were vicariously liable for Zablocki’s injuries; nor did the complaint allege any fault by Shell in granting a franchise to Summit.

On June 14, 2007, Summit procured the Pekin policy as the named insured with an effective date of July 1, 2007. In accordance with certain franchise agreements, Summit listed Shell as “additional insured” to the Pekin policy. The policy contained two endorsements dealing with Shell, the first is listed as “Additional Ins – Grantors of Fran,” with the premium listed for the coverage. The second is listed as “Additional Insured – Flat Charge,” which lists a separate premium for the coverage. The first endorsement provides, “The person or organization shown in the schedule [is an insured], but only with respect to their liability as grantor of a franchise to you.” The second endorsement amends the policy to reflect that Shell is “an insured but only with respect to liability arising out of your operations and premises owned by or rented by you.”

After hearing argument on Pekin’s motion for summary judgment in its declaratory action, with a written response by Shell, with certain franchise agreements between Summit and Shell attached, the circuit court denied summary judgment to Pekin. Instead the court granted judgment as a matter of law to Shell, holding that Pekin had a duty to defend.

ANALYSIS

To determine whether an insurer has a duty to defend an action against an insured, generally, Illinois courts compare the allegations of the underlying complaint to the relevant portions of the insurance policy. If the complaint alleges facts that fall within or potentially within the coverage of the policy, the insurer is obligated to defend its insured even if the allegations are groundless, false, or fraudulent.

Illinois courts construe an insurance policy by considering the policy as a whole, the risk undertaken, the subject matter and the purpose of the contract. If the words in the policy are unambiguous, a court must afford them their plain, ordinary, and popular meaning.  However, if the words in the policy are susceptible to more than one reasonable interpretation, they are ambiguous and will be construed in favor of the insured and against the insurer who drafted the policy.

The existence of these two endorsements for additional-insured coverage necessarily means that the “Grantors of Fran” endorsement does not provide the only coverage to Shell, as the additional insured. While the “Grantors of Fran” endorsement appears to limit coverage as Pekin claims to negligence arising from the awarding of a franchise, Pekin does not, and cannot, argue that either coverage exists for Shell under that endorsement or it does not exist at all. Plainly, Shell is also listed as additional insured under the second endorsement. Since the second endorsement provides coverage to Shell as additional insured, the “grantor of franchise” endorsement does not limit coverage under the Pekin policy to Shell in its capacity as franchisor to Summit. As a consequence, this case does not call upon the Court of Appeal to address the scope of the coverage provided under the “grantor of franchise” endorsement.

A trial court should not ignore the agreements that serve to drive the named insured to purchase the liability policy naming the other party as an additional insured, in assessing the risk undertaken and the subject matter and purpose of the insurance contract. The trial court need not wear judicial blinders and may look beyond the complaint at other evidence appropriate to a motion for summary judgment. The four corners rule does not apply in a motion for summary judgment and that to require the trial court to look solely to the complaint in the underlying action to determine coverage would make the declaratory proceeding little more than a useless exercise.

The franchise agreements, as the driving force behind Summit’s procurement of the Pekin policy, reinforce the decision that Pekin had a duty to defend Shell. Resolution of the duty to defend issue should not turn on the absence of allegations of vicarious liability when the allegations in the complaint do not preclude the possibility that the additional insured could be found liable solely as a result of the acts or omissions of the named insured.

The Court of Appeal rejected Pekin’s implicit contention that in the context of this case, only if the allegations of the underlying complaint support a claim of vicarious liability can it find a duty to defend owed by Pekin. The burden was on Pekin to demonstrate that the allegations in the underlying complaint do not potentially fall within the coverage of the policy. It failed to carry the burden.

In a concurring opinion on justice noted that control is the key element of vicarious liability. The complaint alleged that Shell had “control.” Since “control” is the key element of vicarious liability, the factual allegations of the complaint (without the extrinsic evidence produced at summary judgment) triggered Pekin’s duty to defend, even though the complaint does not allege vicarious liability.

ZALMA OPINION

This is one of thousands of appellate decisions that establish that the duty to defend is broader than the duty to indemnify. More importantly it is evidence that insurance companies fail to read the policies they issue before they issue them to make them clear and unambiguous. Additional insured endorsements are fairly simple documents and can easily be made clear. However, when an insurer, as did Pekin, includes two additional insured endorsements in a single policy, create an unnecessary ambiguity.

Although the four corners rule of policy interpretation calls for strict review of the wording of the complaint and the policy insurers should never conclude that a court will agree with its interpretation of the underlying complaint. In this case, at least one justice, found allegations of vicarious liability bringing the case into the four corners rule even though he agreed with the other justices that the extrinsic evidence presented at summary judgment were sufficient to find coverage.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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 Trumps Policy Wording

Voluntary Payment Clause Does Not Apply to Lawyer’s Admission of Error

Lawyers who make an error that can cause damage to a client are obligated, by ethical canons, to advise the client and others who may have been damaged by the error of the lawyer. Liability insurance policies, including lawyers’ errors and omission policies, require that the lawyer get the permission of the insurer before making an admission of liability. Because the two requirements are contradictory, the Illinois Court of Appeal was called upon to resolve a case of first impression whether an admission of error in a legal malpractice claim by a policyholder without his insurance company’s approval gave the company the right to deny coverage and not defend the attorney and his law firm, in Illinois State Bar Association Mutual Insurance Company v. Frank M. Greenfield and Associates, P.C., An Illinois Professional Corporation, 2012 IL App 110337 (Ill.App. Dist.1 11/09/2012).

Attorney Frank M. Greenfield admitted to making a mistake in drafting a client’s will that affected the distribution of funds from a trust established by his client. According to the letter, which was sent to all of the trust’s beneficiaries, Greenfield’s mistake resulted in several of the beneficiaries receiving less money than they otherwise would have received had the client’s wishes been properly implemented. Those beneficiaries, defendants Orrin Adler, Barbara Adler, Michael Hanna, and Faye R. Adler Grafton (collectively, the underlying plaintiffs), filed suit against Greenfield and his firm, Frank M. Greenfield & Associates, P.C. (collectively, Greenfield), for legal malpractice.

Greenfield had a professional liability insurance policy through Illinois State Bar Association Mutual Insurance Company (ISBA Mutual), but did not inform ISBA Mutual prior to sending the letter to the beneficiaries. ISBA Mutual claims that, by failing to inform it of the letter prior to sending it, Greenfield violated a provision of his insurance policy and, consequently, ISBA Mutual had no duty to defend Greenfield in the subsequent legal malpractice action. ISBA Mutual filed an action for declaratory judgment, seeking an order that it had no duty to defend Greenfield. The prayer for relief in the declaratory action does not mention coverage; it only requested the trial court to find that it had no duty to defend as a result of Greenfield’s admission letter to the beneficiaries of the trust. Both parties filed motions for summary judgment, and the trial court granted Greenfield’s, finding that ISBA Mutual had a duty to defend since Greenfield did not admit to liability in the letter and consequently did not violate his insurance policy; the trial court also found that even if he had violated the policy, ISBA Mutual was not prejudiced by the breach.

BACKGROUND

The facts are largely undisputed. On March 24, 2010, ISBA Mutual filed a complaint for declaratory judgment, alleging that the law firm of Frank M. Greenfield & Associates, P.C., was the named insured on a professional liability insurance policy issued by ISBA Mutual, and Greenfield individually was an insured on that policy. The firm and Greenfield were named in a lawsuit initiated by the underlying plaintiffs, who sought compensatory damages for Greenfield’s omission of a provision in a client’s will, which allegedly damaged the underlying plaintiffs upon the client’s death. The firm and Greenfield tendered their defense of the suit and ISBA Mutual accepted that tender, subject to a reservation of rights for the reasons underlying its complaint for declaratory judgment.

ISBA Mutual alleges that its insurance policy contains a provision entitled “Voluntary Payments,” which provides: “The INSURED, except at its own cost, will not admit any liability, assume any obligation, incur any expense, make any payment, or settle any CLAIM, without the COMPANY’S prior written consent.” (emphasis added)

ISBA Mutual argued that it had no duty to defend the firm and Greenfield in connection with the underlying plaintiffs’ complaint because Greenfield admitted liability in a letter dated June 17, 2008, and seeks a judgment finding the same.

Attached to the complaint was the plaintiffs’ complaint in the underlying action. The complaint alleges that Greenfield represented Leonard and Muriel Perry for purposes of estate planning. Leonard executed a will that poured his assets into a trust known as the “Leonard W. Perry Declaration of Trust”; Muriel did the same, with her assets pouring into the “Muriel W. Perry Trust Agreement.” From time to time, Leonard and Muriel amended their trusts, and in 1996, Leonard executed an amendment giving Muriel the power of appointment to make changes and modifications to the plan of distribution of the funds in his trust upon Leonard’s death. After Leonard’s death, in 2007, Greenfield amended Muriel’s will to include language “that directed, pursuant to her Power of Appointment of the Leonard W. Perry Trust dated March 22, 1996, that assets in the Leonard W. Perry Trust dated March 22, 1996 were to be distributed according to the terms of the Muriel Perry Trust.”

In 2008, Muriel again amended her will, making changes to certain bequests of the funds in her trust. However, in preparing the will, Greenfield “failed to include language that Muriel W. Perry was exercising her Power of Appointment from her deceased husband’s trust.” This error remained undiscovered until after Muriel’s death. Approximately a month after Muriel’s death, Greenfield disclosed his omission of the power of appointment in the 2008 will to the beneficiaries of the trust. The underlying plaintiffs claimed that Greenfield was negligent in failing to include the power of appointment provision and that as a result of that omission, they “have been deprived of monies for which they were the intended beneficiaries.”

The complaint in the underlying action included as an exhibit the June 17, 2008, letter that ISBA Mutual claims relieved it of its duty to defend Greenfield and the firm. Since the language of the letter is central to the issue in the instant appeal, we relate the letter in its entirety. The letter provided:

“You are receiving this letter because you are named in the Muriel Perry Trust as a beneficiary. The purpose of this letter is to give you the facts regarding the value of Trust assets and the respective amounts of the distributions….” It went on to explain how the error could affect the amounts recovered by individual beneficiaries of the will.

On September 8, 2010, Greenfield filed a motion for summary judgment, arguing that he had an ethical duty to inform the beneficiaries of his mistake, that he did not admit liability but only informed the beneficiaries of what occurred, and that the letter did not prejudice ISBA Mutual because JP Morgan Chase Bank, the trustee, would have immediately informed the beneficiaries of the same matters if Greenfield had not done so.

On December 7, 2010, the trial court issued a written opinion in which it found that Greenfield’s letter only admitted facts and did not admit liability. Finally, the court found that even if Greenfield had admitted liability, ISBA Mutual had not demonstrated that it was prejudiced by Greenfield’s conduct, finding that “[a]ny claim of prejudice is speculative, at best.” Accordingly, the trial court granted Greenfield’s motion for summary judgment and denied ISBA Mutual’s cross-motion for summary judgment.

ANALYSIS

The first question the court considered was whether the voluntary payments provision in ISBA Mutual’s insurance policy was enforceable. If it is not enforceable, then the question of whether Greenfield admitted liability or merely admitted the facts concerning his mistake is immaterial. Both parties acknowledge that, as an attorney, Greenfield had a duty to disclose his mistake to the beneficiaries.

There is very little case law concerning the effect of a “voluntary payments” clause such as that at issue.  The Court of Appeal recognized that an admission of fault did not amount to an assumption of liability, since it amounted only to an admission of the truth of the fact from which liability might flow, while an assumption of liability brought into existence a contractual obligation.

The Court of Appeal concluded, after reviewing case law from other jurisdictions, that a provision such as the one at issue here is against public policy, since it may operate to limit an attorney’s disclosure to his clients.

ZALMA OPINION

The reason this is a case of first impression is because the lawyer did not admit liability he only admitted error. The insurer attempted a strict interpretation of the voluntary payments clause and, in so doing, made it worthless since it has now been found to be in violation of public policy by improperly limiting an attorney’s obligation to disclose both good and bad information to his or her clients.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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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Happy Veterans Day

May we all remember those of the Veteran’s who served their country, whether in combat or support roles.

 

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A Trick or Device Becomes A Robbery

Clear Definition Essential

Crime insurance policies have, since they were first offered to insureds, had no problem insuring against theft and robbery. They did have a problem with con games where an insured – because he is tricked – hands over his property to a criminal. In Vam Check Cashing Corp v. Federal Insurance Company, No. 11-2644-cv (2d Cir. 11/07/2012), the Second Circuit Court of Appeal was asked to resolve a dispute between an insured and an insurer that a criminal scheme perpetrated at its store constituted “robbery” within the meaning of its crime insurance policy which the defendant insurer issued.

The common definition of the term “robbery” is the taking of money or goods in the possession of another, from his or her person or immediate presence, by force or intimidation. Insurance companies allow lawyers to help them write insurance policies. Definitions are, as a result, taken from the common meaning and made more complex. As a result insurance coverages that are usually clear and unambiguous become complex enough to allow a court to apply the contra preferendum rule that if there is an ambiguity it will be resolved in the favor of the insured.

BACKGROUND

Plaintiff-appellee VAM Check Cashing Corp. (“VAM” or “the insured”) operates a number of check cashing stores in the New York City area, including Pine Check Cashing in Brooklyn, New York. VAM purchased a crime insurance policy (“Policy”) from defendant-appellant Federal Insurance Company (“Federal” or “the insurer”). During the pendency of the Policy, a group of criminals successfully tricked a Pine Check Cashing employee, Romanita Vazquez, into turning over $120,000 in cash to them. The parties do not dispute the facts of the scheme, which are detailed principally in Vazquez’s three-page statement prepared after the crime.

Some time before noon on September 2, 2009, Vazquez received a phone call from a woman claiming to be the wife of VAM’s owner. Over the course of a wide-ranging chat, the caller told Vazquez that her husband was opening three new check cashing stores, including one in Manhattan that very day. During this call, Vazquez received a second call from another woman who identified herself as the manager of the newly opened Manhattan store. The second caller said that a government official had arrived at the new store to collect a tax bill, but because the store had just opened, it had insufficient cash on hand to pay the bill. Vazquez relayed this information to the original caller, who told Vazquez that a man named Windfrey would come to Pine to collect the $100,000, and that she would be able to identify him by his use of a code number. Later, the original caller increased the amount to $120,000, and Vazquez placed that amount in a box.

Eventually, a man who identified himself as Windfrey came into the store. He offered the pre-arranged code number, and Vazquez buzzed him into the back of the store. She then handed him a box containing the $120,000 in cash, and he left. As noted by the district court, Vazquez testified at her deposition that she “never felt threatened by Mr. Windfrey,” and at the time, “she did not believe he was dangerous or a thief.”

Over the course of the afternoon, Vazquez did not hear anything further from the owner. She gradually grew suspicious and eventually called the police that evening. The police never caught the perpetrators or recovered the money; they advised VAM that the scheme was the work of a sophisticated group of criminals that had perpetrated similar scams across the country.

After the loss, VAM made a claim under the Policy, asserting that the crime was covered under the Policy’s definition of “robbery.” In January 2010, however, Federal gave final notice that it denied the claim. VAM then sued in the United States District Court for the Eastern District of New York (Jack B. Weinstein, District Judge) for breach of contract, claiming damages of $112,500 (the $120,000 loss less the Policy’s $7500 deductible). The facts being essentially undisputed, the parties filed cross motions for summary judgment. On May 25, 2011, the district court granted summary judgment to VAM.

The district court ruled that the policy’s definition of “robbery” is ambiguous, that the insured offered a reasonable interpretation of the policy permitting coverage, and that the insurer was therefore liable for the loss.

DISCUSSION

The parties do not dispute the material facts underlying the claim. The case thus turns on the interpretation of the insurance contract. Under New York insurance law, the plain language of an insurance policy, read in light of common speech and the reasonable expectations of a businessperson.

The basis for VAM’s claim under the Policy, and thus for its breach of contract action for failure to pay that claim, is that the events of September 2, 2009 fell within the Policy’s “Robbery” clause. The Policy states in relevant part that “[Federal] shall be liable for direct losses: . . . Within the Premises of Money and other property received from sources other than the sale of Food Stamps but only when such loss is caused by: . . . (2) Robbery or attempt thereat.” The Policy defines the term:

“‘Robbery’ means the unlawful taking of insured property from an Insured, a partner, an Employee or any other person authorized by the Insured to have custody of the property by violence, threat of violence or other overt felonious act committed in the presence and cognizance of such person, except any person acting as a watchman, porter or janitor.”

The parties agree that Vazquez was an “Employee” and was not “acting as a watchman, porter or janitor.” The parties also agree that “Windfrey” and his associates employed neither actual nor threatened violence. Thus the definition can be simplified for this case:

“‘Robbery’ means the unlawful taking of insured property from . . . an Employee . . . by . . . overt felonious act committed in the presence and cognizance of such person …” This is clearly a different definition than the common dictionary definition recited above.

VAM’s reading is grammatically natural, since it does not require an adjectival word to be read adverbially. VAM’s reading thus has the advantage of respecting the plain (if strict) meaning of the contested phrase. Nor would VAM’s proposed meaning render the word “overt” meaningless. In many forms of theft, the act of taking is itself covert; if, for example, Windfrey had grabbed a pile of cash and snuck it into his pocket while Vazquez’s back was turned, his act itself (not simply the true nature of the act) would presumably be considered covert.

Thus, the meaning of the phrase “overt felonious act” is ambiguous standing alone. We therefore examine whether it can be clarified by the second contested phrase, “committed in the presence and cognizance of such person,” or by the remaining textual context.

THE EFFECT OF AMBIGUITY

With Federal’s textual arguments exhausted, the ambiguity remains. New York follows the maxim of contra proferentem in insurance cases: where the plain language of a policy permits more than one reasonable reading, a court must adopt the reading upholding coverage. Because the plain text of the Policy does not resolve this case, VAM must prevail if it has provided us a reasonable reading permitting recovery.

The Second Circuit concluded that VAM has. Under VAM’s overall reading of the Policy provision at issue, the insured will recover for “robbery” whenever property is taken from an employee by means of an observable act that amounts to a felony, provided that the act occurs in the presence of the employee and the employee is aware of the act’s occurrence. But the employee need not be aware that the act itself is felonious. This interpretation is at least as plausible a reading of the language as that provided by Federal.

No contemporaneous awareness of the act’s criminal nature was required.

Finally, it is clear that the theft fell within VAM’s proposed reading of the Policy. Since the act must effect an “unlawful taking of insured property,” the Second Circuit agreed with VAM that the most relevant act was the obvious, readily observable action of Windfrey in taking the box of cash. That act was clearly “felonious,” was “overt” in the sense of being observable, and was both within Vazquez’s physical “presence” and her “cognizance,” since she was aware of his request for the money and her act of giving it to him.

ZALMA OPINION

Federal Insurance Company failed, in this case, to follow the KISS doctrine to Keep It Simple Stupid. By attempting to make the definition of “robbery” more precise it created an ambiguity and allowed an insured to recover for a “robbery” that was really a bunco scheme or a trick and device.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Artificially Lowering Payroll to Avoid Premium Fails

Are Per Diem Payments Payroll?

No one likes to pay insurance premiums. Businesses and individuals continue to try methods to avoid paying high premiums if there is a facially honorable way to reduce premium costs just as they use similar methods to pay as little tax as facially within the law. In Readylink Healthcare, Inc v. Dave Jones, As Insurance Commissioner, Etc, No. B234509 (Cal.App. Dist.2 11/06/2012), the California Court of Appeal was asked to resolve a dispute over a year-end audit by respondent State Compensation Insurance Fund (SCIF) of appellant ReadyLink HealthCare, Inc.’s (ReadyLink) payroll to determine its 2005 premium for its workers’ compensation insurance policy.

The SCIF assessed an additional premium of $555,327.53 based on its determination that ReadyLink’s per diem payments to traveling nurses counted as payroll. The Insurance Commissioner upheld the assessment, finding that ReadyLink’s per diem payments were not “reasonable” and therefore not exempt from payroll because they could not be substantiated and were designed to camouflage the assignment of income.

On appeal, ReadyLink contended: (1) the trial court incorrectly applied the substantial evidence standard of review rather than its independent judgment; (2) the Commissioner’s decision is preempted by federal tax law; (3) the Commissioner’s decision improperly created a new regulation without public hearing, comment and notice; and (4) equity dictates that the Commissioner’s decision should not apply retroactively.

FACTUAL BACKGROUND

ReadyLink is a private healthcare staffing agency that provides temporary traveling nursing personnel to hospitals and other acute care centers throughout California and other states. Nurses register with ReadyLink, which verifies the nurses’ credentials, notifies them when shifts are available and pays their wages. The SCIF is a quasi-public company created by the Legislature to ensure that mandatory workers’ compensation insurance will be available to California employers.

In September 2000, the SCIF issued a workers’ compensation insurance policy to ReadyLink. The policy was renewed annually until ReadyLink cancelled it in March 2007. At the end of each policy year the SCIF reviewed ReadyLink’s payroll records to determine the amount of wages paid that year to ReadyLink’s employees, because premium rates are largely based on the employer’s payroll.

The SCIF conducted its final audit of ReadyLink in 2007 for the policy period of September 2005 through September 2006. While reviewing ReadyLink’s payroll registers, the SCIF’s senior auditor in the special risk division discovered that ReadyLink was paying nurses a minimum wage of approximately $6.75 per hour plus a much higher stipulated per diem amount. The auditor had conducted dozens of audits of nurse staffing agencies and registries during her employment with the SCIF and had never seen such an agency pay more than 50 percent of wages in the form of per diem payments or pay hourly wages that were significantly below the average hourly rate typically paid to trained, licensed, registered nurses in California.

She questioned ReadyLink about its per diem payments and requested documentation to substantiate these payments. ReadyLink responded that it had been audited by the Internal Revenue Service (IRS) in 2008 for the premium year in question and the IRS found that ReadyLink was in compliance with the federal per diem tax rules. ReadyLink did not provide any additional documents to the SCIF. Based on the lack of supporting documentation, the SCIF determined that the per diem amounts should be included as payroll. This increased payroll had the effect of increasing ReadyLink’s workers’ compensation insurance premium by $555,327.53, for a total annual premium of $800,106.00.

THE ISSUE

The Commissioner’s Decision phrased the issue presented as follows: “For policy year 2005, did SCIF properly include per diem payments made to registry nurses as ‘payroll’ or ‘remuneration’…?” The Commissioner noted this was “a matter of first impression.” Subsistence Payments are considered to be reimbursement for additional living expense by virtue of job location.  Stipulated per diem amounts are not considered payroll if the “amount is reasonable and the employer’s records show that the employee worked at a job location that would have required the employee to incur additional expenses not normally assumed by the employee.”

After a lengthy analysis, including review of federal tax law, the Commissioner determined that a per diem payment is reasonable if it comports with common sense, is not lavish or extravagant, and is not made for the purpose of circumventing per diem regulations. The Commissioner also determined that an employer must provide records proving that each employee receiving per diem reimbursement worked at a location that required the employee to incur additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement.

The Commissioner concluded that ReadyLink failed to prove that its per diem payments were reasonable because it paid “a below-market hourly wage for the type of work being performed” and then used the per diem payments to increase its nurses’ income while avoiding payroll tax liabilities for itself. The Commissioner expressly rejected ReadyLink’s contention that its per diem payments were reasonable because they comported with the federal per diem amounts for the Continental United States listed in 41 Code of Federal Regulations, Chapter 301, Appendix A (CONUS). The Commissioner found that ReadyLink failed to prove the per diem payments reflected the traveling nurses’ anticipated living expenses, failed to show that its nurses worked at locations that required additional duplicate living expenses beyond normal commuting expenses, failed to monitor employee eligibility for per diem payments, and failed to require its employees to substantiate their per diem expenses.

After ReadyLink filed a notice of appeal in the Court of Appeal it filed a class action lawsuit in federal district court against the SCIF and the Commissioner seeking a declaratory judgment that the Commissioner’s Decision is preempted by federal law. The SCIF and the Commissioner filed motions to dismiss the federal complaint. The day after ReadyLink filed its opening brief in this Court, the federal district court issued an order granting the motions to dismiss.

DISCUSSION

A trial court’s review of an adjudicatory administrative decision is subject to two possible standards of review depending upon the nature of the right involved.

  1. If the administrative decision substantially affects a fundamental vested right, the trial court must exercise its independent judgment on the evidence.  The trial court must not only examine the administrative record for errors of law, but must also conduct an independent review of the entire record to determine whether the weight of the evidence supports the administrative findings.
  2. The administrative decision neither involves nor substantially affects a fundamental vested right, the trial court’s review is limited to determining whether the administrative findings are supported by substantial evidence.

The Commissioner’s Decision does not frustrate federal law or create an obstacle for employers to comply with both federal and state regulations on the treatment of per diem allowances. The Commissioner’s Decision merely determined that under his subsistence payments rule, a per diem payment is reasonable “if it comports with common sense, is not lavish or extravagant, and is not made for the purpose of circumventing per diem regulations.” Furthermore, an employer must provide records proving that each employee receiving a per diem reimbursement worked at a location that required the employee to incur additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement.

ReadyLink presented no evidence that compliance with regulations is an ‘administrative burden. Employers routinely compile information for regulatory purposes and already comply with incongruent tax rules and regulations. Given the various laws governing employer recordkeeping and given that the USRP rules do not require any novel recordkeeping.

The Court of Appeal concluded that ReadyLink’s federal preemption argument is nothing more than a red herring and a distraction from the real issue of whether the Commissioner exceeded his authority in determining that ReadyLink’s per diem payments constitute payroll for workers’ compensation premium purposes and the Commissioner’s Decision is not preempted by federal law.

The Court of Appeal agreed with the Commissioner that the employer must provide records proving that each employee receiving per diem reimbursement worked at a location that required the employee to incur additional living expenses. The USRP also mandates that an employer’s records must demonstrate the employee incurred additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement. ReadyLink cannot claim any confusion or surprise with respect to the record-keeping obligation given that the SCIF repeatedly asked ReadyLink for documentation verifying its per diem payments both during and after the audit.

ZALMA OPINION

ReadyLink, by paying its nurses on an inflated per diem basis rather than salary reduced its Workers’ Compensation premium obligation by almost two thirds. It was caught only in the last year of its policy and assessed an additional premium to more accurately represent the risk that it asked the insurer to take. It was lucky that the only dispute is over the amount of premium. If the scheme to reduce premium was found to be intentional ReadyLink could have faced criminal charges for premium fraud.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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UIM Insurer May Mount Defense of Underinsured Motorist

Bankruptcy Does Not Allow Defendant To Admit Liability

The Supreme Court of Virginia was asked to determine whether entry of summary judgment against a defendant motorist also binds the underinsured motorist (UIM) insurer of Sheila Womack and whether the UIM insurance carrier retains its own right to defend in the event that the interests of the UIM insurance carrier and the defendant or her liability insurer diverge. In Transportation Insurance Company v. Sheila Womack, No. 112283 (Va. 11/01/2012) the court was faced with a serious injury case where the defendant filed Chapter 7 Bankruptcy, had the debt to the injured person discharged, and by so doing was found to have admitted liability.

Facts

Sheila Womack filed suit against Jerrene V. Yeoman to recover four million dollars for injuries sustained from a car accident allegedly caused by the negligent driving of Yeoman. A copy of the complaint was served on Transportation Insurance Company (Transportation), Womack’s UIM carrier required by Virginia statutes to take advantage of the policy’s UIM provisions.

Both Yeoman, represented by her liability insurance carrier, Government Employees Insurance Company (GEICO), and Transportation filed answers to the complaint in their own names. Yeoman denied all allegations of negligence and asserted an intent to plead affirmative defenses, including a claim of contributory negligence. Transportation similarly denied all allegations of negligence, reserved the “right to defend this case in its own name or in the name of the Defendant as permitted by statute,” and pled all affirmative defenses that would be supported by evidence.  Transportation asked that Yeoman’s “liability insurance carrier . . . plead and prove the[] affirmative defenses.”

Following the filing of Yeoman’s and Transportation’s answers, Yeoman proceeded to file all motions for the defense and answer all motions filed by Womack. Transportation remained silent. In the midst of the developing litigation, Yeoman filed a voluntary petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. As a result, the tort proceedings were stayed until the conclusion of the bankruptcy action.

In Yeoman’s bankruptcy petition, fifteen million dollars of debt surrounding the tort litigation was listed with no indication in the provided columns of the schedules of debt that the claim was either disputed or contingent. The schedules listed claims of five million dollars each owed to Womack, GEICO, and Transportation. Based on these signed statements, discharge under Chapter 7 of the Bankruptcy Code was granted. The stay was subsequently lifted with instructions that Womack not enforce the recovery or judgment against Yeoman, her property, or property of the estate.

Based on Yeoman’s designation of the debt arising from the tort action in her Chapter 7 bankruptcy proceedings as uncontested, and the subsequent discharge in bankruptcy, Womack made a motion for summary judgment. The motion was heard in the Circuit Court of the City of Richmond, where counsel for Womack, Yeoman, and Transportation were all present.

During oral argument, Transportation objected to the suggestion that the UIM carrier should also be bound by the bankruptcy proceeding, contending that it had no knowledge of the details of, and was not a party to, the Chapter 7 bankruptcy proceeding.

The circuit court granted Womack’s motion for summary judgment on the ground that a continued denial of liability by Yeoman would constitute impermissible approbating (accepting part of an action and rejecting those parts unfavorable to one’s interest) and reprobating. Transportation filed a motion to reconsider, asking that it be able to defend its interests as the UIM carrier. The court denied the motion, explaining that Transportation had relinquished its rights to put forth a defense by filing an answer that relied on the defendant’s liability insurance carrier to assert its affirmative defenses, and that “defendant and her liability insurance carrier admitted liability.” Transportation appealed.

Analysis

Virgina statutes provide that when an insured plaintiff brings suit against a uninsured motorist (UM) or a UIM and intends to make a claim for recovery from the insurer, the UM or UIM insurance carrier will “have the right to file pleadings and take other action allowable by law in the name of the owner or operator of the uninsured or underinsured motor vehicle or in its own name.” It is therefore undisputed that a UIM insurance carrier has a statutory right to defend its interests in a tort action between the insured plaintiff and the underinsured defendant.

It is also undisputed that the UIM insurance carrier’s right to defend is not tied to the actions of the underinsured defendant, but rather each is entitled to control his or its own action but not the actions of the other.

After filing its answer, Transportation did not participate again in its own name until filing a response to the motion for summary judgment, when it once more adopted the defense asserted by Yeoman. Womack contends that Transportation, based on its consistent reliance on Yeoman and her liability insurer, fully exercised its rights by turning the defense over to Yeoman in its entirety.

Transportation denies handing its right to defend over to Yeoman. Transportation describes the “call” for Yeoman to prove these defenses as a demand that Yeoman act on the affirmative defenses rather than a relinquishment of all responsibility for the defense. A liability insurance carrier has a non-delegable duty to defend the insured, and that by asking the liability insurer to assert affirmative defenses Transportation was merely asking the liability insurer to fulfill its statutory requirement to defend.

The Supreme Court reviewed Transportation’s answer in its entirety and found that it was clear that Transportation retained its right to defend should Yeoman or her liability insurance carrier later abandon their own defense of the case. This is evidenced by Transportation’s decision to file an answer in its own name, reserving the right to defend the case in its own name or in the name of the Defendant as permitted by statute. Transportation went on to deny allegations included in Womack’s complaint and assert specific affirmative defenses that it demanded the liability insurer assert in the course of litigation.
In relying upon Yeoman’s liability insurance carrier to defend the case, Transportation did not relinquish its right to conduct its own defense if the interests of the parties diverged. As long as it was in the interest of Yeoman, her liability insurance carrier and Transportation to actively defend against Womack’s claim as to liability and damages, there was no reason for Transportation to mount a separate defense. Only when the interests of the parties diverged, as when Yeoman found it in her interest to file for bankruptcy, was it in Transportation’s interest to mount a separate defense.

Because the Supreme Court reversed the summary judgment as to Transportation it concluded that it must necessarily reverse the summary judgment entered against Yeoman. The best means of resolving the conflict between the defendant’s right to control her case, including the right to admit liability, and the UIM carrier’s right to defend its interests to the ingenuity of the trial courts, which will best be able to fashion workable solutions to problem cases.

Conclusion

The case was remanded to the trial court to allow Transportation to present a defense, as permitted by Virginia statutes.

ZALMA OPINION

Virginia is unique since it allows a UIM insurer to participate in the suit brought by its insured against the underinsured motorist to avoid the underinsured motorist from imposing liability on the UIM insurer by admitting liability. Since the underinsured motorist had, after filing bankruptcy, no personal liability it would be unfair to bind the UIM insurer without allowing it to mount the defense the policy and local statutes allow.

Unlike a liability policy an UIM policy promises that in the event the insured is injured by an underinsured motorist the UIM insurer will act as if it is the insurer of the uninsured motorist and has the right to raise any of the defenses made available to the underinsured motorist as if he or she had no insurance at all. To deprive the UIM insurer of the right to defend would rewrite the wording of the policy and deprive the insurer of the rights provided by state statutes.

The Supreme Court of Virginia concluded, with good cause, that it would have been unfair to make the UIM insurer liable, by the admission, solely because of the bankruptcy, of the tortfeasor.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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City Hoist On Its Own Petard

Think Before Making Offer About Insurance

California is a state with strong government employee unions. In International Brotherhood, Etc v. City of Redding, No. C067709 (Cal.App. Dist.3 11/02/2012) the International Brotherhood of Electrical Workers (“IBEW”) sued the City of Redding to compel it to pay 50% of the cost of medical insurance for retirees. The state of California, California Counties and California cities have been quite generous in the contracts entered into with unions and union employees of the state and local entities. The City of Redding promised to pay 50 percent of employees’ medical insurance premiums after retirement and then attempted to renege on the promise.

FACTS

Local 1245 of the IBEW filed a petition for writ of mandate to compel the City of Redding to rescind its unilateral retraction of its promise. The City demurred, and the superior court sustained the demurrer without leave to amend and dismissed IBEW’s petition, deciding that (1) the right of active employees to receive future medical insurance benefits cannot be vested because it is subject to the collective bargaining process and (2) the memorandum of understanding (MOU) between the parties cannot be deemed to provide vested rights because the MOU remains in force only until its expiration.

After IBEW appealed the superior court’s dismissal of its petition, the California Supreme Court filed its opinion in Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171 (Retired Employees). In that case, the Supreme Court held that “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”

BACKGROUND

IBEW alleged that since 1979, in its memorandum of understanding with the IBEW and in other communications with Local 1245 and City employees, the City promised to all Electric Department employees represented by Local 1245 that the City would pay 50% of the group medical insurance premium for retirees and their dependents. This obligation, communicated repeatedly by the City, was used as an inducement to recruit and retain employees as well as to convince them to accept lower wages in return for the benefit.

In March 2010, the City unilaterally cut the retiree health benefit to provide a subsidy of only 2% per year of service, up to a maximum of 50%. By cutting the City’s contribution to employees’ retiree health benefits IBEW alleged that the City violated its promise to maintain the benefit unless the parties mutually agreed otherwise. The MOUs also provided that they “will remain in full force and effect, unless modified by mutual agreement.” And the promises made in the MOUs were approved by the city council.

City employees with at least five years of service may retire after age 55. The City also made promises to employees, independent of the MOUs, to pay 50 percent of future retiree medical insurance premiums, through job postings, as well as internal documents and communications.  In 2008, the City and IBEW started negotiations for a new collective bargaining agreement. The parties initially agreed that the City’s payment of 50 percent of future retirees’ medical insurance premiums was a vested benefit. In 2010, however, the City changed its position and proposed to pay two percent per year of service, up to 50 percent, of retirees’ medical insurance premiums. Since the parties were unable to reach an agreement, the City unilaterally imposed its new proposal.

DISCUSSION

The Supreme Court decided Retired Employees in response to a certified question from the Ninth Circuit of the United States Court of Appeals. The Supreme Court responded that “a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance.”

Legislation in California may be said to create contractual rights when the statutory language or circumstances accompanying its passage clearly evince a legislative intent to create private rights of a contractual nature enforceable against the governmental body. Although the intent to make a contract must be clear, California case law does not require that the intent be express. A contractual right can be implied from legislation in appropriate circumstances. Where, for example, the legislation is itself the ratification or approval of a contract, the intent to make a contract is clearly shown.

Applying Retired Employees, the appellate court concluded that the trial court’s reasons for sustaining the demurrer are not valid. It concluded that there was a sufficiently clear showing, for pleading purposes, that legislation – that is, the ratification of the MOUs by the city council – was intended to create an obligation that survived the expiration of the MOUs.

The MOUs at issue promised to “pay fifty percent (50%) of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future…” This provision provided not only for “each retiree” during the term of the MOU but also for “future” retirees. With this express language, the MOUs were ratified by the city council. Consequently, then-active employees’ vested right to future retiree medical insurance premium benefits was expressly authorized legislatively.

Having found that the language of the MOU can be interpreted reasonably to provide future retiree medical insurance benefits expressly the appellate court had no reason to consider whether, under Retired Employees, there was an implied contract. Nonetheless, it applied the holding of Retired Employees that contracts between municipal governments and their employees are to be interpreted by the same rules as private contracts unless the Civil Code provides otherwise.

In the MOUs at issue here, the City promised to pay 50 percent of the medical insurance premiums of not only the “retiree” but also for “for each retiree in the future.” Regardless of what different language in other MOUs in other cases may have been interpreted to mean, the most reasonable interpretation of this language is that the City committed itself to pay 50 percent of medical insurance premiums “in the future” on behalf of then-active employees when they retired.

DISPOSITION

Applying Retired Employees the appellate court concluded that the trial court erred by sustaining the demurrer because the petition alleged that the MOUs ratified by the city council promised active employees that the City would pay 50 percent of their future retiree medical insurance premiums.

ZALMA OPINION

The City and the IBEW may now take the case to trial although the appellate court decision may make the trial decision obvious to the trial court.

Governmental agencies in California must be very careful in the promises they make to their employees. Agreeing to pay half of the insurance premium for every employee who worked only five years for the entity for the rest of the employee’s life seems less than practical. The revision to pay two percent for each year of service up to 50 percent seemed more reasonable but because of the earlier actions of the City of Redding, the citizens of that city will be called upon to pay half of increasing costs of health insurance.

Governments in California have made bad deals with its employees that they now cannot fulfill. They are, like the City of Redding, trying to get out of these deals only to find that the California Supreme Court and the Courts of Appeal will enforce those bad deals whether the the entity can afford to pay for the deal or not. Taxes in California will continue to go up and governmental entities will find there are less and less taxpayers to pay for the benefits promised. They should all ask if they were under the influence of a controlled substance when they made the deal and must be prepared to never make such a deal again.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Coverage for Disparagement Under CGL

Coverage for Advertising Injury Requires Actual Disparagement

The purpose of liability insurance is to protect the person or entity insured against the risk of loss by suits for risks of loss accepted by the insurer. Most general liability policies provide broad coverages with few limitations. However, no insurance policy covers against every policy risk of loss. In Hartford Casualty Insurance Company v. Swift Distribution, Inc. et al, No. B234234 (Cal.App. Dist.2 10/29/2012) the California Court of Appeal was asked to determine whether the “advertising injury” provision of an insurance policy required the insurer to provide a defense for its insured against a claim that the insured company’s advertisements disparaged another company’s products.

FACTS

Specifically, in an underlying action, Gary-Michael Dahl (Dahl), who manufactured and sold the “Multi-Cart,” sued Swift Distribution, Inc., dba Ultimate Support Systems, Inc., Michael Belitz, and Robin Slaton (Ultimate), for patent and trademark infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of its product, the “Ulti-Cart.” Ultimate tendered defense of Dahl’s action to its insurer, Hartford Casualty Insurance Company (Hartford), which refused to defend it in the Dahl action. In a subsequent action for declaratory relief against Ultimate, Hartford sought a declaration that it had no duty to defend or indemnify Ultimate in the Dahl action. The trial court granted Hartford’s motion for summary judgment and Ultimate appealed.

Hartford’s policy defined “personal and advertising injury” in several ways. One definition of “personal and advertising injury” was “injury . . . arising out of . . . [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services[.]“

THE SUIT

Dahl filed an action against Ultimate, Dahl v. Swift Distribution, Inc. in U. S. District Court, Central District of California. The Dahl complaint alleged that Dahl owned a U.S. patent to a “convertible transport cart,” which he had sold as the “Multi-Cart” collapsible cart since 1997. The Multi-Cart can be manipulated into eight configurations, and is used to move music, sound, and video equipment quickly and easily. The U.S. Patent and Trademark Office issued a patent to Dahl for the “Multi-Cart” mark. The Dahl complaint alleged that Ultimate impermissibly manufactured, marketed, and sold the “Ulti-Cart,” which infringed patents and trademarks for Dahl’s Multi-Cart and diluted Dahl’s trademark. The complaint attached advertisements for the Ulti-Cart, which do not name the Multi-Cart, Dahl, or any other products other than the Ulti-Cart.

While the Hartford complaint was pending, counsel for Ultimate notified counsel for Hartford that the court in the Dahl action granted Ultimate’s motion for summary adjudication as to Dahl’s two patent infringement claims. Subsequently counsel for Ultimate notified counsel for Hartford that the Dahl action had settled.

The trial court entered an order granting summary judgment in favor of Hartford and denying Ultimate’s motion. The judgment entered in favor of Hartford determined that Hartford had no duty to defend or indemnify Ultimate in the Dahl action.

ISSUE

Ultimate claims on appeal that the Dahl action alleged facts that constituted the potentially covered offense of disparagement. Liability insurance imposes on the insurer both the obligation to indemnify the insured against third party claims covered by the policy and to defend such claims against its insured by furnishing competent counsel and paying attorney fees and costs. The duty to defend is generally determined from all the information available to the insurer when the defense is tendered, although later developments may also affect the insurer’s duty to defend.

The insurer must defend against a suit that potentially seeks damages within the coverage of the policy. The potential or possibility of coverage triggers the duty to defend. A determination whether the insurer owes a duty to defend is made in the first instance by comparing allegations of the complaint with policy terms. Facts outside the complaint may give rise to a duty to defend when they reveal a possibility that the policy may cover the claim. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.)

The duty to defend is broad, but not unlimited. The nature and kinds of risks covered by the policy define its scope. The insurer need not defend where extrinsic facts eliminate the potential for coverage despite allegations in the complaint which suggest potential liability and where the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.

The insurer must establish the absence of a potential for coverage; it must prove that the policy cannot provide coverage of the underlying claim.

The Hartford policy provided insurance coverage for “‘personal and advertising injury’ caused by an offense arising out of your business[.]” The policy defined “personal and advertising injury” to include “injury . . . arising out of . . . [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

This provision provides coverage for product disparagement, which is an injurious falsehood directed at the organization or products, goods, or services of another. Disparagement, or injurious falsehood, may consist of publication of matter derogatory to plaintiff’s title to his property, its quality, or his business. Tortious product disparagement involves publication to third parties of a false statement that injures the plaintiff by derogating the quality of goods or services.

The injurious falsehood must specifically refer to the property, business, goods, product, or services either by express mention or reference by reasonable implication. Dahl’s complaint, application for a temporary restraining order, and responses to Ultimate’s discovery do not allege that Ultimate’s advertisements specifically referred to Dahl by express mention.

Ultimate argues that Dahl’s complaint alleged that Ultimate’s use of “Ulti-Cart,” a name similar to Dahl’s “Multi-Cart,” referred to Dahl and Dahl’s product by reasonable implication. Dahl’s complaint primarily alleged that because of its similarity to Dahl’s “Multi-Cart,” Ultimate’s use of the “Ulti-Cart” name misled the public into believing that Ultimate’s products were the same as Dahl’s, were approved by Dahl, or were affiliated with Dahl’s “Multi-Cart” products.

Ultimate’s advertisements referred only to its own product, the Ulti-Cart, and did not refer to or disparage Dahl’s Multi-Cart. Dahl’s complaint alleged that by using a product name (Ulti-Cart) that was very similar to Dahl’s Multi-Cart product, Ultimate deceived the public that Ultimate was the originator, designer, or authorized manufacturer and distributor of its infringing products. This, however, was not disparagement. Because Dahl did not allege that Ultimate’s publication disparaged Dahl’s organization, products, goods, or services, Dahl was precluded from recovery on a disparagement theory.

The Dahl complaint did not allege that Ultimate represented itself as the only holder of the Multi-Cart trademark, implied that Ultimate had a right to use the Multi-Cart trademark that was superior to that of Dahl, or represented that Dahl did not have rights to the Multi-Cart trademark. The Dahl complaint did not allege disparagement by implication, and no potential for coverage triggered Hartford’s duty to defend Ultimate in the Dahl action.

DISPOSITION

Ultimate’s advertisements did not expressly refer to Dahl’s Multi-Cart and did not “disparage” Dahl’s Multi-Cart product or business, and there was no coverage or potential for coverage for “advertising injury” under the Hartford insurance policy. Thus Hartford had no duty to defend Ultimate in the Dahl action, and the trial court correctly granted summary judgment for Hartford. We affirm the judgment.

ZALMA OPINION

Insurance protects the person or entity insured from many risks of loss. It does not insure against every possible suit. In this case the insured attempted to stretch the meaning of the allegations of the complaint to include a disparagement that did not occur by claiming the disparagement was by implication. They did so after the suit was settled and the defense costs were spent to recover the amounts spent thereby arguing coverage by contradicting the defense mounted in the underlying action. The court saw through the attempt and found that there was no duty to defend since there was no disparagement.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Today Is Election Day — Vote

If you are a citizen of the United States and eligible to vote please do your duty to your country and vote.

I will vote this morning shortly after the polls open and hope that every reader of this blog does the same.

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No Coverage for Damage by Chinese Drywall

Plain Meaning of Insurance Contract Applied

People who bring both tort claims for damage while simultaneously suing an insurance carrier for coverage may find that the evidence produced for the tort claim eliminates any possibility of coverage under a policy of insurance. To prove a case against the manufacturers and installers of infamous Chinese Drywall it was essential that the plaintiff prove that the drywall was defective, that it out gassed sulfuric gases that corroded metal also worked to defeat coverage for the damage caused under a homeowners policy.

The issue of how an insurance policy in Virginia would be resolved the Fourth Circuit Court of Appeal, asked the Supreme Court of Virginia to help it in Travco Insurance Company v. Larry Ward, Supreme Court of Virginia by Justice S. Bernard Goodwyn, November 1, 2012,  Record No. 120347 who answered the following questions posed to the Supreme Court to resolve a question of Virginia law:

For purposes of interpreting an “all risk” homeowners insurance policy, is any damage resulting from this drywall unambiguously excluded from coverage under the policy because it is loss caused by:

        (a) “mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage itself”;

        (b) “faulty, inadequate, or defective materials”;

        (c) “rust or other corrosion”; or

        (d) “pollutants,” where pollutant is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste?[”]

Background

Larry Ward sought coverage under his homeowners’ insurance policy issued by TravCo Insurance Company (TravCo) for damages allegedly caused by sheets of drywall manufactured in China (Chinese drywall) that were installed in his home during its construction. TravCo denied Ward’s claim and brought an action in the United States District Court for the Eastern District of Virginia, seeking a declaratory judgment that Ward’s homeowners’ policy did not provide coverage for such losses.

TravCo moved for summary judgment, and the district court granted the motion on the basis that the policy did not provide coverage for the damages allegedly caused by the drywall in Ward’s residence because of certain policy exclusions. Ward appealed the ruling of the district court to the United States Court of Appeals for the Fourth Circuit, which certified to this Court the question of whether the policy exclusions are applicable to Ward’s claimed losses.

Facts

In May 2007, Ward purchased a newly constructed home located in Virginia Beach and shortly thereafter obtained a home insurance policy from TravCo. The policy was effective from May 7, 2007 to May 7, 2008, and was renewed through May 7, 2010. In May 2009, Ward experienced problems with the home and hired an expert, Zdenek Hejzlar, Ph.D., who determined that the problems were caused by Chinese drywall installed in the house during construction. Ward thereafter filed a complaint against the developer, builder and drywall contractor in the Circuit Court of the City of Norfolk. Ward alleged that the Chinese drywall in his home emitted various sulfide gases and/or toxic chemicals through “off-gassing” that created noxious odors and caused health issues, damage and corrosion. He alleged breach of contract, breach of warranties, negligence, unjust enrichment, nuisance, and other counts claiming that his home “was built with defective drywall.”

Ward subsequently filed a homeowners’ claim with TravCo in September 2009; he stated that the drywall caused fumes and odors, health issues, and damage to the home’s air conditioning system, garage door, and flatscreen televisions. Ward submitted to TravCo a report detailing the condition of his home, prepared by Dr. Hejzlar. Dr. Hejzlar reported a sulfuric odor in the home and confirmed the presence of Chinese drywall. He also noted damage to the HVAC coils and other metallic surfaces in the home and noted that the damage was associated with sulfur emissions from the Chinese drywall.

TravCo thereafter denied Ward’s claim, alleging that the damage caused by the Chinese drywall was excluded from coverage by the terms of Ward’s homeowners’ policy. Relevant to the certified question are exclusions in the policy for loss caused by:

  1. latent defect;
  2. faulty, inadequate, or defective materials;
  3. rust or corrosion; and
  4. pollutants, defined to include any gaseous irritant or contaminant.

Analysis

Virginia Courts, like those of every state, interpret insurance policies, like other contracts, in accordance with the intention of the parties gleaned from the words they have used in the document. Each phrase and clause of an insurance contract should be considered and construed together and seemingly conflicting provisions harmonized when that can be reasonably done, so as to effectuate the intention of the parties as expressed therein.

Insurers are required to draft exclusions limiting coverage in language that clearly and unambiguously defines their scope. However, under Virginia law, an insurance policy is not ambiguous merely because courts of varying jurisdictions differ with respect to the construction of policy language. Additionally, where the exclusion is not ambiguous, there is no reason for applying the rules of contra proferentem or liberal construction for the insured because the rule only applies if there is a true ambiguity.

Because there is no ambiguity in the phrase “latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself,” the Virginia Supreme Court concluded it need not look beyond the plain meaning of the policy language to determine whether it excludes damage caused by the Chinese drywall from coverage.

The Virginia Supreme Court refused to apply canons of construction to create ambiguity where there is none. In the past Virginia defined “latent defect” as: “A defect not manifest, but hidden or concealed, and not visible or apparent; a defect hidden from knowledge as well as from sight; specifically, a defect which reasonably careful inspection will not reveal; one which could not have been discovered by inspection.”

The faulty, inadequate or defective materials exclusion states that TravCo does not insure for loss caused by: “Faulty, inadequate or defective . . .[m]aterials used in repair, construction, renovation or remodeling . . . of part or all of any property whether on or off the ‘residence premises.’ ” The drywall is clearly defective. In fact, Ward himself described the drywall as defective in his circuit court complaint and interrogatory answers. Therefore, the “faulty, inadequate, or defective” materials exclusion is applicable to damage resulting from the Chinese drywall.

The corrosion exclusion bars coverage for the damaged metals in Ward’s home in that there is no dispute that such damage was caused by corrosion. To construe this exclusion, the court applied the plain meaning of the terms “rust or other corrosion.” Because the exclusion is readily understood in accordance with the plain meaning of its language, this Court need not employ extraordinary canons of construction. Rust is defined as a coating formed on metal by oxidation or corrosion, and senses relating to corrosion or deterioration.

Corrosion is defined as the action, process, or effect of corroding: as the action or process of corrosive chemical change not necessarily accompanied by loss of form or compactness; typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron. Ward’s expert submitted an affidavit that concluded: “The corrosion of metal in the Ward . . . residence[] results from exposure to reduced sulfur gases being emitted from the Chinese drywall and interacting with the metal.” This statement undoubtedly reflects a process of corrosion.  The term “loss . . . [c]aused by . . . rust or other corrosion,” is unambiguous and when interpreted according to its plain meaning, encompasses the corrosion caused by the off-gassing of sulfur from the Chinese drywall in Ward’s home.

The pollution exclusion at issue in this case provides that TravCo does not insure for loss caused by: “Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by peril insured against under Coverage C. 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 claimed.”

The sulfur gas in Ward’s house was a contaminant because it was not “supposed to be” in the home and it caused harm. The sulfur gas is likewise an irritant because it caused Ward and his family to suffer nosebleeds and other problems. The sulfuric gases moved from the drywall to the air in the home by way of discharge, dispersal, seepage, migration, release or escape.

The issue of whether the sulfuric gases contaminated the air in the Ward home due to discharge, dispersal, seepage, migration, release or escape is likewise aided by the report and affidavit of Ward’s expert which referenced the “reduced sulfur gases being emitted from the Chinese drywall.” The sulfuric gases at issue in this case were a pollutant within the purview of the exclusion, and we hold that the pollution exclusion is applicable and unambiguously excludes from coverage any damage resulting from the emission of gas from the drywall.

All parts of the certified question were, therefore, answered in the affirmative and there could be no coverage for Ward under the terms and conditions of the policy.

ZALMA OPINION

The Virginia Supreme Court, like courts across the country, used the tried and true method of interpreting an insurance contract – if the language is clear and unambiguous it must be applied.

Plaintiffs must not be greedy. In this case the plaintiff sought to both recover in tort and to recover from his insurance company. The evidence he collected to recover from the manufacturers and installers of the drywall was sufficient to defeat his insurance claim. Just because insurance companies are not well liked by the public a policyholder should never try to get a court to rewrite the policy after a loss when the language is clear and unambiguous. Ward has a great case against the manufacturer and builder and should have limited his efforts to recover from them.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Life Insurance Proceeds Not “Damages”

Right of Reimbursement Limited

People buy life insurance to protect the interests of their heirs and stated beneficiaries. People do not buy life insurance to protect a workers’ compensation insurer who pays none of the premium. A workers’ compensation insurer in Vermont asked that the Supreme Court of Vermont interpret a state statute to allow the workers’ compensation insurer to obtain reimbursement of death benefits it has paid when a claimant’s beneficiary also receives proceeds from a life-insurance policy in
Estate of Monica Dunn v. Windham Northeast Supervisory Union, 2012 Vt. 93 (Vt. 10/26/2012). The state statute is similar to the Federal statute allowing Medicare to be reimbursed from a tortfeasor’s insurer for amounts paid to the Medicare beneficiary.

FACTS

The underlying facts are not disputed. Claimant was an employee of Windham Northeast Supervisory Union. In October 2009, claimant died of complications from surgery to treat a work-related knee injury. Windham’s workers’ compensation insurer, the Vermont School Boards Insurance Trust, began paying workers’ compensation death benefits to her estate. Claimant also held a life insurance policy, which named her husband as her beneficiary. The plan provided for a lump-sum payment upon proof of her death, as well as payments of $3000 a year per child for up to four years while the children attended college.

Windham/VSBIT sought reimbursement of the death benefits it had paid, and a credit against future benefits, to the extent of claimant’s husband’s receipt of life-insurance proceeds. Windham/VSBIT argued that claimant’s receipt of both workers’ compensation and life-insurance proceeds was the type of double recovery the statute was designed to prevent.

Claimant’s estate countered that the reimbursement provisions apply only to money employees recover from third parties who are responsible for their injuries. The Commissioner, agreeing with claimant’s estate, concluded an employer’s right to workers’ compensation reimbursement attaches only to damages received from a third party tortfeasor.

Even if the statute were construed to permit reimbursement out of proceeds from any third party, including a life insurer, life-insurance payments made to claimant’s beneficiaries did not constitute “damages,” which the Commissioner defined as “a sum of money awarded to a person injured by the tort of another.”

ANALYSIS

Vermont’s workers’ compensation reimbursement statute provides, in relevant part, that:

       (e) In an action to enforce the liability of a third party, the injured employee may recover any amount which the employee . . . would be entitled to recover in a civil action. Any recovery against the third party for damages resulting from personal injuries or death only . . . shall first reimburse the employer or its workers’ compensation insurance carrier . . . . Reimbursement required under this subsection, except to prevent double recovery, shall not reduce the employee’s recovery of any benefit or payment provided by a plan or policy that was privately purchased by the injured employee, including uninsured-under insured motorist coverage, or any other first party insurance payments or benefits.

Windham/VSBIT contends principally that claimant’s life insurer is a “liable” third party under the statute and that the proceeds it paid constitute a “recovery of damages” that is subject to reimbursement to prevent an insured’s double recovery from a first-party insurance benefit.

The conclusion regarding the scope of an employer’s right to workers’ compensation reimbursement is in keeping with Vermont’s long-standing interpretation of the statute. The reimbursement statute aims to create a fair result for all parties. When a third party is found responsible in a personal injury action for damages suffered by the worker, the worker is not permitted double recovery. Rather, the law evens out the consequences by permitting the workers’ compensation carrier to recoup the benefits it paid the worker.

Here, claimant’s family has received life-insurance proceeds deriving from the insurer’s contractual obligation to make payment upon the occurrence of a specified event. Claimant’s beneficiaries received the life-insurance proceeds because she died, not because of a third party’s actions. There is no third party whose malfeasance would occasion the need to more equitably distribute financial responsibility for claimant’s injury.

Payments on a life insurance policy are not contingent on a third party’s wrongdoing, nor are they necessarily directly linked to a quantifiable, compensable harm, either economic or non-economic. They are contractual benefits paid simply upon proof of death. To be sure, people purchase life insurance to insulate beneficiaries from the economic impact of lost wages or burial costs, which workers’ compensation death benefits partially address. The purpose of life insurance is not contractually limited in any way, or conditioned on, compensating such readily ascertainable economic losses.

The Supreme Court concluded that the workers’ compensation reimbursement provisions must be read as a harmonious whole. Taking the statutory language as a whole, the Supreme Court concluded that a workers’ compensation carrier is entitled to reimbursement only when a claimant or – in this case, a claimant’s estate – receives money for damages because of a third party’s responsibility for an injury. This is the case whether the claimant receives payment directly from the tortfeasor or, as happens frequently, from the third party’s own liability insurer.

In sum, the statute does not permit a workers’ compensation insurer to tap a claimants’ life-insurance proceeds for reimbursement because the proceeds of that particular type of first-party policy do not constitute damages paid because of a third party’s action.

ZALMA OPINION

What is amazing is that a workers’ compensation insurer would consider life insurance proceeds to be “damages” in any interpretation of the word. Insurers always have a right of subrogation when it pays an insured for injuries caused by another. It does not have a right to deprive the injured or deceased worker from obtaining the benefits of a life insurance policy the worker had the good sense to buy with the workers’ own funds that was in no way tied to the tortious conduct of another.

The Vermont Supreme Court interpreted its statute fairly and avoided an injustice.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Claims in A Catastrophe

Claims In A Catastrophe

© 2008 Barry Zalma
ClaimSchool, Inc.

In 2008 I wrote this article to help those faced with catastrophic losses. I reprint it here because of Hurricane Sandy in hopes it will help those victims of that catastrophe deal with their claims.

Presenting a Claim

If your house was damaged or destroyed by the fire, windstorm, or flood as a result of state declared catastrophes and you had a fire, homeowners, flood insurance, tenant’s homeowners or condominium policy you will be dealing with an insurance adjuster. You should recognize that dealing with an insurance adjuster in a catastrophe is usually fairly easy because of the number of claims the adjuster is required to deal within a short time.

Insurers will be in a very generous mood. They will be seeking good publicity by taking care of victims of the catastrophe quickly and fairly. To make the claims process go easily the insured person must understand that both the insured and the adjuster have duties when damage-caused by fire, windstorm, flood or other insured perils are discovered. The following list outlines the most important of these duties:

  1. You should be sure there is no unnecessary delay in reporting the fact of the discovery of damage to your insurer as a claim.
  2. You and the adjuster should establish that there is no unnecessary delay in responding to any fire, fire fighting, flood or water-related cause of loss where “mold” may result as a natural result of water, warmth, and existence of mold spores in all building.
  3. You may be asked to sign a non-waiver agreement.
  4. You may receive a reservation of rights letter advising you of your duties under the policy, the conditions that apply or might apply, and the exclusions that may apply to the facts of the loss.
  5. You, as the insured, should readily, and without objection, sign the non-waiver agreement or accept the reservation of rights as an expression of the status quo.
  6. The adjuster should remind you, as part of the reservation of rights letter and explanation of the duties of the insured, to preserve and protect the damaged property and to mitigate the loss with due diligence and dispatch.
  7. You can request from the adjuster the identity of respected, competent, and professional contractors experienced in fire reconstruction or the drying out of buildings and the prevention or restriction of further loss including mold growth.
  8. You should follow up regularly with the adjuster to ensure that he or she is meeting contractual obligations since a catastrophe often makes communications difficult.
  9. If you have failed to protect the property from further loss, the adjuster must remind you, in writing, of your failure and how that could effect your claim.
  10. The adjuster should consider advance payments to avoid any unnecessary difficulties so that you and your family will have a place to live while your house is being rebuilt.
    1. You can expect an advance of $10,000 to $20,000 if your house is destroyed to carry you over
    2. Even if your house was not damaged you are entitled to additional living expense payments if you were ordered out of your house by the state government, federal government
    3. Homeland Security, or the local fire department.
    4. Remember that additional living expense coverage does not pay all of your post loss expenses, only those over and above your normal expenses.

Insurance claims require personal attention to detail by the insured. You and the adjuster must meet in person. If the claim is to be resolved expeditiously and fairly, both you and the adjuster should work to establish a personal relationship and to resolve, if coverage is available, the problems caused by the damage to the dwelling or business structure.

Once the rights, obligations, and duties of the insured and the insurer have been stated, and the initial investigation is complete, the insurer is obligated to conduct a prompt analysis of the policy wording and the law to determine whether coverage exists for the damage claimed. Once the investigation is complete and the decision made, it is the adjuster’s obligation to advise you, promptly and in detail, of the decision of the insurer. If coverage is available, it is also the obligation of the adjuster to advise you of your duties and obligations to obtain complete indemnity from the insurer and to protect the property from further loss.

The Notice of Loss

If you believe that your property was damaged or destroyed by a peril insured by your policy you should call or write the insurance agent, broker or insurer immediately (or as soon as practical) to report your claim. Follow up the phone call with a fax, an email, and a letter. If the house was not destroyed but a great deal of fire fighting water or subsequent rain or flood water entered the property try to get a remediation team into the home or business within the first 48 hours to begin drying out the property. If you do not know one ask your insurer for a referral. This is crucial to preventing or containing mold growth and rot. If the agent, insurance company, independent adjuster, or restoration company delays the claim, follow up with a fax, an email, and a letter confirming their delay in responding. It would be helpful to send copies of the follow-up letters to the consumer protection unit of the state’s Department of Insurance.Take detailed notes of every conversation, including the name, company, phone number, address, and job title of every insurance adjuster, representative, consultant, and contractor you deal with. Confirm all agreements in writing and insist that appointments and deadlines be honored. Keep a log of all notes and letters and ask for and keep business cards from everyone involved in your claim.

Immediately after the telephone call, write a letter to the broker or agent, with a copy to the insurer, providing the same information. The letter need not be formal. It can be handwritten on any available paper. Make a photocopy.

The notice of loss should include the following information:

•    Your full name.

•    The location of the property.

•    The policy number.

•    The effective dates of the policy.

•    The date when damage first occurred.

•    The type of property damage.

•    The cause or causes of the damage.

•    How the adjuster can contact you.

•    That you need immediate contact from the adjuster.

By providing the information to the agent, the broker and/or the insurer you have fulfilled the first obligation under the policy: to provide immediate notice of loss to the insurer.

If the insurer is working effectively and has a catastrophe team of adjusters in place you should receive contact from an adjuster within 24 hours of the notice. The first call should arrange an appointment to inspect the property. You should arrange for inspection as soon as possible and have the entire property available for the inspection if possible. If emergency efforts are required, you should so advise the adjuster so that he or she can help you take emergency measures to protect against further loss.

If possible, you or the adjuster should arrange to have one or more contractors present at the first meeting to determine the extent of the damage. If the damage is extensive, consider retaining the services of a public insurance adjuster [if you determine a public insurance adjuster would be helpful, it is appropriate to seek one who is a member of the National Association of Public Insurance Adjusters (NAPIA), a professional membership organization that seeks to instill professionalism in the trade] or an attorney experienced in representing policyholders in the claims process to represent your interest. The lawyer will usually work on an hourly fee basis while the public insurance adjuster will expect a percentage of the amount paid by the insurer. You must recognize that the public insurance adjuster will ask for a 10 – 15% negotiable fee. Do not hesitate to negotiate with the public insurance adjuster. Never pay the first fee quoted. Considering the volume of work in a catastrophe, you should be able to negotiate a fee between 3% and 10%.

Insurance Company Response

Your insurer should respond to typical catastrophe claims by written or verbal contact within 24 hours of your notice of the claim. The insurer should share information regarding emergency repairs, additional living expenses, temporary advance payments and prevention of further loss with you.

Your insurer should, and in California is obligated to, advise you of your responsibilities under the policy. Many require their representatives to be at your home within 24 to 72 hours of notice of claim. If you explain that your fire loss is severe, the insurer should attempt to have a representative at your house within 24 hours.

The insurer is obligated by statute, state administrative regulations, or by the terms of the policy to determine whether your claim is covered and provide an initial estimate of damage within seven to 14 days after the insurer’s first on-site visit. This first estimate is subject to change. Within the same time frame, your insurer should attempt to provide you with a written statement confirming or denying coverage. These time limits are usually waived in catastrophes and may be impossible to meet with regard to Hurricane Katrina event and other massive catastrophes. You should expect your insurer to return all phone calls within 24 hours. Initial contact may be with your insurance agent or broker or a claims office or the toll-free phone number included in the policy. Because of the volume of claims after a catastrophe like those in the 2005 hurricane season and the 2008 California wild fire season, this time frame will probably not be feasible.

First Contact with the Adjuster

Your first contact with the adjuster is usually an informative meeting where you discuss the cause of the loss, the type of loss, when the loss was discovered, and make an initial effort to agree on a tentative scope of loss.
You should expect the adjuster to do the following:

  1. ask for a walk-through inspection of the entire dwelling or building.
    1. You should make every effort to point out each item of damage or suspected damage during the walk-through inspection
    2. You, or your representative, should assist the adjuster in viewing both the damage and the source of the damage;
  2. ask you to submit to a recorded statement;
  3. ask you for the identities of each family member or vendor who can give the adjuster information about the loss;
  4. ask for the recorded statements of the persons identified;
  5. ask permission to allow experts retained by the insurer to inspect the property and do minor destructive testing to establish the appropriate methods of reconstruction and repair; and
  6. ask permission to contact others who know information about the loss and to obtain from those people within your control a detailed recorded statement and documents relating to their knowledge of the loss and the extent of the loss.

First Meeting with the Adjuster

An adjuster is a person professionally trained to assess the damage to your property. He or she will probably visit your home or business before you are asked to complete any forms. The more information you have about your damaged home or business and belongings, the sooner your claim will be settled. Your adjuster generally will come prepared to do a thorough and complete evaluation of the damage to your property. If the adjuster is unable to complete a thorough inspection due to time constraints or the extent of damage, he or she should prepare a scope of the loss report. This is a brief listing of the findings of damage determined at the initial inspection of the damage. The adjuster should ask you to agree to the scope of loss. Agreeing to a scope of loss is not presenting a claim. It is understood by the adjuster that the scope is incomplete and will be added to as new damage is discovered. It is usually supplemented with a second visit after the reports of experts are received to complete the inspection.

The “scope of loss” should include the following:

  • degree of damage;
  • a description of each location where damage was observed;
  • a description of the adjuster’s and your own best estimates of the type of damage observed;
  • a list of all personal property damaged or destroyed;
  • quality of the materials and workmanship; and
  • measurements needed to calculate quantities, including length, width, and height of rooms and the number of “openings” (windows and doors) in each room.

The scope of loss, usually referred to by claims people as the “scope,” differs from the finished estimate in two ways the scope does not necessarily list any prices, although prices can be used to describe quality
the scope does not list the calculated quantities; it includes just the raw counts and measurements needed to calculate quantities for the estimate.

Protect All Property from Further Damage

Every policy requires that the insured protect the property from further loss. Therefore, you should turn off any water flow to broken appliances or pipes, arrange to have openings in roofs or walls covered to protect from rain damage, and seek help from the adjuster to further protect your property from losses of all types.

Take any necessary emergency measures to protect the building and personal property from any further damage. Do not throw anything away until permission of the insurance company is obtained in writing and you have documented its condition unless the damaged property presents a hazard to the health or safety of your family or others.

If the insurer delays or refuses to authorize measures to prevent further loss, confirm the insurer’s delay in a fax, email, and a letter, and take whatever reasonable measures you can afford to protect the property. If your loss is covered, the insurance company should also cover the cost of any reasonable emergency measures you took to protect your property. It is not unusual for an insurer to deny coverage for damage resulting after the initial claim on the grounds that an insured failed to comply with the policy condition to protect the property from further damage.

Document the Loss

If you were prudent and prepared, before the catastrophe, an inventory of your contents or took pictures of your contents, provide the adjuster with the inventory and photographs or videotape. Photograph, videotape, and inventory all damaged property after the loss. Make sure you record the date of the photos and videotape. It is important to document the source and the extent of damage whether by fire or water intrusion.

In most states, a material misrepresentation, concealment, or omission made in connection with the claim will give the insurer a valid reason to reject the entire claim. For example, claiming that an item was destroyed that really wasn’t or substantially overstating the value of a damaged item is fraud. In most states insurance fraud is a felony that can place you in state prison if convicted. No catastrophe is so bad as to cause you to attempt to defraud your insurer to make up for uninsured losses. You should never exaggerate, speculate, or guess about the loss or value of any particular piece of property. Make it clear to your insurer when recollection may not be accurate, when you are estimating value, and the basis for your estimate. For the value of items you are not sure about on a claim presentation, use the phrase “To Be Determined.” If you do not have receipts to show the price of an item, information can be found in catalogs, statements from retail clerks, bank statements, credit card statements, or statements from family members or friends.

If all else fails, a formal appraisal can be obtained from a professional personal property appraiser. Save this as a last resort, since the insurer will usually refuse to reimburse you for the costs of hiring an appraiser, but may hire one at no cost to you if asked courteously.

You Must Cooperate with the Insurance Company’s Investigation and Handling of the Claim

You have a contractual obligation to cooperate with the insurer in its investigation and handling of the claim. However, you never have an obligation to allow yourself to be abused. In most states the insured and the insurance company have a mutual obligation to act in good faith and deal fairly with each other to investigate and process the claim. This means that both should avoid taking any unreasonable position or doing or saying anything that would in any way frustrate each other’s rights under the policy. The insurer may require one or more recorded statements from you. Always request a copy of the tape and a transcript of the statement to review. When the recording is complete, ask the adjuster to break out the tab so that nothing can be recorded over the tape and place your signature and date on the tape label. Ask the adjuster to similarly place his or her signature on the tape. You have a right to review and correct the transcript of any recorded statement.

You may also be required to appear for an “Examination Under Oath” (EUO). The insurer may, but is not required to, hire an attorney to take the EUO to represent the insured. Since a lawyer is not required, however, the insurer will not pay for the attorney that is representing you. The EUO is a contractual obligation and there is usually no clause in the insurance policy promising to pay a lawyer to help the insured make a claim against an insurer. You should not appear for an EUO until you understand all rights, the insurance coverage, and the full extent of the claim, or until counsel is retained. Do not refuse to appear at an EUO or the insurer may reject the claim because such refusal is a breach of a material condition of the policy. You may reasonably request a delay in appearance at an EUO to obtain the services of counsel or a public insurance adjuster.

The insurer may ask you to make available various documents related to the claim, including banking statements, investment reports, receipts, and other personal financial documents. You are required to produce any documentation reasonably related to the insurer’s investigation of the claim that can include tax returns. In some states, tax returns are considered privileged and the insured cannot be compelled to produce them, while in other states the failure to produce tax returns is sufficient cause to deny the claim. [See Barry Zalma, Insurance Claims: A Comprehensive Guide, (Specialty Technical Publishers, 2002): Chapter II-5.] The insurer can require you to produce these kinds of documents as long as they are reasonably related to its investigation. You should not provide these documents to the insurer until you understand the rights, duties, and obligations imposed by the insurance coverage and the full extent of the claim. You should never refuse to produce documents unreasonably since the requirement for document production is a condition precedent to the insurer’s obligation to provide a defense and/or indemnity to you.

Proof of Loss Requirement

Most first party property policies require that you submit a sworn proof of loss form to the insurer within a certain amount of time, either after the loss or after being provided the proof of loss form. During a catastrophe, especially when total losses are involved, insurers will often waive this requirement.

Flood insurance policies require the proof of loss within sixty days of the loss and are applied in a draconian fashion. If you cannot produce a proof of flood loss within 60 days of the loss obtain an extension of time, in writing from the adjuster, or you will lose all rights under the policy to indemnity.

The National Flood Insurance Program, on September 21, 2005, announced that it  is waiving proof-of-loss requirements for victims of Hurricane Katrina and will instead rely on claims adjuster reports, aerial photography, and information on water depths to help expedite the process of paying claims, the Federal Emergency Management Agency said.

According to the NFIP, information from underwriting files will be used in concert with photographic and topographical data to determine where it is readily apparent that a covered property’s flood damage has exceeded the amount of coverage purchased. The process would allow claims to be paid on homes that have been washed off their foundations, have been inundated by standing water for extended periods of time, or where only a slab or the home’s pilings remain, even where no formal site visit has been conducted.

In most states you are contractually obligated to submit the sworn proof of loss within the time limit (usually 60 days from the date of request), or at least to substantially comply with the requirement, unless the insurer agrees to dispense with the sworn proof of loss or extend the time. You should not submit the sworn proof of loss to the insurer until you understand all of the rights and obligations imposed by the policy, the insurance coverages, and the full extent of the claim. It is not unusual for an insurer to consider mistakes in the sworn proof of loss (since they are sworn to under oath) as intentional misrepresentations sufficient to allow it to reject coverage for a claim. A statement made under oath cannot, by definition, contain an innocent misrepresentation. Never sign a sworn proof of loss, even if your lawyer or professional public insurance adjuster prepares it, until you have carefully read every word and are certain that the statements made are true.

Some insurers believe that, at some point, you will refuse to comply with their requests. If you refuse to comply with reasonable requests for a recorded statement, an EUO, a sworn proof of loss, or documents reasonably related to the insurer’s investigation, you may give the insurer a valid excuse to deny the claim based on your breach of the duty to cooperate. If you believe that any requests made by the insurer are unreasonable, ask the insurer to explain the reason(s) for the requests in writing. Err on the side of caution and provide all documents that have some reasonable connection to the policy or loss. Before giving an insurer a reason to deny a claim because of your failure to cooperate, consult with a policyholder attorney, a public adjuster, or the state Department of Insurance before refusing a request that may, in retrospect, turn out to have been reasonable.

Get a Second Opinion

Many insureds believe that insurers make a practice of making inadequate (sometimes called “lowball”) offers of settlement. They are wary of what they think are estimates from insurance-company-friendly contractors. Whether true or not, it is a good practice to get a second, or even a third, written estimate to repair and replace damaged property from reputable, independent professionals that you would hire to do the repairs if there was no insurance. You are entitled to have the damaged property replaced with “like kind and quality.” This means that you should insist that the amount determined to be the amount of loss is sufficient to replace the property with property of like kind and quality to the damaged property. When you cannot match the remaining undamaged tile, wallpaper, carpeting, or other portions of undamaged property, you are usually entitled to have the entire “line of sight” replaced to match. For example, if a broken water pipe destroys the hardwood floor in a kitchen and does no damage to the contiguous hardwood floor in the adjoining family room, the insurer is required to replace both the damaged and undamaged floors so that they match as long as they are in a continuous line of sight.

Some losses are paid on an actual cash value (ACTUAL CASH VALUE) basis, which in some states means either the fair market value of the property at the time of loss unless the policy defines ACTUAL CASH VALUE differently. Many policies will define ACTUAL CASH VALUE as replacement cost less physical depreciation for age and wear and tear. Some losses are paid out on a replacement cost value (REPLACEMENT COST VALUE), where the insured is paid the difference between actual cash value and replacement cost value after the insured has actual sums necessary to complete the replacement. You may collect the ACTUAL CASH VALUE loss immediately and advise the insurer you intend to make claim for the difference between ACTUAL CASH VALUE and REPLACEMENT COST VALUE when the structure is rebuilt. If your policy has a time-limit for rebuilding be sure to get a written extension of time since, after a catastrophe, the rebuilding process is often severely delayed.

When fire and water-damage reconstruction contractors write estimates for insurance companies they always add at the end of their estimate a sum equal to 10% of the basic contract price for “overhead,” and an additional 10% of the basic contract price for “profit.” This technique is a fiction believed only by contractors and adjusters. Knowledgeable construction people know that no contractor could survive on 10% profit and that contractors build overhead and profit into their basic unit costs (paint, plaster, roofing, etc) and add the “profit and overhead” numbers as a fee for the extra service they provide to insurers. In recent years, some insurers have attempted to withhold 20%, an amount equal to the contractor’s “profit and overhead” numbers to arrive at an ACTUAL CASH VALUE amount. There is no basis in the policy that allows withholding profit and overhead as a means of calculating ACTUAL CASH VALUE. In fact, ACTUAL CASH VALUE is defined either as the difference in the fair market value of the property before the loss and the fair market value of the property after the loss or the full cost of replacement using like kind and quality, less physical depreciation. You should insist that any amounts withheld from payment pending completion of the work, be documented in writing and justified by the adjuster objectively. Policyholder attorneys and some insurance regulators have successfully prevented insurers from withholding these amounts.

Investigate Contractors

Thoroughly investigate the qualifications, license, and references of your insurance company’s approved contractor before agreeing to hire them to perform the repairs. The State Contractors Licensing Board will usually provide the consumer, by telephone or over the Internet, with the contractor’s license status and history of discipline. At a minimum, the licensing entity and a reference should be checked before a contract is signed. You do not have to use consultants or contractors recommended or approved by the insurer to perform repairs. Approved contractors are typically contractors who have agreed to discount their labor and costs and follow insurer guidelines in exchange for a volume of business from the insurance company. If your insurer promises to guarantee the approved contractor’s work, the guarantee is generally limited to replacing any defective materials or correcting faulty workmanship. The insurer is not insuring against any contractor delays, negligence, or liability. Accordingly, do not use the approved contractor unless it is a contractor that you would independently hire to do the work after a thorough screening. Check that each contractor’s license is valid and for any complaints against the license. Ensure that the contractor is bonded and insured.

Seek Proper Legal Advice

Never sign a release, waiver, indemnity, or “hold harmless” agreement without proper legal advice. If the insurer, adjuster, consultant, or contractor asks you to sign a release, waiver, indemnity, or hold harmless agreement, ask them to explain why in writing. These kinds of agreements can be used to deprive an insured of rights and benefits and may obligate you to pay thousands of extra dollars for issues that arise. Consult a policyholder attorney to determine your rights before signing any such agreement.

Seek professional help, if needed. If you reach an impasse with the insurer, document the dispute fully in writing. Explain your position and why the insurance company’s position is unreasonable. If the dispute does not require legal advice, you may be able to resolve it by calling the California Department of Insurance at 1-800-387-HELP or by hiring a lawyer or public adjuster. If the dispute does require legal advice, contact a lawyer who is experienced and specializes in representing policyholders. There are many consultants who claim to be “insurance claims experts” who do not have adequate training, skill, or experience. Before you retain one investigate the person diligently by contacting licensing bodies and references.

Be Aware of Deadlines

Make sure you know all the deadlines that may cut off the right to file a lawsuit. California has a four-year statute of limitations for breaches of written contracts but most insurance policies require suit within one or two years of the loss or the denial of a claim. If your claim is denied seek legal advice promptly.

In most states the insurance company is required to tell you, in writing, that the claim is denied, and that the limitations clock is running. That is, if you disagree with the insurer’s conclusion to deny your claim you have a limited time to file suit. Make sure you understand all possible deadlines. Consult with a policyholder attorney as soon as possible. The time limitation can be as short as one year from the date the loss occurred and can be put on hold by actions of the insurer. If you wish to sue, it is best to contact counsel as soon as possible before the expiration of the time limit.

Report all Unfair Claims Handling to the Department of Insurance or an Insurance Regulator

The state Insurance Department tracks policyholder complaints about their insurers and compiles the results. Most states have proactive consumer advocates in their insurance departments who will jump in to help you if they believe the insurer is not treating you fairly.

Conclusion

Many insurers involved in Catastrophes provide their adjusters with policy limits authority and instruct the adjuster to be generous. If your house was one of those totally destroyed and coverage is available there is a good probability that you will receive the full policy limits immediately.

If you did not carry sufficient insurance to totally rebuild your house and replace your contents consider the acquisition of a factory built home which can be trucked to your site and completed, with all appliances included, for much less than a conventionally constructed home.

Almost all claims will be handled promptly and fairly. A person knowledgeable about insurance claims can better deal with an insurance company. Don’t take advantage of your insurer and don’t let an insurer take advantage of you. You are entitled to indemnity. You and your insurer should work together to make you whole.

[Adapted from Barry Zalma’s book, "Insurance Claims: A Comprehensive Guide" and his book "Mold: A Comprehensive Claims Guide" published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.]

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Fraud Continues With Vigor

Fraud Continues With Vigor

Continuing with the twenty first issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the September 1, 2012 issue about the end of the story of  two senior citizens dubbed the “black widows” who collected more than $2 million by murdering homeless people after purchasing life insurance claiming to be relatives. The black widows’ appeal failed and they will remain in prison for the rest of their lives.

ZIFL also reports on the fact that the state of Virginia now requires public adjusters to be licensed and to prove they have attended continuing education classes; that California has funded the Ventura County anti-fraud efforts from special taxes paid by insurers; and the last chapter of  “Candy & Abel” a serialized story about insurance fraud.

ZIFL also reports on two new E-books from Barry Zalma, Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013. For details on the two 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 555 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•        Notice-Prejudice Rule Applied to Proof Of Loss Condition
•        Failing to Predict A Tort Judgment Is not Bad Faith
•        Just for Fun
•        Targeted Tender Binds Insurer
•        Divorced Spouse Collects Life Benefits
•        REGULAR USE EXCLUSION EFFECTIVE
•        Insurers and Reinsurers Must Read Their Agreements
•        Anger Resolves Nothing
•        Employee Dishonesty Covered
•        Defective Construction Not an “Occurrence”

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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Failure to Defend Deprives Coinsurer of Right to Question Costs of Defense

Equitable Contribution Required

St. Paul Mercury Insurance Company (St. Paul Mercury), the general liability insurer for the general contractor, sought equitable contribution from Mountain West Farm Bureau Mutual Insurance Company (Mountain West), the insurer for the framing subcontractor, based on an additional insured endorsement in Mountain West’s policy naming the general contractor. The trial court ruled in favor of St. Paul Mercury and ordered Mountain West to contribute $2,087,171.50, plus interest in the amount of $372,731.73, to the defense and settlement costs St. Paul Mercury incurred in the underlying construction defect litigation. In St. Paul Mercury Insurance Company v. Mountain West Farm Bureau Mutual Insurance Company, No. B229345 (Cal.App. Dist.2 10/25/2012) Mountain West’s appealed claiming its participation in the defense of its additional insured by paying into the settlement of the underlying construction defect action on behalf of its named insured (the framing subcontractor) allows it to avoid contribution.

However, Mountain West admitted it owed a duty to defend its additional insured (the general contractor) but did not provide a defense.

St. Paul Mercury had the burden to prove the potential for coverage under Mountain West’s policies; Mountain West had the burden to prove the absence of actual coverage as an affirmative defense, and forfeited its right to challenge the reasonableness of the defense costs and the amounts paid in settlement.

FACTUAL BACKGROUND

Four Seasons Jackson Hole (FSJH) commenced a project to build a Four Seasons resort hotel in Teton Village, near Jackson Hole, Wyoming that included 17 high-end condominium units referred to as Area 6. Jacobsen Construction Company, Inc. (Jacobsen), was the general contractor on the project. St. Paul Mercury insured Jacobsen in a series of a general liability policies through April 1, 2004.

Teton Builders, Inc. (Teton), the framing contractor, contracted to build all of the structural wood framing for the four-story Area 6 condominium units only. Teton did not work on the main hotel structure. Mountain West insured Teton in two commercial general liability policies, one effective October 1, 2001 through October 1, 2002, and the other from October 2002 through October 1, 2003. Mountain West and Teton made Jacobsen an additional insured under Teton’s policies on June 12, 2002 and removed Jacobsen from the policies on March 17, 2003.

FSJH terminated Jacobsen from the project in February 2004. Jacobsen sued FSJH alleging breach of contract and nonpayment. FSJH cross-complained against Jacobsen seeking damages for construction defects for, inter alia, “[i]nstallation of defective and non-conforming work,” “defective and incomplete installation of exterior wood finishes,” “out of plumb, out of square and/or out of level interior walls,” and defective weatherproofing and roof edges. In its amended cross-complaint dated March 23, 2006, FSJH alleged “defective and deficient installation of framing, drywall, millwork, and paint at Area 6″ among other problems (the underlying construction defect action).

Mountain West refused to accept St. Paul Mercury’s tender and rejected numerous attempts by St. Paul Mercury’s attorneys to share evidence showing the damage alleged by FSJH that arose out of Teton’s framing work. The underlying construction defect action was eventually resolved by a settlement.

The threshold question of Mountain West’s duty to defend Jacobsen in the underlying construction defect action was resolved by motion. Mountain West did not dispute it “never defended Jacobsen against FS Jackson Hole’s cross-complaint.” In granting summary adjudication, the trial court ruled Mountain West’s duty to defend Jacobsen “was triggered by the allegations of framing deficiencies.”

DISCUSSION

Normally, in an action by an insurer to obtain contribution from a coinsurer, the inquiry is whether the nonparticipating coinsurer had a legal obligation to provide a defense or indemnity coverage for the claim or action prior to the date of settlement, and the burden is on the party claiming coverage, St. Paul Mercury here, to show that a coverage obligation arose or existed under the coinsurer’s policy.

However, the burdens and proof are altered somewhat when one insurer with a defense duty does not join in the defense of the underlying action. In an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of potential coverage under the nonparticipating insurer’s policy. The settling insurer does not have to prove actual coverage. After the settling insurer has satisfied its burden of proof, the burden shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy.

The trial court found that Jacobsen tendered the defense to Mountain West and that the insurer acknowledged Jacobsen was an additional insured under its policies covering Teton. The court also found that Mountain West acknowledged it had a duty to defend Jacobsen against FSJH’s claims in the underlying construction defect action but did not assign defense counsel to defend Jacobsen or pay any costs incurred in the defense of Jacobsen in the underlying action.

By virtue of its policies’ additional insured endorsement naming Jacobsen, Mountain West had an obligation to provide a defense to Jacobsen. Mountain West’s policies expressly included a duty to defend. It is settled that where an insurer has a duty to defend, the obligation generally applies to the entire action, even though the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy.

The trial court found that the property damage arising out of Teton’s work “began occurring promptly as other trades followed [Teton's] framing work” was of a continuous, progressive nature. Mountain West clearly and admittedly had a duty to defend Jacobsen because Mountain West actually covered the risk. Equitable contribution is usually allowed for the amount paid in settlement of the third party claim plus defense costs incurred by the insurer who defended the action.

As a coinsurer who declined to provide a defense, Mountain West was precluded from challenging the reasonableness of the defense costs or the amount in settlement. The parties stipulated that St. Paul Mercury paid $1,783,887.20 to defend Jacobsen and that a total of $3,070,000 was paid to settle the case.

Mountain West was required to pay 43 percent of the total defense costs is equitable. Mountain West argued that where there were 18 subcontractors on the entire project and allegations of defects unrelated to Teton’s work, it should not be required to pay 43 percent of the defense costs. But, only St. Paul Mercury and Mountain West had a duty to defend Jacobsen and St. Paul Mercury demonstrated what portion of the claims against Jacobsen arose out of Teton’s work. The appellate court concluded that the trial court’s allocation of defense costs did not exceed the bounds of reason.

The trial court here chose the time on the risk method to apportion responsibility, which apportionment is based upon the relative duration of each primary policy as compared with the overall period during which the ‘occurrences’ ‘occurred.’  In so ruling, the court noted that this approach was the most equitable and the most favored method of apportionment. The court reasoned that both insurers’ policies afforded coverage for property damage during their policy periods and that there was continuing and progressive property damage claimed against Jacobsen by FSJH that arose out of Teton’s work and that occurred during Mountain West’s policy period.

Mountain West’s policies were in effect during the period of Tetons’ work, or about nine months, whereas St. Paul Mercury’s policy was in effect for 12 months. As there were only two insurers with a duty to defend Jacobsen and who provided coverage for property damage during their policy periods, the trial court properly apportioned its share by the time on the risk method which was not  challenged.

ZALMA OPINION

An additional insured endorsement gives the additional insured who qualifies for the coverage all of the rights provided to the named insured. Defending the named insured and ignoring the additional insured is a scheme fraught with peril. By doing so the insurer of the additional insured loses its right to control or question the amounts spent in defense and/or settlement of the suit. This can be exceedingly expensive and accomplishes nothing if the additional insured or its primary insurer decides to seek contribution.

This case makes it clear that when an additional insured fails to provide a defense that it is incumbent on the person or entity designated as additional insured and its primary insurer should never allow the insurer of the additional insured to avoid its obligation and should seek contribution.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

 

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Notice-Prejudice Rule Applied to Proof Of Loss Condition

California Court of Appeal Ignores Prior Supreme Court Decision

Courts try to do justice and modify statutes and earlier precedent to provide a remedy to people otherwise not entitled to receive it by ignoring the fact that there is no power in the court to dispense with a condition, or excuse the nonperformance of it. The case discussed below seems to have ignored its obligation to follow Supreme Court precedent and took on itself the power to rewrite a contract of insurance to give plaintiffs the right to sue their insurers even though the insureds failed to fulfill a mandatory condition precedent to indemnity and the right to sue.

The state of California mandates a statutory fire insurance policy requiring, among other things, that an insured submit a sworn statement in proof of loss within 60 days of the loss. Modern policies are permissibly more favorable to the insured by only requiring submission of a sworn proof of loss within 60 days of a demand.

Failure to submit the proof of loss is a breach of a material condition precedent to the benefits of the policy. One hundred twelve years ago the California Supreme Court ruled in White v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900) that, unless waived, failure to file the proof within the time limited by the policy is fatal to an action upon it.

The Supreme Court in White stated:

“The contract is that the action cannot be brought until after a full compliance by the insured with all the forgoing requirements. One of these requirements demanded the insured to furnish proofs of loss within 60 days from the date of the fire. At the time this complaint was filed the insured had not complied with this requirement of the contract and the 60 days had long since gone by.”

The trial court in White allowed the insured recovery because the insurer had presented the proofs necessary within “a reasonable time.” The Supreme Court reversed because the condition was clear and unambiguous and because White clearly breached a material condition precedent. That case has not been reversed or modified.

Regardless, the Court of Appeal, without a mention of White v. Home Mutual, decided that the so-called notice prejudice rule requires the court to ignore the Supreme Court’s clear and unambiguous ruling and require that failure of providing a timely proof of loss sixty days after it is requested must substantially prejudice the insurer before the condition will be enforced in Ocie E. Henderson et al v. Farmers Group, Inc., et al, No. B236259 (Cal.App. Dist.2 10/24/2012)

FACTUAL SUMMARY

Ocie E. Henderson, Anthony Wallace, Roscoe and Edna M. Allen, and John and Sharon Billingslea (Plaintiffs) appealed from judgments entered after the court granted motions for summary adjudication in favor of Fire Insurance Exchange (FIE), which disposed of all appellants’ causes of action. Besides FIE, Plaintiffs sued Farmers Group, Inc. (Farmers Group); Farmers Insurance Exchange; Fire Underwriters Association (FUA); Mid-Century Insurance Company; Truck Insurance Exchange; and Truck Underwriters Association alleging that these entities collectively denied or underpaid valid claims for property damage sustained in the 2009 Southern California wildfires (Station Fire). Plaintiffs brought causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith), and unfair business practices under the Business and Professions Code.

FIE moved for summary adjudication of breach of contract and bad faith claims by Henderson, Wallace and the Allens on the grounds that their failure to submit sworn proofs of loss, as required under their respective insurance policies, constituted a complete defense to these claims. The court granted the motions on this ground. Because Henderson and the Allens dismissed their claims for unfair business practices, the court entered a judgment. On appeal, they contend that the summary adjudication against them was erroneous because FIE cannot rely on the failure to submit a proof of loss as a defense absent a showing of substantial prejudice.

In August 2009, the Station Fire destroyed 250 square miles of forest and 89 homes in Southern California. Plaintiffs owned homes located near the fire line. While none of their homes was burned by the fire, they claimed their homes sustained damage from smoke, soot, and ash from the fire, requiring remediation.

The policies required Plaintiffs to provide a signed, sworn proof-of-loss notice within 60 days of a request by FIE. The policies, like the policy in White v. Home Mutual, provide that the insured cannot bring an action against FIE unless he or she has fully complied with all policy terms and conditions.

DISCUSSION

The primary issue in these cases is whether, in order to sustain a defense based upon the failure of Henderson, Wallace, and the Allens to submit a sworn proof of loss, FIE must show substantial prejudice.

Although the notice-prejudice rule in the past was limited to the “notice” condition of the policy the Court of Appeal in this case added to the rule that it also requires the insurer to prove prejudice before enforcing the condition that required the insured to submit a sworn statement in proof of loss within 60 days of request.

Noting that the purpose of the proof of loss requirement is to give the insurer the necessary facts to facilitate its investigation of a claim of loss after it has received notice of the claim and that the proof of loss helps the insurer identify fraudulent claims it still concluded that it is unenforceable if the delay did not prejudice the insurer. In so doing it adopted the reasoning of the trial court in White that was reversed by the Supreme Court.

FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible. The Court of Appeal reasoned that a reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property. The Court of Appeal, by so doing, ignored the fact that the Legislature, and the California Supreme Court, made it a mandatory condition precedent to receipt of indemnity.

The Court of Appeal concluded that the notice-prejudice rule applies to this case. In order to enforce a defense based upon plaintiffs’ failure to provide a timely proof of loss and that FIE, and all first party insurers, must show that it suffered substantial prejudice as a result of the breach of condition.

ZALMA OPINION

The Legislature of the state of California, like the legislatures of almost every other state, enacted a standard fire insurance policy that compels submission of a sworn statement in proof of loss within 60 days of a fire or any extension of time provided by the insurer.

In this case FIE gave extra time to the Plaintiffs and only required a sworn proof of loss within 60 days of its request. The Plaintiffs failed to provide that proof of loss and California Supreme Court precedent, even though hoary with age, should be followed and the breach of the proof of loss condition must be treated as an common condition precedent. Failure to comply deprives the insured of the right to sue.

As the Supreme Court stated in White:

“Time, too, is the essence of the contract in conditions of this kind, and there is now power in the court to dispense with a condition, or excuse the nonperformance of it.”

The Court of Appeal in this case dispensed with a material condition and appears to have exceeded its power and ignored the precedent set by the Supreme Court. It has, without the agreement of the parties and the Legislature rewritten the policy. Hopefully, if the California Supreme Court is asked to review, will support its precedent from 1900.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Failing to Predict A Tort Judgment Is not Bad Faith

The Defense Wins

In The Insurance Company of the State of Pennsylvania v. Old Republic General Insurance Corporation, Inc., United States District Court, Central District of California, Case No. 2:11-ev-05856-JHN-FFMx the Insurance Company of the State of Pennsylvania (ISOP) sued Old Republic General Insurance Corporation, Inc. (ORIC) for bad faith failure to settle with a plaintiff within its policy limits only to have an excess verdict at trial.

David Garthe of Boornazian, Jensen & Garthe represented ORIC in trial and retained me as his expert to testify about the custom and practice of primary and excess insurers. I was able to testify that in my professional and expert opinion, ORIC acted reasonably and appropriately followed the custom and practice of CAI in California by:

  1. That ORIC, evaluated the claim of the plaintiff in the underlying case after conducting a thorough investigation of the claim;
  2. Retained competent, a.v. rated counsel to defend the insured;
  3. Authorized counsel to retain experts requested by them to defend the insured;
  4. Authorized and paid for a sub rosa investigation of the plaintiff that obtained video tape of the plaintiff that showed his injuries were not as stated;
  5. Authorizing the retention of competent expert witnesses to testify at trial;  paid the fees of counsel and all expenses of trial; and
  6. After judgment paid its $1 million limit of liability.

ORIC and counsel retained to defend the insured, in the custom and practice of CAI in California, advised the insured and ISOP of the evaluation of counsel, the independent evaluation of ORIC and counsel, and their evaluation of proposed settlement offers made by the Plaintiff.

ORIC’s conduct, in the custom and practice of the industry, was reasonable, prudent and in good faith.

The jury deliberated for 7 1/2 hours and rendered a defense verdict.

Primary insurers owe a duty to insureds — and their excess insurers — to settle a case when liability is reasonably clear. Primary insurers also owe a duty to insureds — and their excess insurers — to defend through trial a case where it reasonably believed that its insured was not liable in amounts approaching its policy limits. That the jury disagreed is not evidence that the primary insurer acted in bad faith. It is, as the jury found, nothing more than a failure to accurately predict the jury verdict. In this case the defense counsel advised that in their opinion there was approximately a 20% chance the plaintiff would obtain a verdict in his favor and if the jury could find damages in excess of the limits of the primary policy. The jury fell in that 20% in the tort case and the jury in the case by ISOP against ORIC found that there was no breach of duty or bad faith in taking the injury case to trial.

To prove bad faith more is required than a failure to accurately predict a jury verdict.

Mr. Garthe must be commended for presenting a thorough and well reasoned defense.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Just for Fun

Chapter 15 from “Heads I Win, Tails You Lose”

The story that follows is based on fact. It is, however, a work of fiction. The names, places and descriptions have been changed to protect the guilty. Any resemblance to real people is purely coincidental. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. It is part of my e-book and claims training course available from A.D. Banker. I have to testify today so I don’t have the time to do my regular post.

Who’s Cheating Whom?

Some people are too smart for their own good. They want to commit a fraud but don’t know how. In so doing they hurt themselves rather than help.

When I was a young insurance adjuster, forty years ago, the company, I worked for insured a homeowner who owned a Capuchin monkey as a pet. The monkey was a friendly sort. He did not like confinement to the house. He wanted to be out and about meeting and greeting the world.

One day, when the insured was not looking, the monkey escaped. He was a pet and did not want to run away. He just wanted out of the house. His escape, therefore, led him to the roof of the next door neighbor’s house.

The next-door-neighbor had a tile roof. The monkey’s sharp little toenails made an infuriating clicking noise as he ran back and forth on the tiles. The neighbor, unable to stand the noise, came out of the house and saw her neighbor’s monkey on her roof. The insured was not home. The noise was unbearable. Not only did he scratch his nails on her roof but he chattered incessantly. She yelled at him without success. She picked up stones from her yard and began throwing them at the monkey.

The claimant did not know how aggressive little wild animals can be even if they are raised as pets. The monkey took offense when hit by a stone. He jumped to her shoulder sinking his claws through her thin cotton shirt and taking a bite out of her neck. He was tiny so, unlike a chimpanzee, could not cause serious damage, but his bite did break the skin.

The insured returned home at about the same time, patiently removed the monkey from her neighbor’s neck and applied first aid. The insured reported the incident to her insurance company and I was assigned to adjust the claim. I met the neighbor who informed me that she was a good woman. She said she did not wish to take advantage of her neighbor. She had gone to her doctor who applied antibiotic cream and a bandage. The doctor told her to clean the wound out daily with hydrogen peroxide and place a new dressing on the wound for a week. She wanted only to be paid her doctor’s $100 office visit charge $5.00 for the bottle of peroxide and $1.00 for the bandages.

Since liability with injuries caused by a wild animal are always clear I readily accepted her offer of settlement. The claimant did not ask for any recovery for her pain and suffering. She did not ask to be paid for the trouble and inconvenience she went through to have her wound bandaged.

I thought I had an excellent settlement. I told the claimant I would send her a check and asked, only, that she allow me to complete my file by sending me the doctor’s bill and the receipts for the peroxide and bandages.

The $106 dollar check, with the release printed on the back, went in the mail that day. It was negotiated by the claimant immediately. The receipts and billing from the doctor appeared the next day in my office.

Normally they just would have been filed without a glance, the file closed and put away. This time, I was waiting for a telephone call from a private lawyer to settle a $100,000 case and had time on my hands. I looked at the doctor’s bill she sent me and found that it was an original carbon. The doctor kept the original bill and gave the claimant a carbon copy. On the carbon for the office visit charge were the numbers one and zero in blue followed by an additional zero in black ballpoint.
The claimant, who for an injury of her type, could have easily talked me into paying her $1,000 to $3,000 back in 1972 thought she had cheated me by changing a $10.00 doctor bill to $100.00 bill. In so doing she gained $90.00 and lost $3,000 or more.
Her fraud was a success. We did nothing. We reported the fraud to no one. The insured owed the claimant much more than the $106.00 we paid her. The claimant probably thought she committed a brilliant fraud. This time the person actually damaged by the fraud was the claimant, not the insurance company.

Adjusters must always keep in mind that when they receive an offer to settle a claim for an amount that seems too good to be true there is a very high probability that it is, in fact, too good to be true.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

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Targeted Tender Binds Insurer

More than One Insurer

Insured Chooses Who Defends

Insurance companies are not popular or well liked by the public. Triers of fact will, on occasion, allow their dislike of insurers to color their decision. When insurers sue each other, however, the dislike is applied equally and the letter of the law is usually applied. Illinois allows for targeted tender of the obligation to defend and indemnify when more than one insurer’s coverage applies to a particular loss.

The Illinois Court of Appeal was called upon to resolve the dispute between two sets of insurers, one that was targeted by an additional insured and one that had to step in after the first refused to defend all of the additional insureds. The Defendants appealed from the trial court’s orders and the Plaintiffs cross-appealed with neither side being pleased with the trial court’s decision.

Background

This appeal concerning the extent of the respective parties’ insurance coverage stems from the underlying lawsuit filed after the deceased, Marian Gal, died due to an elevator malfunction at a building located at 200 North Dearborn Parkway in Chicago. The accident occurred on July 19, 2001. The fifth amended complaint alleged that on the day of the accident, Gal was at the building performing janitorial services. Despite previous malfunctions with one of the elevators, Gal was given an access key to the elevator by an Aargus security guard. When the elevator doors opened, the elevator was not at the same floor as Gal, and he plummeted down the elevator shaft to his death. The suit was ultimately settled in November 2006.

The Agreement and Insurance Policies

In 1995, Aargus Security contracted with 200 North Dearborn in a continuing services agreement (Agreement) to provide certain services with respect to the property located at 200 North Dearborn Parkway in Chicago. The Agreement provided that Aargus would name Baird & Warner, Inc., and the “[o]wner” as “additional insureds.” “Owner” was defined as “200 North Dearborn Partnership.”

United National issued a commercial general liability policy to Aargus, which covered the relevant time period when Gal’s accident occurred. The “additional insured” endorsement did not specifically name who was an additional insured; rather, it stated “blanket where required by contract.”

The “additional insured” endorsement contained two limitations. First, the insurance would not apply to an additional insured’s own acts or omissions. Second, if liability was to be imposed on the additional insured because of its acts or omissions and those of the named insured, the insurance would serve as “coinsurance with any other insurance available to the additional insured, in proportion to the limits of liability of all involved policies.”

The policy also contained an employer’s liability exclusion, which excluded coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured. Further, the policy had a $1 million per-occurrence limit. United National initially denied coverage to 200 North Dearborn and Baird & Warner; however, United National later provided a defense under a reservation of rights.

200 North Dearborn was also insured by Hartford Casualty Insurance Company. Hartford issued a commercial general liability insurance policy to 200 North Dearborn, which covered the relevant time period when Gal’s accident occurred. The policy had a $1 million per-occurrence limit. Hartford undertook 200 North Dearborn’s defense in the underlying lawsuit.

Declaratory Judgment Action

United National filed a declaratory judgment action on August 18, 2006. United National acknowledged that it was defending its named insured Aargus in the underlying lawsuit. United National further acknowledged that it had agreed under a reservation of rights to defend 200 North Dearborn and Baird & Warner pursuant to the “additional insured” endorsement in its policy with Aargus. However, United National contended that it had no duty to defend or indemnify as additional insured defendants Kenilworth, Inc., Warner Investment Company, Inc., and Elzie Higgenbottom, whom it referred to collectively as the “non-identified defendants” who were partners of 200 North Dearborn. According to the declaratory judgment complaint, the “non-identified defendants” were added as defendants in the third amended complaint in the underlying cause in 2003. Both sides filed motions for summary judgment.

The court ruled on the motions in a written order on August 4, 2009. The court denied United National’s motion and granted Hartford’s motion in part. The court determined that United National had a duty to defend the “non-identified defendants” under the “additional insured” endorsement since they were partners of 200 North Dearborn. The court also determined that defendants had targeted tender to United National rather than to Hartford and United National was required to reimburse Hartford for all sums paid in defense and settlement of the underlying lawsuit.

United National filed a motion for reconsideration or clarification of the court’s order. The court ruled on the motion in a written order on January 27, 2010. The court ordered:

  1. United National was not estopped from asserting defenses to the duty to indemnify defendants;
  2. defendants 200 North Dearborn and Baird & Warner were not entitled to indemnification from United National since the policy issued by United National excluded coverage for bodily injuries to an employee of the insured and the deceased was the insured’s employee;
  3. any remaining duty of United National to reimburse Hartford was limited to the remaining limits of United National’s policy; and
  4. there was no just reason to delay enforcement or appeal of the order.

 

Appeal

Summary judgment is appropriate where the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. The interpretation of an insurance policy and the coverage provided are questions of law that are appropriate for resolution through summary judgment.

To resolve the dispute the Court of Appeal first considered the trial court’s determination that United National was not estopped from contesting coverage and found that United National was not estopped from contesting coverage because United National defended 200 North Dearborn and Baird & Warner under a reservation of rights and also filed a declaratory judgment action, which sought, among other relief, a determination of its rights to defend the “non-identified defendants.”

It reasoned that the fifth amended complaint in the underlying lawsuit was filed in June 2006, and United National’s complaint for declaratory judgment was filed in August 2006. The Court of Appeal concluded that United National’s declaratory judgment suit was filed within a reasonable amount of time so as to preclude estoppel because of the long procedural history of the case. United National only learned the “non-identified defendants” were seeking coverage under United National’s “additional insured” endorsement sometime in 2005 or 2006 and its filing of the declaratory judgment suit in August 2006 was not so delayed or unreasonable. Although the trial court ultimately determined that United National breached its duty to defend the “non-identified defendants,” estoppel does not apply because United National filed a declaratory judgment action.

As noted above, United National’s policy also contained an employer’s liability exclusion, which excluded coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured. Notwithstanding the parties’ arguments to the trial court regarding the exclusion, the trial court did not specifically address the exclusion in its August 4, 2009, order. After United National moved to reconsider the trial court addressed the exclusion in its January 27, 2010, order, determining that the exclusion applied to preclude indemnification.

United National presented evidence to the trial court that 200 North Dearborn admitted that Gal was its employee in various documents 200 North Dearborn submitted to the trial court in the underlying lawsuit. Here, the Court of Appeal found no error in the trial court’s determination that Gal was the insured’s employee, and as such, the employee liability exclusion in the policy precluded indemnification but not the duty to defend.

Targeted Tender Required

The trial court determined that the “non-identified defendants” were additional insureds because they were partners of 200 North Dearborn, noting that a partner’s liability was coextensive with the partnership itself. Even though the identity of the additional insured was “200 North Dearborn Partnership” as owner, coverage included the partners within the partnership.

United National had a duty to defend the “non-identified defendants” under the “additional insured” endorsement. As to 200 North Dearborn and Baird & Warner, the trial court initially ordered United National to reimburse Hartford for 100% of its defense costs (later qualified by up to the limits of the policy) because defendants had targeted their tender to United National. As addressed below, based on the theory of targeted tender, United National was obligated to provide for all of defendants’ defense costs, up to the policy limits.

In Illinois when an insured is covered under more than one insurance policy, it may tender its defense solely to one insurer, and that insurer may not seek equitable contribution from another insurer whose policy is in existence but whose coverage the insured has refused to invoke. Even when there is an “other insurance” provision in the policy, if the other insurance is never triggered, then the apportionment of liability under the “other insurance” clause does not arise. The trial court determined that since 200 North Dearborn and Baird & Warner targeted their defense to United National, United National had the sole primary obligation to defend and indemnify them.

United National must reimburse Hartford for 100% of its defense costs up to United National’s policy limit. The trial court’s order was affirmed.

ZALMA OPINION

This case turned on an Illinois Supreme Court decision that allows an insured to target one insurer to pay for its defense and indemnity. It teaches that when a dispute arises between insurers over the duty to defend they should work together to resolve the dispute rather than litigate. No one won in this case except, perhaps, Mr. Gal’s heirs.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

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Divorced Spouse Collects Life Benefits

Failure to Change Beneficiary Fatal

When people are divorced they want nothing more than to totally forget the ex-spouse. Usually that is a healthy thing to do for the psyche of the spouses. It is not a good thing with regard to insurance and especially to life insurance. When divorcing life insurance should be part of any settlement agreement or judgment. When ignored, at the time of the death of an insured spouse, the heirs and the ex-spouse will find themselves embroiled in unnecessary litigation.

For example, in Utah, Rhonda H. Malloy (Malloy) appealed from the district court’s Order Granting Summary Judgment dismissing her claim to the proceeds of a life insurance policy insuring her deceased husband Dan Malloy (Husband) in Rhonda H. Malloy, An Individual v. Mary Beth Malloy, 2012 UT App 294 (Utah App. 10/18/2012) who, after his divorce from Mary Beth failed to change the beneficiary designation on his life insurance policy.

FACTS

Husband married appellee Mary Beth Malloy (Defendant) in July 1989. In August 1989, Husband purchased a $50,000 Federal Employees’ Group Life Insurance (FEGLI) policy through his federal employer. At that time, Husband executed a FEGLI Life Insurance Election form (the election form), as well as a Designation of Beneficiary form (the beneficiary form) naming Defendant as the policy’s sole beneficiary. In April 2004, Husband and Defendant divorced, but Husband did not change or cancel his designation of Defendant as the beneficiary of his FEGLI policy.

In June 2006, Husband married Malloy. A little over three years later, on September 1, 2009, Husband died. Husband did not change or cancel his 1989 designation of Defendant as the policy’s beneficiary prior to his death, and FEGLI paid the $50,000 policy benefit to Defendant pursuant to the beneficiary form. Malloy sued Defendant, asserting several causes of action in an attempt to recover the insurance proceeds from Defendant.

THE ISSUE

Malloy claimed that, pursuant to Utah Code section 75-2-804, Husband’s divorce from Defendant automatically revoked his designation of Defendant as the beneficiary of the FEGLI policy.  Section 75-2-804(2) states, in relevant part, “Except as provided by the express terms of a governing instrument, … the divorce or annulment of a marriage … revokes any revocable … disposition or appointment of property made by a divorced individual to his former spouse in a governing instrument….” Utah Code Ann. § 75-2-804(2) (Supp. 2012).

In opposition to Malloy’s motion for summary judgment on this claim, Defendant provided the district court with a copy of a FEGLI insurance manual that stated, “A divorce does not invalidate a designation that names your former spouse as beneficiary. You need to complete a new [Designation of Beneficiary] to remove a former spouse.”

TRIAL COURT DECISION

The district court granted summary judgment to Defendant. In its Memorandum Decision, the district court determined that the “governing instrument” of Husband’s FEGLI policy was “the insurance policy and insurance manual, which is incorporated by reference in the election form.” The district court further determined that the insurance manual “says that divorce does not invalidate the designation of the beneficiary” and that this language is “contrary to the general rule which states that divorce does revoke the designation of beneficiary.” In light of this determination, the district court entered summary judgment in favor of Defendant.

ANALYSIS

The insurance manual is a government publication, no such supporting evidence is required to establish its authenticity. In Utah, the following items of evidence are self-authenticating; they require no extrinsic evidence of authenticity in order to be admitted: Books, pamphlets, or other publications purporting to be issued by public authority.

The district court determined that the insurance manual was “incorporated by reference” into Husband’s election form. Malloy does not challenge the district court’s determination that this language incorporated the FEGLI Handbook – the insurance manual – into Husband’s election form.

There is no dispute that Husband signed, and thereby executed, his election form in 1989, well prior to his divorce from Defendant. Accepting the district court’s determination that the insurance manual was incorporated by reference into that form, the insurance manual constitutes “a governing instrument executed by the divorced individual before the divorce or annulment of his marriage to his former spouse”. Further, the insurance manual’s provision that “divorce does not invalidate a designation that names your former spouse as beneficiary” clearly satisfies the statute’s exception for “the express terms of a governing instrument.

In light of the express terms of the insurance manual, its incorporation into Husband’s signed election form, and the “express terms” exception of the statute the appellate court concluded that  the district court properly determined that Husband and Defendant’s divorce did not revoke Husband’s designation of Defendant as the beneficiary of his FEGLI policy.

ZALMA OPINION

Divorce happens often. People who divorce should consult their life insurance policies and, unless they want the ex-wife to collect on the policy, the beneficiary designation should be changed. Similarly, all insurance policies, should be reviewed to remove the spouse as a beneficiary of first and third party policies to avoid confusion and litigation.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

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REGULAR USE EXCLUSION EFFECTIVE

An Apple Can Never Be an Orange

Erie Insurance Exchange (“Erie”) appealed to the Superior Court of Pennsylvania from the grant of summary judgment in favor of Patrick and Daryl Rother (“Mother”) in a declaratory judgment action involving the applicability of the regularly used, non-owned vehicle exclusion in Mother’s personal vehicle policy. In Patrick Rother and Daryl Rother v. Erie Insurance Exchange, 2012 Pa.Super. 228 (Pa.Super. 10/18/2012) the appellate court resolved the issues raised by the appeal.

FACTS

Patrick Rother was severely injured in a motor vehicle accident on March 3, 2007, while he was driving his father’s vehicle. At the time of the accident, Patrick was residing with his mother, Daryl Rother. He had recently acquired a job that was located ten miles from his mother’s home and he did not own a car. His father permitted him to use one of his vehicles, a 1990 Nissan, to commute to work and for emergencies only. Patrick had been using the vehicle for those purposes for two weeks when he was involved in an accident with an intoxicated driver and was severely injured.

After recovering the liability benefits under the other driver’s policy, Patrick and Mother commenced this action seeking a declaration that Erie was obligated to provide underinsured motorist coverage under Mother’s policy. Erie maintained that the coverage was excluded by the regular use exclusion contained in the policy. The Rothers filed a motion for summary judgment, which the trial court granted finding the regular use exclusion inapplicable on the facts of the case.

It is undisputed that Patrick was driving his father’s 1990 Nissan, a vehicle not owned by Mother and not insured for UM or UIM coverage under her Erie policy, and that Patrick was a resident of Mother’s household at the time of the accident. His father permitted him to use his car to commute to work and for emergencies. On five of the days Patrick operated the Nissan he retrieved the car at his father’s home in the morning and returned it after work. On two occasions he drove the Nissan to the home he shared with his mother. On one of the latter occasions, he received a call late in the evening from a friend who required a ride, and it was while Patrick was proceeding to retrieve his friend that the accident occurred. Patrick viewed this as an emergency.

QUESTION PRESENTED

Did the trial court err in determining that the regularly used, non-owned vehicle exclusion in a personal auto policy was not applicable to the claims of the plaintiff, Patrick Rother, for recovery of underinsured motorist benefits where his injuries arise out of the operation of a vehicle: (1) not owned by him or any resident relatives; and (2) used regularly by him to travel back and forth to work?

In evaluating the trial court’s decision to enter summary judgment, the appellate court must focus its analysis on the legal standard articulated in the summary judgment rule. Whether a claim for insurance benefits is covered by a policy is a matter of law which may be decided on a summary judgment motion. The appellate court may only disturb the entry of summary judgment only where it is established that the court committed an error of law or abuse of discretion.

The policy provision at issue provides:

        What We Do Not Cover – Exclusions This insurance does not apply to:
        
        10. bodily injury to you or a resident using a non-owned motor vehicle or a non-owned miscellaneous vehicle which is regularly used by you or a resident but not insured for Uninsured or Underinsured Motorist Coverage under this policy.

The only issue is whether, on the undisputed facts presented to the court, Patrick regularly used the 1990 vehicle.

In Pennsylvania, the test for “regular use” is whether the use is “regular” or “habitual.”  Erie contends that the trial court erred in refusing to apply the regular use exception on the facts herein. Patrick’s use of his father’s vehicle to go to and from work constituted regular use of the vehicle and the fact that his use was of short duration prior to the accident was irrelevant.

Patrick counters that the facts herein establish that his use of his father’s 1990 Nissan was “incidental, infrequent and irregular” and “significantly restricted” by his father.  When presented with the Rothers’ motion for summary judgment, as well as the parties’ stipulation of facts and opposing and supporting submissions, the trial court granted the motion, and held as a matter of law that Patrick’s use of the vehicle did not preclude coverage under the exclusion.

The Nissan was supplied by Patrick’s father for the specific purpose of transportation to work and the appellate court found that such use was regular in the context of a personal vehicle. Furthermore, restrictions on Patrick’s use of his vehicle and regular use of that vehicle are not mutually exclusive. Patrick routinely and habitually used the vehicle within the scope of his father’s permission to go to and from work four days per week. The appellate court found this type of restriction on use to be comparable to the situation involving fleet or employer-owned vehicles where use is limited to work-related activities, and despite restrictions on use, it found the use to be regular within the meaning of the exclusion.

While Patrick had only used the vehicle for two weeks for this purpose, there was no indication that the use was temporary. The 1990 Nissan was the only vehicle Patrick used, it was used for a particular purpose, the pattern of use was consistent, and Patrick’s use and possession of the vehicle was exclusive for a significant time each workday. Patrick’s use could not be the type of isolated, casual, or incidental use of a non-owned vehicle that courts have held not to constitute regular use.

The regular use exclusion has been upheld on policy grounds because it generally promotes the cost containment policy underlying the state motor vehicle statutes. In an automobile insurance policy, it functions to prevent an insurance company from being subjected to an additional risk of coverage for a vehicle for which the insurance company did not receive a premium or intend to insure. As a matter of law the appellate court held that the regular use exclusion applies on the facts to preclude coverage. Therefore, the order granting summary judgment was reversed and the case remand to the trial court for entry of summary judgment in favor of Erie.

ZALMA OPINION

It is refreshing to find a court that reads a policy clearly as it is written rather than stretch the language of a policy to provide benefits to a person severely injured.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Insurers and Reinsurers Must Read Their Agreements

No Relief From Terms of Contract

The Connecticut Court of Appeal was asked to resolve a dispute between an insurance holding company and a reinsurer in Trenwick America Reinsurance Corporation v. W. R. Berkley, No. (AC 33388) (Conn.App. 10/23/2012). The defendant W. R. Berkley Corporation appealed from the judgment of the trial court, rendered in favor of the plaintiff, Trenwick America Reinsurance Corporation. On appeal, Berkley claimed that the court improperly (1) concluded that there was no mutual mistake and (2) found that the commutation agreement was not ambiguous.

FACTS

Trenwick is a reinsurance company with its principal place of business in Fairfield, Connecticut. Berkley is an insurance holding company with its principal place of business in Greenwich, Connecticut. At various times prior to September 3, 2004, Trenwick entered into reinsurance agreements with the defendant and its subsidiary insurance companies. The reinsurance agreement obligated Trenwick to reinsure certain liabilities of Berkley’s insurance companies. More specifically, in exchange for premiums paid by the Berkley Trenwick agreed to pay a stated percentage of the defendant’s insurance companies’ losses, claims, and other expenses.

Trenwick and Signet Star Reinsurance Company (Signet Star), a reinsurance company that is a subsidiary of Berkley entered into an agreement on June 10, 1999, referred to as Special Casualty and Accident Reinsurance Facility (SCARF II). The trial court noted that SCARF II obligated Trenwick “to accept a ten percent part of sixty percent of Signet Star’s overall losses under the program in exchange for a corresponding quota share (ten percent) of the premiums that Signet Star collected.” As part of SCARF II, the plaintiff also “agreed to accept a 20 [percent] participation of the employer’s liability [for the workers' compensation claims] part of the program.”

On or about September 3, 2004, Trenwick and Berkley entered into a commutation and release agreement (commutation agreement). By its terms, the commutation agreement referred to Trenwick as the “Reinsurer” and Berkley, its subsidiaries and affiliates collectively were referred to as the “Company.” The commutation agreement’s stated purpose was to “fully and finally terminate, release, determine and fully and finally settle, commute and extinguish all [the parties'] respective past, present, and future obligations and liabilities, known and unknown, fixed and contingent, under, arising out of, and/or pursuant to the [r]einsurance [a]greements…”

The commutation agreement defined “reinsurance agreement” in the following paragraph: “Whereas, the [p]arties have entered various reinsurance agreements pursuant to which the Reinsurer reinsured certain liabilities of the Company and/or the Company reinsured certain liabilities of the Reinsurer (such agreements and all other agreements entered into in connection or relating to such agreements are referred to herein collectively as the [r]einsurance [a]greements) . . . .” The commutation agreement required Trenwick to make a payment of $15,248,338 to Berkley “in full satisfaction of the Reinsurer’s past, present and future net liability under the [r]einsurance [a]greements . . . .”

The commutation agreement provided that each party “represents to the other as follows: (a) it has had full opportunity to consult with its respective attorneys in connection with the negotiation and drafting of this [a]greement; (b) it has carefully read and understands the scope and effect of each provision contained in this [a]greement; (c) it has conducted all necessary due diligence, investigation and analysis of the transactions contemplated by this [a]greement; and (d) it is not relying upon any representations made by any other party, its attorneys or other representatives.”

Following the execution of the commutation agreement, from September 3, 2004 until approximately June, 2008, the Trenwick continued to make payments pursuant to SCARF II. Likewise, during that time, Berkley continued to make premium payments to the plaintiff, totaling approximately $56,000. Between 2006 and 2008, however, Trenwick began falling behind on its SCARF II payments and the SCARF II administrator began pressing Trenwick for the past due payments.

In January, 2008, Stephen Eisenmann became an executive vice president and officer of the Trenwick. In that capacity, he had the opportunity to review the commutation agreement. On the basis of his review of the commutation agreement, Eisenmann concluded that it commuted SCARF II and therefore Trenwick had no obligation to make payments to the defendant pursuant to SCARF II after the commutation agreement went into effect on September 3, 2004. Eisenmann determined that, based on the commutation agreement’s language, the agreement was global, thereby commuting all reinsurance agreements between Trenwick and Berkley, including SCARF II, as of the effective date of the commutation agreement. Trenwick stopped making further payments under SCARF II and sought a return of the sum of $451,006.72, an amount it believed it had unnecessarily paid to the defendant pursuant to SCARF II. Berkley disagreed with Eisenmann’s conclusion that the commutation agreement commuted SCARF II and that the money paid following the execution of the commutation agreement should be returned.

Trenwick instituted an action seeking a declaration that the commutation agreement commuted SCARF II.  Following a bench trial, the court held as to count one that the commutation agreement did, in fact, commute SCARF II. As to count two, the court held that the restitution sought by the plaintiff was barred pursuant to the voluntary payment doctrine.

ANALYSIS

If the contract was entered into as a result of a mutual mistake it can be reformed to fulfill the intent of the parties. Berkley sought such reformation. However, a cause of action for reformation of a contract in Connecticut rests on the equitable theory that the instrument sought to be reformed does not conform to the real contract agreed upon and does not express the intention of the parties and that it was executed as the result of mutual mistake. Before a court can reform a contract for mutual mistake it must be established that both parties agreed to something different from what is expressed in writing, and the proof on this point should be clear so as to leave no room for doubt.

The contract was drafted and signed by an officer of Berkley who was experienced in such matters. In fact, in the commutation agreement itself Berkley affirmatively represented that it had read and understood the commutation agreement and that it was not relying on any representations outside of the contract. In addition, the commutation agreement states in multiple places that it fully and finally terminates all of the parties’ reinsurance relationships.

It is clear from the provisions of SCARF II that it falls squarely within the definition of reinsurance. Finding the commutation agreement not ambiguous the court of appeal concluded there was no basis to reform the agreement.

When the parties stand on an equal footing, each having access to his own copy of the written contract, upon the true interpretation of which the existence of a debatable legal obligation depended they cannot claim they were deceived.  When the parties to a written contract stand on an equal footing as to means of knowledge of their contract obligations, money paid by one to the other, in part performance of the contract, in response to a claim made in good faith and based upon a permissible but erroneous construction of the contract, cannot be recovered back as money paid under a mistake of law.

The trial court found that prior to Trenwick’s realization that its obligations under SCARF II were relieved by the commutation agreement, it accepted premium payments from Berkley. In like manner, Trenwick paid policy claims to the administrator of SCARF II, which were then remitted to Berkley’s subsidiary, Signet Star. Thus, both parties were carrying out their obligations pursuant to the agreement as they understood them and the benefits bargained for by one party were in direct proportion to the benefit conferred on the other, as contemplated in SCARF II. For four years Trenwick and Berkley, erroneously, but in good faith, believed that the obligations of SCARF II remained in effect notwithstanding the commutation agreement, and, during that time period, both parties performed their respective obligations and conferred anticipated benefits on each other, as they believed them to be.

Accordingly, the court of appeal found that there was no evidentiary foundation for the court to have determined that one party had been unjustly enriched at the expense of the other. On that basis, it agreed with the trial court’s conclusion that restitution was not appropriate.

ZALMA OPINION

Although contracts dealing with insurance are often construed against the drafter because of the unequal bargaining power of the parties when two insurers deal with each other the court will treat them as equals and will not weigh one against the other.

These two insurers both had the knowledge and power to understand what were the terms and conditions of the commutation agreement. Trenwick found it erred in believing it needed to honor SCARF II and when it then insisted that the commutation agreement must be enforced it was correct and Berkley, who had no excuse for not understanding the contract it drafted, could not have it changed to keep SCARF II in force.

Failure to read and understand a contract between two equal parties is no excuse.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Anger Resolves Nothing

Good Faith is a Two Way Street

Most states, including Louisiana, require insurers to pay all agreed claims within 30 days of the agreement. Sometimes it is difficult for an insurer to cross all the “t’s” and dot all the “i’s” to get payment within the required 30 days. When it is difficult or impossible to make the payment within the required 30 days the parties have a choice to explain the problem and work together to get the payment made as soon as possible or, succumb to anger and file another suit seeking punishment of the insurer for delay.

In Katie Realty, Ltd. D/B/A the Landry Building v. Louisiana Citizens Property Insurance Corporation, No. 2012-C-0588 (La. 10/16/2012) the Supreme Court of Louisiana was called upon to resolve such a dispute and whether, dealing with different Louisiana statutes, a written settlement agreement compromising a contested property insurance claim constitutes “proof of loss” under Louisiana statutes sufficient to trigger the penalties set forth in the statute for the insurer’s arbitrary and capricious failure to timely pay the settlement funds.

FACTS

Plaintiff, Katie Realty, Ltd., filed suit against defendant, Louisiana Citizens Property Insurance Corporation (Citizens), for its untimely handling of plaintiff’s Hurricane Gustav property damage claim. The matter was settled through mediation for $250,000, inclusive of penalties and fees. When Citizens failed to timely pay the settlement funds, plaintiff filed a motion to enforce settlement and assess penalties pursuant to Louisiana statutes. The District Court awarded plaintiff $125,000 in penalties. The court of appeal affirmed, finding the settlement agreement constituted sufficient “proof of loss.” It further concluded that Citizens’ misconduct warranted the imposition of penalties.

On September 1, 2008, Hurricane Gustav made landfall in south Louisiana. Commercial property owned by plaintiff, located at 1244 Barrow Street in Houma, Louisiana, sustained damage as a result of the storm. At the time, plaintiff maintained commercial insurance on the property through Citizens. On December 4, 2008 (only four months after the hurricane), plaintiff filed suit against Citizens, seeking payment of its unpaid property damage claim plus statutory penalties and attorney fees pursuant to Louisiana statutes. The petition alleged that damage quotes, totaling $192,423.98, were received by Citizens on October 24, 2008, and Citizens failed to pay the insured’s claim despite receiving this satisfactory proof of loss.

Citizens filed various exceptions and defenses and generally denied liability for plaintiff’s claim. On July 16, 2010, the parties submitted the matter to mediation and signed a written settlement agreement. According to the agreement, Citizens was to pay the amount of $250,000, plus court costs up to $1,000, within thirty days “from today,” July 16, 2010. The settlement amount included payment for Citizens’ arbitrary and capricious conduct in the handling of plaintiff’s claim.

As a courtesy, counsel for plaintiff emailed counsel for Citizens on August 11, 2010, asking him to make sure funds were received by the close of business on August 16, 2010, or his client would insist on penalties as allowed by law. On August 16, 2010, counsel for Citizens contacted opposing counsel requesting a completed W-9 form; the duly-executed W-9 was returned to Citizens that same day. The next day, counsel for Citizens left a phone message for plaintiff’s counsel, indicating a paralegal would be contacting him regarding the signing of the settlement documents. It was not until eight days later, on August 25, 2010, that Citizens contacted opposing counsel, via email, attaching a proposed receipt and release and copy of the settlement checks. Plaintiff’s counsel requested changes to the receipt and release reserving plaintiff’s right to sue for penalties and attorney fees. An agreed upon copy was signed and mailed as well as emailed on August 27, 2010. On August 28, 2010, Citizens sent an email stating the checks went out “yesterday afternoon.” Two days later, on August 30, 2010, plaintiff filed a “Motion and Order to Enforce Settlement and Assess Damages, Penalties, and Attorney’s Fees.”

The settlement checks were not received by plaintiff until August 31, 2010, forty-five days after the written settlement agreement. Moreover, it was not disputed the envelope containing the checks was post-marked August 30, 2010, not August 27, 2010, as indicated in Citizens’ email. Notwithstanding the filing of the instant proceeding, plaintiff subsequently negotiated the $250,000 check.

The District Court rendered judgment in open court on October 8, 2010, ordering Citizens to pay a penalty in the amount of fifty percent of $250,000, i.e., $125,000, inclusive of attorney fees. In rendering its decision, the District Court noted: (1) there was no evidence in the record that Citizens requested more time to pay; (2) there was no evidence offered as to why the money was paid late; and (3) plaintiff’s attorney had to remind Citizens to pay the settlement money.

DISCUSSION

It is undisputed Citizens failed to timely pay the settlement. The Legislature mandates the timely payment and adjustment of property and casualty insurance claims.

Under Louisiana jurisprudence, “proof of loss” is a vehicle meant to advise an insurer of the facts of the claim and often takes the form of an estimate of damages prepared on behalf of the insured. A settlement agreement, however, is not based on any factual determination of what the insured is owed. Rather, it is a compromise or agreement between the parties entered into in order to resolve a dispute and Citizens is unaware of any jurisprudence equating a settlement agreement to a proof of loss.

A settlement is not an insurance claim arising under a contract of insurance. Rather, it is a compromise that resolves the dispute over the insurance claim. A written settlement agreement constitutes proof of the amount due on the settlement of the claim, not the amount due on the insurance claim itself.

In the present case, the facts undisputedly demonstrate Citizens was guilty of violating a Louisiana statute by failing to timely process plaintiff’s Hurricane Gustav property damage claim upon satisfactory proof of loss. Rather than waiting out the litigation process to recover the remedies provided by the statutes for misconduct plaintiff elected to settle its penalty claim with Citizens. By settling its property insurance claim, plaintiff was precluded from bringing a subsequent action based on that claim, which was thereby compromised.

An interpretation of the statute as encompassing the settlement of plaintiff’s claim would not only renounce the validity of the settlement, but would also revive plaintiff’s compromised claim. Such an interpretation not only leads to an absurd as well as an inequitable result, but further fails to comport with the strict construction of penal provisions required by Louisiana jurisprudence.

Under the provisions of the statute, La. Rev. Stat. § 22:1973(C), when an insurer knowingly fails to timely pay a settlement, an insured “may be awarded penalties assessed against the insurer in an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.” Here, the record evidence undisputedly shows Citizens’ actions in failing to timely pay the settlement funds were knowingly made, and as such, Citizens is susceptible to penalties, at the court’s discretion, for this misconduct. The record also supports the District Court’s finding Citizens’ actions constituted a callous indifference to its insured who had to fight at every level for every cent it was owed. However, the damages for this misconduct were not proven, and thus, the penalty for such misconduct cannot “exceed five thousand dollars.”

CONCLUSION

The written settlement of a contested insurance claim does not constitute proof of loss of an insurance claim sufficient to subject the insurer to the penalties set forth in La. Rev. Stat. § 22:1892(B) for its untimely payment of the settlement funds. Rather, the explicit provisions of La. Rev. Stat. § 22:1973(B)(2) and (C) control and the Supreme Court awarded penalties in accordance with these provisions for Citizens’ knowing failure to timely pay the settlement funds.

Accordingly, it reversed the judgment of the court of appeal and rendered judgment awarding plaintiff $5,000 in statutory penalties.

ZALMA OPINION

Resolving disputed insurance claims is sometimes difficult. During a catastrophe, like after Hurricane Gustav, insurance company personnel are hard pressed to provide service to the multiple insureds who suffer damage. Plaintiffs like Katie are impatien and filed suit within four months of the hurricane hitting land.

When suit is filed over a disputed insurance claim emotions of the parties and their counsel often run high although counsel are expected to be dispassionate and clear headed.

In this case it took a mediation to resolve the dispute. The insurer, continuing its less than reasonable conduct, took 45 days to pay the settlement amount rather than the 30 days required by Louisiana law. Rather than work together the plaintiffs’ counsel immediately filed another suit seeking penalties and fees. They convinced all courts, including the Supreme Court, that the delay was in violation of law. However, the Supreme Court applied a different statute than that by the trial court and limited the penalty to $5,000.

Both sides spent a great deal of money on lawyers and appeals when they could have resolved their dispute like gentlemen.

It is time that insurance claims be resolved by reasonable people working together without allowing emotion and anger to take control over good common sense. There is no question that plaintiffs’ counsel spent more in time and energy than the $5,000 the plaintiffs eventually received. Both sides forgot that insurance is a business of utmost good faith where the insured must act just as fairly and in good faith to the insurer as the insurer must act fairly and in good faith to the insured.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Employee Dishonesty Covered

Embezzlement From Payroll Account Not Salary

When an insurer interprets its insurance policy it must read the entire contract and apply the facts to the wording of the policy to determine coverage. It should never read the policy with a highly restrictive interpretation in an attempt to avoid coverage. Rather, it should read the grant of coverage broadly and the exclusions narrowly with an intent to provide coverage to the insured if possible.

Amerisure Insurance Company (Amerisure) appealed from the trial court’s decision that the commercial insurance policy Amerisure sold to Debruyn Produce Company (Debruyn) covered the losses caused when Debruyn’s former controller issued herself unauthorized checks from the payroll account. In Amerisure Insurance Company v. Debruyn Produce Company, No. 307128 (Mich.App. 10/16/2012) the Michigan Court of Appeal was asked to resolve the dispute.

In February of 2010, Debruyn discovered that its former controller, Jillone Phillips, had been issuing herself unauthorized checks. When doing payroll, Phillips would create a second check to herself for the same amount as her actual payroll check. These additional checks were also paid out of the payroll account. Phillipsthereby doubled, without the approval of her employer, her effective net salary. She did not pay taxes or withholding on the additional checks, but simply wrote them for the same net amount as her regular paycheck.

Phillips was convicted of embezzlement for this activity.

The Claim

Debruyn filed a claim with Amerisure under the “employee dishonesty” portion of the insurance policy. Amerisure denied the claim on the basis that the loss did not constitute the type of employee dishonesty covered by the policy. On September 7, 2010, Amerisure filed a declaratory action, seeking a ruling that it is not liable to Debruyn on this claim. After both parties filed motions for summary disposition the trial court held that Phillips’s misconduct did constitute employee dishonesty under the insurance policy, such that Amerisure was required to cover Debruyn’s claim. Amerisure appealed.

This case revolves around the interpretation of the insurance policy provided to Debruyn by Amerisure. A number of cases from other jurisdictions have addressed the same or similar contractual language as is before the court, but there appears to be no binding precedent.

The Policy

The insurance policy at issue provides coverage for “employee dishonesty,” which is defined it defines as follows:

        “Employee Dishonesty” in paragraph A.2. means only dishonest acts committed by an “employee”, whether identified or not, acting alone or in collusion with other persons, except you or a partner, with the manifest intent to:

     (1) Cause you to sustain loss; and also

     (2) Obtain financial benefit (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions) for:

        (a) The “employee”; or

    (b) Any person or organization intended by the “employee” to receive that benefit.

The Issues

The parties dispute only whether Phillips’s acts fall under the exclusion in subsection 2, which excludes coverage where the financial benefit received by the employee consists of “employee benefits earned in the normal course of employment.” Amerisure argued that the use of the word “earned” should not be taken to mean that any unearned benefits are covered, but rather as a general descriptor of the type of benefits excluded, i.e. those that are generally earned in the normal course of employment. Amerisure pointed out that there is no need to exclude from coverage benefits that were actually earned, because such benefits would not constitute a loss to the insured in the first place. Debruyn concedes this point, and does not base its argument on the fact that Phillips did not “earn” her additional checks.

The controlling question in this case is whether the money taken by Phillips constituted salary or not.

The appellate court concluded that Phillips’s embezzlement fell within the coverage of the policy which, among other things, covers theft by employees through forging checks, fraudulently using employer credit cards, embezzlement, stealing from inventory, and altering purchase orders to confer a benefit on the selling company. Phillips committed a classic act of embezzlement, and it was very similar to forging checks, though she had the authority to write checks on the payroll account.

In reaching its decision the appellate court considered the Third Circuit case of Resolution Trust Corp v Fidelity and Deposit Co of Maryland, 205 F3d 615 (CA 3, 2000) is particularly helpful. In that case, the officers of a company hid a troubled loan to make their company look more valuable so that they would receive more compensation when the company was bought out. The court grappled with the meaning of the exclusion and concluded:

        [w]e hold that the exclusion covers payments knowingly made by the insured to the employee as a consequence of their employment relationship and in recognition of the employee’s performance of job-related duties. Applying this standard here, we find that the golden handcuff payments fall squarely within the exclusion set forth in subsection (b), whether it be because they are considered a “bonus,” “award,” or simply a financial benefit that the employees “earned in the normal course of employment.

As the Resolution Trust Court stated, each of the eight types of compensation listed as being earned in the normal course of business share the singular characteristic that they are all financial benefits provided knowingly by an insured, in its capacity as an employer, to its employees as a form of compensation and as a result of the employment relationship.

Applying the analytical framework supplied by Resolution Trust to the present case, it is clear that the money taken by Phillips was not salary. Her employer did not intend to write her multiple checks. She simply helped herself to money under her control and was convicted of the crime beyond a reasonable doubt. It was not included in her regular paycheck and she did not pay income tax or other withholding on the money. There is no question that embezzlement is covered.

The money should not be considered salary simply because she stole it from the payroll account instead of a cash register.

ZALMA OPINION

It seems odd that an insurance company would attempt to avoid paying this claim after the embezzler was convicted and sentence by a court. The policy includes losses by embezzlement in clear and unambiguous language. The exclusion could not apply since, if the extra checks were just payment of salary she would never have been charged with or convicted of embezzlement.

The insured should be commended for taking the case through appeal and the insurer should reconsider its claims philosophy.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Defective Construction Not an “Occurrence”

Fortuity Rules

The Sixth Circuit Court of Appeal asked the Ohio Supreme Court to resolve a question that had not been resolved in Ohio about coverage for construction defects. The Supreme Court answered the Sixth Circuit’s question in Westfield Insurance Company v. Custom Agri Systems, Inc., No. 2011-1486,  Slip Opinion No. 2012-Ohio-4712.

BACKGROUND

Custom Agri Systems, Inc. built a steel grain bin that the general contractor believed was defectively constructed.  Custom filed third-party complaints against the subcontractors it had used to construct the bin and turned to its insurer Westfield Insurance Company to defend and indemnify it in the litigation. Westfield intervened in order to pursue a judgment declaring that it had no such duty under the terms of its commercial general liability (“CGL”) policy with Custom.

Custom was sued under two general theories: defective construction and consequential damages resulting from the defective construction.

Westfield argued that none of the claims against Custom sought compensation for “property damage” caused by an “occurrence” and therefore that none of the claims were covered under the CGL policy. In the alternative, Westfield argued that even if the claims were for property damage caused by an occurrence, they were removed from coverage by an exclusion in the policy.

Westfield and Custom filed cross-motions for summary judgment. The parties agreed that the case was governed by Ohio law, and the United States District Court for the Northern District of Ohio acknowledged that it was an open question under Ohio law whether defective-construction claims fall under the auspices of a CGL policy. Rather than decide the issue, the district court assumed that Custom’s policy covered defective construction and went on to find that the exclusion removed such claims from coverage. After reconsideration of an earlier order, the district court granted summary judgment for Westfield in Younglove Constr., L.L.C. v. PSD Dev., L.L.C., 767 F.Supp.2d 820 (N.D.Ohio 2011).

Custom appealed. Westfield moved to certify two questions of state law to this court. Custom did not oppose the motion. In a divided decision, the Sixth Circuit determined that the question of whether defective construction or workmanship constitutes an “occurrence” within the meaning of a CGL policy in Ohio might be determinative of the action in federal court. Furthermore, the Sixth Circuit found no controlling precedent on the issue in our decisions. For those reasons, the Sixth Circuit certified the following two questions of state law to this court:

  1. Are claims of defective construction/workmanship brought by a property owner claims for “property damage” caused by an “occurrence” under a commercial general liability policy?
  2. If such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the commercial general liability policy preclude coverage for claims for defective construction/workmanship?

The Ohio Supreme Court agreed to answer both questions.

ANALYSIS

The underlying claim is one of defective construction of or workmanship on the steel grain bin by Custom. The present action is one of contract interpretation, as the issue is whether the claims of defective construction or workmanship against Custom fall within the insurance policy issued by Westfield.

In Ohio, like other states, when confronted with an issue of contractual interpretation, the court considers its role is to give effect to the intent of the parties to the agreement.

The insurance policy provides, in part:

“1. Insuring Agreement a. We 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. … 

“b. This insurance applies to “bodily injury” and “property damage” only if:

“(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory;”
* * *
“17. “Property damage” means:

“a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.”

CGL policies are not intended to protect business owners against every risk of operating a business. In particular, the policies are not intended to insure “business risks” that are the normal, frequent, or predictable consequences of doing business, and which business management can and should control or manage. Courts generally conclude that the policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work. In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks of loss that arise from the insured’s work.

All of the claims against which Westfield is being asked to defend and indemnify Custom relate to Custom’s work itself, i.e., the alleged defective construction of and workmanship on the steel grain bin. Although it is a widely accepted principle that such claims are not covered by CGL policies, the Supreme Court did not end its review there. Specifically, it was required to decide whether Custom’s alleged defective construction of and workmanship on the steel grain bin constitute property damage caused by an “occurrence.”

In the CGL policy issued by Westfield the word “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The word “accident,” however, is not defined in the CGL policy. Therefore, “accident” must be given its natural and commonly accepted meaning.

Insurance, by definition, requires fortuity. Applying this rule in the construction context, truly accidental property damage generally is covered because such claims and risks fit within the general understanding of fortuity. Conversely, the Ohio Supreme Court concluded that faulty workmanship claims generally are not covered, except for their consequential damages. This is so because they are not fortuitous.

Claims for faulty workmanship are not fortuitous in the context of a CGL policy. In keeping with the spirit of fortuity that is fundamental to insurance coverage, the Supreme Court held that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin.

ZALMA OPINION

The decision was not unanimous and reached over a strenuous dissent. Regardless, the decision applies the age-old rule that insurance can only insure against fortuitous events, not the expected business risk of doing a job badly. Custom built a defective steel bin. The construction of the bin did not damage any other property.

Since the loss claimed by the general contractor was neither contingent or unknown to Custom it was not fortuitous and there could be no coverage available to defend the suit claim Custom did its work badly and breached its contract with the general contractor.

CGL insurance covers many things but does not, nor can it, cover every possible problem faced by a business.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Evil Gets a Hearing At the Supreme Court

Black Widows Remain in Jail For Life

Evil should not be honored by the courts. The infamous Black Widows who killed homeless men and defrauded insurers of millions had the unmitigated gall to claim that their Sixth Amendment right to confront witnesses against them was violated when toxicology reports performed by others were testified to by the lead toxicologist.

Helen Golay and  Olga Rutterschmidt were in their mid-70′s when they were convicted of murdering two men – one in 1999, the other in 2005 – by running over each of them with a car. Issued in each victim’s name were life insurance policies listing defendant Golay and co-defendant Rutterschmidt as beneficiaries. They collected $589,124.93 on one victim’s life insurance policies; with respect to the other victim, Golay received $1,540,767.05, and Rutterschmidt $674,571.89.

Facts and Procedural History

A. Murder of Paul Vados

In 1997, Paul Vados, then about 70 years old, moved into an inexpensive apartment on South Fedora Avenue in Los Angeles. Between 1997 and 1999, applications for at least six policies insuring Vados’s life were made on his behalf. Some policies listed either defendant Golay or co-defendant Rutterschmidt as a beneficiary, while others listed both. Rutterschmidt was listed as Vados’s cousin and Golay as his fiancee. In fact, Rutterschmidt and Vados were unrelated, and lacking is evidence of a romantic involvement between Golay and Vados.

On the morning of November 8, 1999, the body of 73-year-old Vados was found lying in an alley near North La Brea Avenue in Los Angeles, about a mile from Rutterschmidt’s home. Nine days later, defendant Golay and co-defendant Rutterschmidt reported to the police that Vados had been missing for over a week. Rutterschmidt, who signed the missing person report, described herself as Vados’s cousin. Golay and Rutterschmidt collected $589,124.93 on the insurance policies taken out on Vados’s life.

B. Murder of Kenneth McDavid

In September 2002, defendant Golay leased, and paid for, an apartment for Kenneth McDavid, who had been homeless and living outside a church in Hollywood. Between November 2002 and March 2003, Golay and Rutterschmidt submitted 17 applications for insurance policies on McDavid’s life. Thirteen policies were issued by various insurance companies. As had occurred with murder victim Vados, most of the policy applications described Golay as McDavid’s fiancee and Rutterschmidt as his cousin, and some policies listed either Golay or Rutterschmidt as a beneficiary, while others listed both.

On October 30, 2004, co-defendant Rutterschmidt came to McDavid’s apartment with a hired, armed security guard. She told McDavid to leave, and told the guard to stay in the apartment for a week to prevent anyone from entering. Defendant Golay paid a portion of the guard’s fee. At approximately 1:00 a.m. on June 22, 2005, nine months after McDavid’s eviction from the apartment, his dead body was found lying in an alley near the corner of Westwood Boulevard and Santa Monica Boulevard in Los Angeles.

In August 2005, Rutterschmidt, claiming to be McDavid’s cousin, asked the police for a copy of the report on McDavid’s death in the alley. Rutterschmidt and Golay then filed claims under the insurance policies on McDavid’s life. Golay collected $1,540,767.05, and Rutterschmidt $674,571.89.

In Golay’s house, police found a pill container bearing a prescription label for Ambien (a sleeping pill), but containing a crushed powder that later was determined to have Vicodin (a pain killer), Venlafaxine (an antidepressant that causes drowsiness), and Temazepam (an anti-anxiety drug that causes drowsiness). Also found were two pill containers with prescription labels for Vicodin (prescribed for Golay), and pill containers with prescription labels for Venlafaxine and Temazepam (prescribed for Golay’s daughter, Kecia).

The Mercury Sable station wagon that co-defendant Rutterschmidt had bought in 2004 was impounded and sold at a lien sale after it was found abandoned. In May 2006, the Los Angeles Police Department repurchased the car. When criminalist Cheryl Hill examined the car’s undercarriage, she found human blood, hair, and tissue samples. The tissue samples matched murder victim McDavid’s DNA profile; the probability that a randomly selected person would have the same profile was one in 10 quadrillion.

C. Toxicology Analysis of Murder Victim McDavid’s Blood

The prosecution’s theory was that defendant Golay had drugged McDavid before killing him. To prove this, the prosecution presented the testimony of Joseph Muto, a toxicologist and a certified blood-alcohol analyst.

Muto said he was the laboratory director of the Los Angeles County Department of the Coroner, and that four laboratory analysts working under Muto’s supervision had tested samples of McDavid’s blood in July of 2005, two weeks after his death. The tests showed that McDavid’s blood contained alcohol, zolpidem (the generic form of sleep aid Ambien) and hydrocodone (the generic form of painkiller Vicodin). Laboratory director Muto explained that after the testing the four analysts gave the data generated by their equipment to clerical staff, who then prepared a report reflecting the test results.

Golay objected to Muto’s testimony, contending that it violated her Sixth Amendment right to confront at trial the laboratory analysts who had tested murder victim McDavid’s blood samples. The trial court overruled the objection. The prosecution did not introduce the laboratory reports into evidence.

D. Verdict and Appeal

The jury found both Golay and Rutterschmidt guilty of two counts of first degree murder and two counts of conspiracy to commit murder; it also found special circumstances of multiple murder and murder for financial gain. The trial court sentenced both defendants to life imprisonment without possibility of parole. The Court of Appeal affirmed the judgment.

The Court of Appeal rejected Golay’s contention that laboratory director Muto’s testimony regarding two reports prepared by the laboratory violated Golay’s Sixth Amendment right to confront and cross-examine the analysts who performed the tests described in the reports. Moreover, the Court of Appeal stated, even if there was a confrontation right violation, the error was not prejudicial.

In June of this year, 12 days after we heard oral argument in this matter and while it was pending before us, the U.S. Supreme Court court decided Williams v. Illinois (2012) 567 U.S. ___ [132 S.Ct. 2221] (Williams). At issue in Williams was testimony by Illinois State Police forensic biologist Sandra Lambatos that a DNA profile (derived from semen on vaginal swabs taken from a rape victim) produced by a Maryland laboratory matched a DNA profile (derived from a sample of the defendant’s blood) produced by the Illinois State Police Laboratory.

The plurality opinion by Justice Alito concluded, based on two alternative grounds, that Lambatos’s expert testimony did not violate the Sixth Amendment’s confrontation right.

Discussion

The California Supreme Court concluded, after a discussion of Sixth Amendment Cases, did not need to decide, however, whether the trial court erred in allowing laboratory director Muto’s testimony, because any error did not prejudice Golay. Violation of the Sixth Amendment’s confrontation right requires reversal of the judgment against a criminal defendant unless the prosecution can show “beyond a reasonable doubt” that the error was harmless. Here, that standard is met, because the evidence of Golay’s guilt was overwhelming.

The uncontradicted evidence showed that Golay and co-defendant Rutterschmidt, through fraud, took out 13 insurance policies on murder victim McDavid; that before McDavid’s death, Rutterschmidt and another elderly woman (presumably Golay), bought a car and, to prevent being linked to the car, registered it in the name of a woman whose driver’s license had been stolen; that this was the car later used to run over McDavid; that on the night of McDavid’s killing an elderly woman identifying herself as Golay telephoned to have a tow truck take this very car from a location close to the scene of McDavid’s killing to a place near Golay’s home; and that thereafter Golay collected $1,540,767.05 under the insurance policies she had taken out on McDavid’s life.

The evidence also showed that six years earlier, Golay and co-defendant Rutterschmidt had collected $589,124.93 under various policies insuring the life of then 73-year-old Paul Vados, who, like murder victim McDavid, died from being run over in an alley by a car.

In light of the overwhelming evidence against defendant Golay, exclusion of laboratory director Muto’s trial testimony in question would, beyond a reasonable doubt, not have affected the outcome of Golay’s trial. We therefore agree with the Court of Appeal’s affirmance of the judgment of conviction.

ZALMA OPINION

Some people, like Golay and Rutterschmidt, commit insurance fraud because they are evil. The victims in this case were not just the two homeless men the Black Widows killed but the insurers who paid them over two million dollars and the people of the state of California who legitimately buy life insurance.

They will die in prison and the punishment is insufficient.

That these evil women got a hearing in the California Supreme Court who found it necessary to write a lengthy opinion to keep them in prison added the state courts as an additional victim of their crimes.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Fidelity Bond Not Liability Insurance

Bond Only Protects Insured From Infidelity

When an investment company went bankrupt and its investors lost their investment the investors took an assignment from the investment company against the insurers who had issued a fidelity bond to the investment company and sued the insurer. Arlene Abady, Duane Duffy, Pete M. Montoya, Caitlin and Denali Lowe, Pamela A. Wilson, and the Estate of Wallace N. Wilson (collectively investors) lost and appealed the trial court’s summary judgment in favor of Certain Underwriters at Lloyd’s, London (Lloyd’s), in Arlene Abady, Duane Duffy, Pete M. Montoya, Caitlin Lowe v. Certain Underwriters At Lloyd’s London Subscribing To Mortgage, 2012 COA 173 (Colo.App. 10/11/2012).

Background

In the general allegations of their complaint, investors alleged that Matthew Witt (officer), the Chief Executive Officer of Commercial Capital, Inc. (CCI), formed CCI as a real estate lending company providing short-term financing for commercial construction projects. CCI engaged in a practice known as “hard money lending,” providing commercial real estate loans to borrowers who could not otherwise obtain loans from lenders with more restrictive lending criteria.

During 2006 and 2007, CCI, through efforts by officer and other officials and employees, began to solicit private investors to invest funds into the company. The proposed investment involved the acquisition of debt securities documented by a subscription agreement and a promissory note from CCI (the notes). As part of its solicitation efforts, CCI held seminars for potential investors wherein CCI agents, including officer, described CCI, its investment characteristics, investor security, the high rate of return, and a guaranteed return of the principal amounts invested and any interest thereon.

Investors alleged that officer misrepresented among other things that:  (1) CCI had a $5 million policy in place to protect investors’ principal against loss; (2) the investments had high guaranteed rates of return; (3) the interests sold were registered with the Securities and Exchange Commission; (4) the investments were “more liquid than other private real estate strategies” and “enjoyed a superior risk return profile due to inefficiencies in the commercial lending market”; (5) CCI would conduct vigorous due diligence before granting any loans; and (6) the investments and any interest would be personally guaranteed by officer.

Investors alleged that based upon these and other misrepresentations, they collectively invested in, or loaned money to, CCI in an amount in excess of $1 million. According to investors, CCI is in default on the notes and officer has not honored his personal guarantee.

Shortly after CCI filed bankruptcy certain creditors including investors filed a motion for relief from the automatic stay in order to pursue CCI’s rights under Insuring Clause A1(b) of the Mortgage Bankers Bond No. MBB-06-00090 (the bond), which was issued to CCI by Lloyd’s. The bankruptcy court granted the motion, and the bankruptcy trustee then assigned all of CCI’s rights, title, and interest in the bond to investors, retaining thirty percent of the gross recovery less reasonable attorney fees and $50,000 to be paid to investors, with the balance to the investors.

The insuring clause provides:

DISHONESTY INSURING CLAUSE A1 Direct financial loss sustained by the Assured at any time and discovered by the Assured during the Bond Period by reason of and directly caused by

        [a] Theft of Money, Securities and other Property by any Employee of the Assured, whether committed alone or in collusion with others, or

        [b] any other dishonest acts by any Employee of the Assured, whether committed alone or in collusion with others, committed by said Employees with the manifest intent to obtain Improper Personal Financial Gain for said Employee, or for any other person or entity intended by the Employee to receive such Improper Personal Financial Gain. (Emphasis added)

The term “direct financial loss” is not defined in the policy.

Investors asserted two first-party claims against Lloyd’s: the first, as assignee of the bond and the second, a garnishment claim asserting a right to garnish Lloyd’s after obtaining judgment against CCI. These claims incorporated the general allegations of the complaint, which in turn alleged wrongdoing by CCI and its officers and employees in the marketing and management of CCI, with an additional allegation stating: “At such time as [investors] procure a judgment against CCI, CCI will have incurred a loss under the Policy.”

Following a period of discovery, Lloyd’s filed a motion for summary judgment, which the trial court granted. In its order, the trial court concluded, as pertinent here, that

  1. the bond is a fidelity bond and not a surety bond;
  2. the bond terms were unambiguous;
  3. the plain language of the bond protects only CCI;
  4. the assignment of CCI’s rights to investors did not convert their third-party claims into first-party claims; and, therefore,
  5. investors’ claims were not recoverable under the bond.

Fidelity Bonds

A fidelity bond is a contract whereby one for consideration agrees to indemnify the insured against a loss arising from the want of integrity, fidelity, or honesty of employees or other persons holding positions of trust. Although called a “bond,” fidelity contracts are in legal effect analogous to policies of insurance. It is not, however, a liability policy protecting the insured against claims that it caused damage to third parties.

Insurance contracts are liberally construed in favor of coverage for the insured, courts are wary of rewriting provisions. Courts read the various policy provisions as a whole, and neither add provisions to extend coverage, nor delete them so as to limit coverage.

The Issue

The issue the appellate court was asked to resolve was whether under this coverage, Lloyd’s would be liable to CCI for the damages suffered by investors arising out of the wrongful acts of its officers and employees in marketing interests in CCI to investors. The Court of Appeal found that the losses asserted by the investors do not constitute direct losses to CCI as contemplated by the bond. The individual investors lost money when CCI failed. There were no allegations from the investors that CCI incurred a direct loss.

Direct Losses

Investors argue that the phrase “direct financial loss” is ambiguous and, therefore, the policy should be construed in favor of providing coverage. The bond issued by Lloyd’s provided coverage for direct financial loss sustained by CCI. Because “direct financial loss” is not a term defined by the fidelity bond, the appellate court looked to the plain and ordinary meaning of the phrase, that is, free from extraneous influence or immediate.

The policy here is a fidelity bond which is to be distinguished from a liability policy. A fidelity bond covers the loss of property owned by the insured or held by the insured and for which it is legally liable, as a result of employee dishonesty and other perils. A liability policy protects the insured against claims brought by third parties who have been injured by the insured’s conduct.  A fidelity bond deals with direct losses while in the liability context, the insured’s loss is indirect; it is a third party who directly suffers the loss.

The distinction between fidelity bonds and liability policies matters because liability coverage was available from Lloyd’s, but was not purchased by CCI.

Based upon the plain and ordinary meaning of the phrase “direct financial loss,” and the purpose of the policy the appellate court concluded that “direct financial loss” sustained by CCI unambiguously refers only to the immediate loss of CCI’s property through the dishonesty of its own officers and employees.

Fidelity Bond Does Not Provide Coverage for Damages to Third Parties

The Fidelity Bond, the appellate court concluded, does not provide coverage to CCI against the risk that its officers and employees may engage in wrongful conduct directed at, and causing damages to, third parties, including investors.

CCI is liable for losses suffered by investors, if at all, under a theory of vicarious liability. To accept investors’ definition of “direct financial loss” would create the potential that any loss would be deemed a direct loss. Such an interpretation would eliminate the distinction between a direct loss and an indirect loss and would transform the bond into a liability policy.

Conclusion

The appellate court concluded that the losses asserted by investors do not constitute direct financial losses to CCI. Investors, as assignees of CCI’s rights and remedies, were precluded from seeking recovery for the claims by the language of the policy.  Since the plaintiffs were only suing as assignees of CCI and since there was no allegation that the employees deceived CCI to receive improper financial gain, the judgment in favor of Lloyd’s was affirmed.

ZALMA OPINION

The Bankruptcy of CCI eliminated the investors right to sue CCI for its false representations that caused them to invest. CCI did not have liability insurance that might have covered the allegations. CCI, rather, only purchased a fidelity bond. It is first party insurance and the investors, as assignees, had no more rights than would CCI had it not filed bankruptcy.

This case make clear that although a fidelity bond is akin to insurance it is not liability insurance and is not designed to protect third parties but only to protect the insured.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Poor Claims Handling Causes Litigation

Excess May Sue Primary in Kentucky for Bad Faith Refusal to Settle

Almost every tort lawsuit involves insurance. When a person or company is sued he, she or it asks its insurer to defend or indemnify he, she or it as a defendant. Many insureds are risk averse enough to buy both primary insurance and layers of excess insurance to protect against judgments in excess of the policy limit. Any competent plaintiffs’ or defense lawyer will, to protect their clients when a serious injury is involved, will immediately determine all insurance protection available to the defendant.

If there is a potential for a judgment in excess of the primary limit competent counsel for the insured will immediately give notice to the excess insurer and seek its assistance and cooperation. A competent claims handler, when the potential for an excess verdict becomes potential, will ask its insured and/or its insured’s broker if there is other insurance available to the insured to allow it – if there is an excess insurer – and the excess insurer to properly evaluate the claim.

Often, insurance claims handlers, defense counsel and plaintiffs’ counsel fail to ascertain the insurance available. In such a case reasonable settlements may be refused, settlement offers may be made for small amounts that plaintiffs’ counsel believes is the policy limit, and litigation between the insured, the primary insurer and the excess insurer will ensue.

When a primary insurer against tort liability refuses to settle and then loses at trial for amounts greater than its coverage limits, does an excess insurer in Kentucky have any rights against the primary insurer? In National Surety Corp. v. Hartford Casualty Insurance Co., 493 F.3d 752 (6th Cir. 07/30/2007) the Sixth Circuit was asked to resolve the issue whether, under Kentucky law, an excess insurer can recover against a primary insurer pursuant to the doctrine of equitable subrogation, either for the primary insurer’s failure in good faith to settle a claim or for the primary insurer’s failure to investigate whether an insured has other insurance.

The excess insurer in this case, National Surety Corporation, argued that the primary insurer, Hartford Casualty Insurance Company, acted in bad faith by failing to settle a tort claim against their mutual insured, Sufix U.S.A., and thereby exposed Sufix to excess liability. National Surety sought to step into Sufix’s shoes, pursuant to the doctrine of equitable subrogation, to assert this bad-faith claim. National Surety also sought to assert a claim against Hartford for Hartford’s failure to discover that Sufix was insured by National Surety. The district court held that National Surety did not have a cause of action under Kentucky law, and accordingly granted Hartford’s motion to dismiss.

THE FACTS

National Surety’s complaint alleged the following facts, which this court must accept as true:

  • Hartford and National Surety both issued insurance policies to Sufix U.S.A. Hartford’s policy provided $1 million in primary liability coverage and National Surety’s policy provided $10 million in excess liability coverage.
  • On or about May 19, 1998, a weed trimmer manufactured by Sufix injured Tommy Cook when the trimmer broke apart while Cook was using it.
  • In May of 1999, Cook filed suit against Sufix in Jefferson Circuit Court, alleging that the weed trimmer was defectively designed and that Sufix was grossly negligent in failing to discover the defect.
  • Hartford assumed the defense of Sufix pursuant to its insurance contract.
  • Hartford, through its attorneys, engaged in settlement negotiations with Cook, and ultimately rejected Cook’s offer to settle for the limits of Hartford’s policy (i.e., $1 million).
  • National Surety did not receive notice of Cook’s action against Sufix from Sufix or Hartford until approximately two weeks before trial.
  • National Surety alleges that because of the lack of timely notice, it was (1) unable to evaluate effectively its exposure to Cook under the excess policy, (2) unable to evaluate Cook’s settlement demand, (3) not given the opportunity to participate in or direct the preparations for the trial, and (4) unable to engage in informed settlement negotiations with Cook.
  • On May 21, 2002, a jury found Sufix liable to Cook and awarded Cook $6,486,588.44. After the trial, National Surety assumed the defense of Sufix and brought an unsuccessful appeal to the Court of Appeals of Kentucky.

THE EQUITABLE SUBROGATION ACTION

On February 24, 2005, National Surety filed suit against Hartford in the United States District Court for the Western District of Kentucky. National Surety sued Hartford for breach of contract and for violation of the common-law duty of good faith. National Surety asserted in its complaint that Hartford failed “[t]o perform an adequate investigation of the allegations that form the basis of the Civil Action,” failed “[t]o provide Sufix with an adequate and competent defense of the allegations contained in the Civil Action,” and failed “[t]o settle claims against Sufix within its policy limits so as not to expose Sufix and its assets to an excess judgment.”

National Surety claimed that it is subrogated to Sufix pursuant to the terms of the excess policy and the doctrine of equitable subrogation. Hartford filed a motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), on the grounds that Kentucky does not recognize the right of excess insurers to sue primary insurers in a situation like this one. Second, the district court concluded that Kentucky would not follow the jurisdictions that have adopted the rule advocated by National Surety because excess insurers do not suffer an injury when a primary insurer, in bad faith, fails to settle a claim within its policy limits.

The district court reasoned that the excess insurer, National Surety, has received a premium in exchange for assuming the risk of an excess judgment and therefore suffered no wrong, while the insured, Sufix, who has been fully indemnified, has suffered no loss.

ANALYSIS

In resolving an issue of state law in a diversity case, this court must make the best prediction, even in the absence of direct state court precedent, of what the Kentucky Supreme Court would do if it were confronted with the same question of law. Because Kentucky law and policy support the majority rule that an excess insurer may recover against a primary insurer under the doctrine of equitable subrogation, and arguments to the contrary are not persuasive, the Kentucky Supreme Court would likely recognize the rule asserted by National Surety in this case.

The Kentucky Supreme Court would likely adopt the majority rule because that rule naturally follows from two other Kentucky insurance rules: (1) that an insured may sue an insurer who, in bad faith, fails to settle a claim within policy limits, and (2) that an insurer may step into the shoes of the insured, pursuant to the doctrine of equitable subrogation. In addition, the majority rule furthers Kentucky policies of encouraging fair and reasonable settlements and preventing wrongdoers from piggybacking on an insured’s insurance.

Kentucky also recognizes the doctrine of equitable subrogation. Although Kentucky courts note that equitable subrogation should be strictly limited in its application, the courts recognize that equitable subrogation has a long and rich tradition of benevolence and fairness,  and is irrevocably anchored in principles of natural justice.

Considering these two principles together leads to the conclusion that an excess insurer is permitted to step into the shoes of the insured and sue a primary insurer pursuant to the doctrine of equitable subrogation to enforce the primary insurer’s duty to avoid excessive judgments against an insured.

In Kentucky the law always looks with favor upon an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences on such terms as to them seem fair and reasonable. This principle also applies in the insurance context. For example, Kentucky’s Unfair Claims Settlement Practices Act prohibits persons in the business of entering into insurance contracts from not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonable clear.

In addition, the majority rule’s goal of preventing a primary insurer from, in bad faith, failing to settle a claim comports with Kentucky’s insurance policy goals. As discussed above, a primary insurer has an incentive to fail to settle a claim within its policy limits even though the settlement offer is objectively fair and reasonable. Although the insured has a cause of action against a primary insurer who fails to settle in good faith, when the insured has excess insurance, the insured has little incentive to sue because the harm of the primary insurer’s refusal to settle falls completely on the excess insurer.

National Surety, however, may not assert a claim against Hartford for Hartford’s purported failure to investigate whether Sufix had other insurance. Such a claim does not sound in subrogation because Sufix, who presumably knows from whom it has obtained insurance, would have had no such claim against Hartford. Instead, such a claim would presume a direct obligation of the primary insurer to the excess insurer, a concept rejected by most of those jurisdictions accepting subrogation of the primary insurer’s obligation to its insured.

For the foregoing reasons, the Sixth Circuit affirm the dismissal of the claim against Hartford to the extent it relied on the failure to investigate whether its insured had other insurance coverage, but otherwise reverse the district court’s order granting Hartford’s motion to dismiss, and remand for further proceedings consistent with this opinion.

ZALMA OPINION

This case is an example of poor claims handling which has nothing to do with the decision of the Sixth Circuit. The suit could have been avoided if the claims handler, the plaintiffs lawyer or the defense lawyer knew about the excess insurer.  Considering the verdict it is difficult to conceive that if the plaintiffs’ lawyer knew there was $11 million in available coverage that an offer of $1 million would not have been made. Similarly, applying basic the test of bad faith: if the Hartford had $11 million in coverage with the injuries involved and received a $1 million settlement offer, it probably would have accepted the offer.

When dealing with serious injuries like those incurred by the plaintiff in this case it is incumbent upon professional insurance claims people, plaintiffs’ lawyers, defense lawyers, the insured’s risk manager and the insured to involve all available insurance. There is no question the plaintiff would have been upset if the Hartford accepted its settlement offer and then informed the plaintiff of the extra $10 million in available coverage.

Even though the court found there was no duty to seek out excess coverage that could be the basis of a suit against the Hartford it found there was a suit available to the excess insurer against the primary for its alleged bad faith failure to accept the $1 million settlement offer. The case will go back to the trial court and National Surety will present evidence it hopes will find that Hartford acted in bad faith and compel the Hartford to pay the amount National Surety paid in excess of the Hartford’s limit.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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INSURED AND BODY SHOP CONVERT INSURANCE SETTLEMENT

Requirement for Insurance Must Be Honored

When a person borrows money to buy a car and promises the lender that insurance will be purchased to protect the interest of the lender the borrower must, in good faith, obtain the insurance and protect the rights of the lender whether insured or not. The owner of the vehicle, when it is damaged in an accident, must use the insurance proceeds to repair the vehicle to protect, as the borrower promised, the interest of the lender. In Los Angeles Federal Credit Union v. Edgar Madatyan et al, No. B232073 (Cal.App. Dist.2 10/11/2012) the California Court of Appeal was asked to overturn the decision of the trial court that the borrower and a body shop converted the insurance proceeds by circumventing the equitable lien the lender had in those insurance proceeds.

FACTS

Plaintiff and respondent Los Angeles Federal Credit Union (the Credit Union) prevailed in an action for conversion against defendants and appellants Edgar Madatyan and Elvis Madatyan  concerning an insurance check Edgar endorsed that was payable jointly to the owner of the damaged car and to GAD Auto Body Shop (GAD), a defendant owned by Elvis. The Credit Union, which had loaned the car owner money to purchase the car and had a lien on the car, claimed to have an interest in the insurance check because of the lien and because the loan agreement required the car owner to maintain insurance on the car.

On August 1, 2008, the Credit Union financed the purchase of a 2000 Bentley by Areg Khachikian in the amount of $136,126. The loan agreement provided that the car was collateral for the loan and required Khachikian to maintain insurance for the car. The insurance provision of the loan agreement stated, in part, “You promise to maintain property insurance in an amount necessary to protect Our security interest in the collateral, with a policy as specified by Us, in the amount and for the period required by Us, and with Us named as loss payee for Our protection. Such insurance shall protect against loss by fire, theft, and collision….”

Paul Pitts, the Credit Union’s collection manager, testified that Khachikian fulfilled his responsibility to maintain insurance on the car through a policy with Allstate. The Credit Union was not named as an additional insured or loss payee on the policy as required by the loan agreement.

In October 2008, Khachikian took his car to GAD to be repaired. Elvis owned, and Edgar managed, GAD. An Allstate adjuster went to the body shop and appraised the damage to Khachikian’s car at $39,697.35. Allstate sent Khachikian a check for that amount, naming Khachikian and GAD as payees, but not the Credit Union.

Khachikian took the insurance check to GAD and asked Edgar to endorse it. Edgar went with Khachikian to Bank of America to obtain a signature guarantee of Edgar’s endorsement. Edgar endorsed the check on behalf of GAD. Khachikian left the bank without cashing the check. Edgar did not know Khachikian before Khachikian brought his car to GAD. Edgar did not know that the Credit Union had a lien on Khachikian’s car before he endorsed the check.

Elvis stated that Khachikian’s request that GAD endorse the check was not unusual. In Elvis’s experience, “Sometimes customers decide to go somewhere else, do the work themselves, or simply hold the money until we complete the work so they know it was done right. Since I am confident of the quality of our work, and since we have a lien on the vehicle for any work performed (which means we do not release the vehicle under we are paid) I have not, in the past, refused to endorse the checks, nor, until now, experienced any problems due to endorsing a check.”

Pitts testified that insurance companies make checks payable to an insured and an auto shop to ensure that the car is repaired. In Pitts’s experience, such checks were cashed “[o]nly at the completion of the repair work to the vehicle[,] then the check is signed off by the Credit Union and paid to the body shop for the services completed.” Pitts explained that in the usual case, insurance checks were made out to the Credit Union and the body shop, and not the “customer” and the body shop, because the Credit Union had an interest in the car. As a payee on the check, the Credit Union would endorse the check after the work was completed. That was the only way to ensure that the repairs were made.

Khachikian did not authorize GAD to work on the car. GAD had not worked on the car at the time the check was signed. The insurance check was cashed. GAD did not receive any money from the check, from Allstate, or from Khachikian.

When Khachikian did not make the payments required by the loan agreement, the Credit Union repossessed the car from GAD where it had been abandoned. Upon repossessing the car, the Credit Union determined that the car was damaged and that an insurance claim had been made with respect to the damage. The Credit Union incurred costs of $47,000 to repair the car. GAD charged the Credit Union $950 in car storage fees. Khachikian, a named defendant, filed for bankruptcy that kept him from this case.

TRIAL COURT RULING

The trial court ruled that defendants converted the insurance check or its proceeds. In support of its ruling, the trial court found that Khachikian’s loan agreement with the Credit Union required Khachikian to insure the car and name the Credit Union as an insured. Khachikian insured the car, but violated the loan agreement by not naming the Credit Union as an insured. The purpose of the insurance was to repair the car in the event it was damaged. The trial court found that by assisting Khachikian in negotiating the insurance check, defendants “interfered with the [Credit Union's] right” and therefore defendants were liable for conversion.

DISCUSSION

Defendants contended that the evidence did not support the trial court’s ruling that they converted the Credit Union’s property because they did not receive and were never in control of the proceeds of the insurance check. Defendants also claimed that defendants did not know of the Credit Union’s existence.

Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are:

  1. the plaintiff’s ownership or right to possession of the property;
  2. the defendant’s conversion by a wrongful act or disposition of property rights; and
  3. damages.

Conversion is a strict liability tort. The foundation of the tort rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty. The act of conversion itself is tortious.

Questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial. The basis of a conversion action rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which injury to the latter results. Therefore, neither good nor bad faith, neither care nor negligence, neither knowledge nor ignorance, are the gist of the action.

The appellate court concluded that substantial evidence supports the trial court’s finding that the credit Union had an interest in the insurance proceeds represented by the Allstate check. When a party that is contractually obligated to purchase insurance for the mutual benefit of itself and another party breaches that obligation by purchasing insurance solely for its own benefit, an equitable lien is created in the uninsured party’s favor on any resulting insurance proceeds.  Khachikian’s loan agreement with the Credit Union obligated him to purchase insurance naming the Credit Union as a loss payee to protect the Credit Union’s interest in the car. Khachikian breached that contractual obligation by failing to name the Credit Union on the Allstate insurance policy thereby creating an equitable lien in the Credit Union’s favor on the proceeds from that policy. Because the Credit Union had an equitable lien in the insurance proceeds, with which defendants interfered when Edgar endorsed the Allstate check, defendants are liable for conversion. That defendants did not know that the Credit Union had an interest in the car or in the insurance proceeds is immaterial to a conversion action.

ZALMA OPINION

Lenders, unlike the Credit Union, should always ascertain that borrowers actually name the lender as an additional insured or as a loss payee on every loan made. The lender was saved from its error — although it took a lawsuit, a trial and an appeal — by the law of conversion.

People who provide services for damaged property that are asked to endorse an insurance check should never do so unless the check is to be deposited into the vendor’s account in payment for services rendered. In this case, by signing the insurance check, got nothing for the service and was required to make it good because he trusted a customer who took the money, left the Bentley, and filed bankruptcy to avoid responsibility for his conversion of the Credit Union’s money.

The villain succeeded. The body shop and the credit union lost. I can only hope that Mr. Khachikian receives a visit from the local police for the theft of the money that he knew belonged to the Credit Union. His debt to the Credit Union may have been discharged by the bankruptcy court but his debt to the state still remains.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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MORE FRAUD – LESS PROSECUTIONS

MORE FRAUD – LESS PROSECUTIONS

Continuing with the twentieth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the October 15, 2012 issue about:

  1. the end of the story of serial fraud perpetrator Martin Frankel;
  2. how fraud caused an insurer to fail; why 85% of all health insurance fraud claims investigated by federal authorities are not prosecuted;
  3. details on how and why an administrative law judge in California stopped the California Department of Insurance from enforcing California Fair Claims Settlement Regulations that exceed the provisions of the California Insurance Code;
  4. announces a fraud training seminar by the Department of Insurance in Massachusetts;
  5. a report on higher estimates of fraud surfacing from the insurance industry;
  6. the third chapter of  “Candy & Abel” a serialized story about insurance fraud; and a report on a two new E-books from Barry Zalma, Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013.

 

For details on the two 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 540 posts to the blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

  • No Cover for Damage to Contractor’s Work
  • Court Too Nice to Arsonist
  • Arson & the Loss Payable Clause
  • Limit on Non-Economic Damages Constitutional
  • It is Expensive to Fight Insurance Fraud & Worth Every Penny
  • Insured Who Rushed to Sue Must Submit to Appraisal
  • Statute Revokes Beneficiary Designation
  • Evidence Of Physical Manifestation Required
  • Insurer v. Insurer Suits Should Be Avoided If Possible
  • Breach of Contract Not an Accident

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 Cover for Damage to Contractor’s Work

No Right to Defense if No Right to Indemnity

The Wisconsin Court of Appeal, in Pamperin Rentals II, LLC, Pamperin Rentals III, LLC v. R.G. Hendricks & Sons Construction, Inc, No. 2011AP2544 (Wis.App. 10/10/2012), was called upon to resolve a dispute about the duty to defend a contractor whose work was found wanting by its customer.  R.G. Hendricks & Sons Construction, Inc., appealed a summary judgment dismissing Pekin Insurance Company. The trial court concluded that Pekin’s policy afforded no coverage for the claims asserted against Hendricks, and that Pekin therefore had no duty to indemnify or further defend Hendricks.

BACKGROUND

Hendricks was involved in the construction of several service stations. Hendricks contracted to “prepare the site and supply and install concrete, stamped concrete, and colored concrete ….” Pamperin Rentals II, LLC and others (collectively, Pamperin) sued Hendricks, alleging the concrete Hendricks supplied and installed “was defective and/or the work performed was not done in a workmanlike manner and has resulted in damages, including pitting and deterioration of the concrete, and will require replacement.” Pamperin further alleged:

 That [Hendricks's] breach has and will cause the Plaintiffs damages, including, but not limited to, concrete and asphalt repair, all appropriate testing for the installation of replacement concrete, all incidental and consequential damages related to the tear-out and replacement of concrete and asphalt, business interruption and lost profits, and all incidental and consequential damages including contractual liabilities related to business interruption.

Hendricks’s insurer, Pekin, agreed to provide a defense, subject to a reservation of its right to later contest coverage. During discovery, Pamperin disclosed that only the concrete had suffered physical damage. The alleged business interruption and physical damage to asphalt were merely expected future harms to be incurred when the concrete itself was repaired or replaced. Hendricks asserted that the exclusions would not apply if the damage to the concrete did not arise from Hendricks’s faulty workmanship. That is true; it is also irrelevant. Pamperin alleged that Hendricks’s faulty workmanship caused the damage to the concrete, and if that is not true, then Pamperin has no basis for holding Hendricks liable in the first place. For example, if a child leaves her properly constructed jump-rope on her neighbor’s lawn and the rope is damaged by a lawnmower, is the jump-rope manufacturer liable to repair or replace it?

Pekin moved for summary judgment, arguing it had no duty to indemnify or further defend Hendricks because there was no policy coverage for Pamperin’s alleged damage. Pekin argued there was no occurrence in the first instance and, additionally, the business risks exclusions applied to bar coverage. Specifically, Pekin argued exclusions k. and l. applied, which preclude coverage for damage to the insured’s product and work, respectively. The court granted Pekin’s motion, holding there was no occurrence.

DISCUSSION

Where an insurer, like Pekin, has provided an initial defense pending a final coverage determination, the “four-corners rule” – related to the duty-to-defend inquiry – is not implicated. Instead, the court simply proceeds to a coverage determination. At that time the court may consider extrinsic evidence and, if there is no arguable coverage, determine on summary judgment that there is no duty to indemnify. The insurer’s duty to continue to defend is contingent upon the court’s determination that the insured has coverage if the plaintiff proves his case. Therefore, when a court concludes there is no duty to indemnify, the insurer is relieved of its duty to further defend the insured.

Hendricks’s commercial general liability (CGL) policy affords coverage when an “occurrence” causes “property damage.” The policy defines property damage as:

         a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

            b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

Hendricks argues both definitions apply here because, regardless of the alleged damage to Hendricks’s own product or work, Pamperin alleges physical injury to asphalt and plumbing, and loss of use of its stores and carwash bays. Hendricks failed to acknowledge that no such physical injury or loss of use has happened. Since it did not happen there was no “property damage” subject to coverage.

Hendricks tried to claim that there is policy coverage because Hendricks paid a separate premium for products – completed operations coverage. It asserts that, because this is therefore a separate, purportedly expensive, coverage, the business risks exclusions do not apply. The Court of Appeal found that a plain reading of the policy reveals that it merely recognizes two types of property damage and personal injury risks – those arising from property or operations under the insured’s control, and those arising from products or work over which the insured has relinquished control – and provides separate limits of coverage for each type of risk.

The fact that the insured pays a separate (substantially discounted) premium for the (apparently diminished) risk of liability associated with products or work for which it has relinquished control does not dictate that the risk magically becomes a separate coverage grant with its own insuring agreement and set of exclusions. Rather, the products – completed operations hazard is plainly a component of Coverage A., which insures for bodily injury and property damage liability.

ZALMA OPINION

Pekin Insurance found a way to avoid the “four corners rule” by providing a defense under a reservation of rights. When discovery showed that the only property damage was to the work performed by the contractor it filed a complaint for declaratory relief because there was no potential for the policy to pay indemnity even if the plaintiff proved every allegation it had no duty to defend.

If it properly reserved its rights Pekin could also recover from its insured the fees it paid to defend Hendricks before it learned there was no potential for coverage.

What Pekin did should be followed by insurers in those states that follow the four-corners rule unless the allegations show absolutely no potential for coverage. Evidence that there is no potential for coverage is better than speculation upon the meaning of a less than perfectly pleaded law suit.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

 

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Court Too Nice to Arsonist

No Mercy to an Arsonist

Arson is a violent crime. People, usually firefighters fighting the fire, are injured and killed. It is for that reason that when a person is convicted of arson and attempted insurance fraud, he or she is usually sentenced for committing a serious felony and a violent crime. Sometimes, judges, take a liking to the criminal when he or she admits to the crime and imposes a sentence that does not recognize the seriousness of the crime.

Giovanni Naccarato (“Naccarato) entered a plea of nolo contendere to four counts of burning a dwelling house, one count of burning insured property, and one count of arson of personal property having a value of $1,000 or more but less than $20,000. Naccarato was sentenced to a term of three years’ probation for all six counts and was ordered to make full restitution to the tenants of the building he burned down and his insurance company. The state appealed the sentence in People of the State of Michigan v. Giovanni Naccarato, No. 305222 (Mich.App. 10/04/2012)

FACTS

On October 6, 2007, at around 1:00 p.m., firefighters responded to a fire at an apartment building owned by Naccarato. Naccarato had previously evacuated the building under the guise that the building was being fumigated for insects. Once in the apartment building, firefighters noticed two partially filled gasoline containers on a stairway leading to the second floor and later found a third gasoline can in the basement. An investigation was conducted after the fire was extinguished. Investigators determined that the fire was the result of a person’s actions and that gasoline was used. Two units on the second floor were destroyed along with all furniture, personal belongings, and clothing in the units. Additionally, two first floor units suffered severe smoke damage as a result of the fire.

Naccarato had insured the apartment building for fire loss. Naccarato’s claim for reimbursement of around $400,000 was denied by Naccarato’s insurance company. The insurance company did, however, reimburse Naccarato’s mortgage company for the unpaid mortgage balance of $135,000 on the building. Estimated damage of the tenants’ personal property ranged from $5,000 to $20,000.

PLEA AND SENTENCING

Naccarato entered a plea of nolo contendere on March 1, 2011 to four counts of burning of a dwelling, one count of burning insured property, and one count of arson of personal property. Naccarato stipulated to an investigator’s report being read into the record to form the factual basis for his plea. At the sentencing hearing on May 24, 2011, the state and Naccarato disagreed over the scoring of offense variable (OV), and prior record variable (PRV). The trial court ruled that OV 1 was not scored properly and that PRV 7 was scored properly. In issuing its sentence, the court departed downward from the sentencing guidelines.

Naccarato’s age, ability to be rehabilitated, lack of prior convictions, lack of convictions in the interim between the incident and sentencing, role as a family man, employment at Ford Motor Company, lack of intent to physically harm anyone, and willingness to make restitution were all reasons cited by the trial court as reasons for departing from the sentencing guidelines.

On appeal, the state first asserted that Naccarato should be resentenced within the guidelines. The state argued that the downward departure by the trial court was not warranted because the reasons cited by the trial court were not sufficiently substantial and compelling, because the trial court failed to explain the extent of the particular departure, and because the trial court failed to explain why the sentence imposed was more proportionate to Naccarato’s crime than a sentence within the guidelines.

If a court decides to overturn a trial court sentence it must conclude that the trial court’s decision to depart from the sentencing guidelines is abused its discretion. The appellate court reviews the reasons given for a departure for clear error. A trial court’s conclusion that a reason is objective and verifiable is reviewed as a matter of law. Reasons cited by a court as substantial and compelling enough to justify the departure are reviewed for an abuse of discretion, as is the amount of the departure. An abuse of discretion occurs only if the minimum sentence imposed falls outside the range of principled outcomes.

Under the sentencing guidelines, a court may depart from the appropriate sentence range only if the court has a substantial and compelling reason for that departure and states on the record the reasons for departure. Reasons sufficient to merit departure must be “objective and verifiable” and should keenly or irresistibly grab the courts attention. For a reason to be objective and verifiable it must be based on actions or occurrences external to the minds of those involved. Usually, a substantial and compelling reason exists only in exceptional cases.

Among the reasons cited by the trial court, a number can constitute substantial and compelling reasons for a departure from the sentencing guidelines.  For example: Naccarato’s age, in conjunction with Naccarato’s lack of a criminal record may be a reason for a downward departure. However, in order to depart from the sentencing guidelines on the basis of Naccarato’s lack of a prior criminal history, the trial court had to first conclude that the sentencing guidelines gave inadequate or disproportionate weight to the Naccarato’s criminal history.

In this case the appellate court noted that the trial court did not conclude that the sentencing guidelines gave inadequate or disproportionate weight to Naccarato’s criminal history. Consequently, although consideration of Naccarato’s lack of prior criminal history was appropriate, the trial court failed to explain how that reason was not already adequately addressed in the guidelines when enacted by the Legislature.

Another potential substantial and compelling reason for departure is Naccarato’s employment of over 20 years at Ford Motor Company, Naccarato’s family support, in conjunction with the other reasons cited can also constitute a substantial and compelling reason for departure from the guidelines.

Nevertheless, even if substantial and compelling reasons exist for a departure from the guidelines, when departing, the trial court must explain why the sentence imposed is more proportionate than a sentence within the guidelines recommendation would have been. When it is unclear why the trial court made a particular departure, an appellate court cannot substitute its own judgment about why the departure was justified. Moreover a sentence cannot be upheld when the connection between the reasons given for departure and the extent of the departure is unclear.

No reason was given for the extent of the particular downward departure by the trial court. The trial court also failed to explain why the sentence imposed was more proportionate than one within the guidelines. Therefore, Naccarato’s sentences must be vacated and the case remanded to the trial court for resentencing. When the trial court reconsiders its decision and a new sentence it must do so within the guidelines unless the trial court provides substantial and compelling reasons for departure and explains why the particular departure is more proportionate to Naccarato’s offense than a sentence within the guidelines.

The appellate court reviews anew the proper interpretation and application of the legislative sentencing guidelines. In terms of scoring under the sentencing guidelines, the appellate court reviews the scoring to determine whether the sentencing court properly exercised its discretion and whether the evidence adequately supported a particular score. When construing a statute, unambiguous language is given its plain meaning and the statute is applied as written. OV 1 should, in the opinion of the appellate court, be scored 20 points when, the victim was subjected or exposed to a harmful incendiary device. Since gasoline is an incendiary that, as fumes, each gallon has the explosive power of 13 sticks of dynamite, the device Naccarato used to start and accelerate the fire, the crime must be scored at 20 points not zero.

Victim is defined under the statute as any person who was placed in danger of injury or loss of life. No tenants were in the building at the time of the fire, but there were witnesses in the area. Furthermore, one firefighter and Naccarato were injured as a result of the fire. Even if Naccarato does not count as a victim, the witnesses in the area and the firefighters are all persons who were placed in danger of injury or loss of life as a result of the fire caused by Naccarato.

Accordingly, Naccarato’s sentences were vacated and the appellate court remanded the case to the trial court for resentencing consistent with the appellate opinion.

ZALMA OPINION

Arson is one of the most serious of violent crimes. No matter how elderly, how nice, what a good family man, or what a good employee the arsonist is, he is as violent a criminal as an armed robber who shoots a victim. In this case he injured a firefighter and put in danger the residents in the neighborhood. He deserves a punishment greater than probation and restitution to deter other “nice” people from being tempted to start a fire to collect insurance money and profit from the fire.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

 

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Arson & the Loss Payable Clause

Arson By Insured Does Not Eliminate Rights of Mortgagee

The Sixth Circuit Court of Appeals was called upon to determine whether certain insurance policies exclude coverage to a loss payee when the primary insured caused the loss by intentionally burning insured trucks. Applying Virginia law, the district court concluded that the exclusion did not bar coverage and granted the insured’s loss payee judgment on the pleadings. In Wells Fargo Equipment Finance, Incorporated v. State Farm Fire, No. 11-1635 (4th Cir. 10/04/2012) the Sixth Circuit interpreted the clear meaning of the policy wording.

FACTS

In April and May 2008, Wells Fargo Equipment Finance, Inc. (“Wells Fargo”) loaned RODO, Inc. (“RODO”) funds for the purchase of three trucks. The loan contracts granted Wells Fargo a security interest in the trucks. In July 2008, RODO assigned the loan contracts and trucks to Miriam Trucking (“Miriam Trucking”).

In August 2008, State Farm Fire and Casualty Company (“State Farm Fire”) issued an insurance policy to Miriam Trucking covering two of the trucks, and State Farm Mutual Automobile Insurance Company (“State Farm Auto”) issued an insurance policy covering the third truck. Both policies named Wells Fargo as the loss payee with respect to the trucks. On December 13, 2008, a fire destroyed two of the trucks.

the parties stipulated for the purposes of this case that Miriam Trucking intentionally destroyed the trucks. Wells Fargo filed claims with State Farm Fire and State Farm Auto (collectively “State Farm”), which State Farm refused to pay. Wells Fargo then brought suit against State Farm claiming breach of contract. Wells Fargo moved for judgment on the pleadings as to these claims, which the district court granted.

ANALYSIS

To uphold a grant of judgment on the pleadings, the Sixth Circuit had to find that the nonmoving party can prove no set of facts in support of its claim that would entitle it to relief.    The dispute in this case centers on the interpretation of the “Loss Payable Endorsement” in both policies. This endorsement provides, in relevant part:

With respect to coverage provided by this endorsement, the provisions of the coverage form apply unless modified by the endorsement.

            (a) We will pay, as interest may appear, you and the loss payee named in the policy for “loss” to a covered “auto.”

            (b) The insurance covers the interest of the loss payee unless the “loss” results from conversion, secretion or embezzlement on your part.(Emphasis added)

Under Virginia law, when terms of an insurance policy are “clear and unambiguous” courts give the language its plain and ordinary meaning. When, however, language in an insurance policy is ambiguous, courts construe it in favor of the insured, i.e. to provide coverage.

In this case, the district court held that the insurance policies created an obligation to the loss payee, Wells Fargo, even if the primary insured, Miriam Trucking, was barred from recovery by its asserted arson. The court reasoned that the alleged arson of the primary insured did not unambiguously qualify as “conversion” under the conversion exclusion clause.

This conclusion accords with that reached by nearly every court to consider a comparable question. The Sixth Circuit agreed with the district court and most of the other courts to consider similar policy language that the conversion exclusion does not unambiguously apply to bar coverage by the loss payee. Accordingly, the district court properly granted judgment to Wells Fargo.

ZALMA OPINION

It is axiomatic that no one should profit from a wrongful act. The arsonists, by having their liens paid to Wells Fargo by State Farm profited from their arson. They gained no money but had their debt eliminated.

Had State Farm wished to avoid the effect of the wrongful act of their named insured to avoid paying the loss payee all they had to do was change the wording of the loss payable clause to read:

(b) The insurance covers the interest of the loss payee unless the “loss” results from conversion, secretion, embezzlement or any criminal or intentional act on your part that causes damage to the property that is the subject of the insurance.

Insurance is a contract that must be interpreted from the clear meaning of the policy. The insurer attempted to turn an arson into “conversion” to fit the exclusion. Since “conversion” can be defined as a tort where one converts another’s property to his/her own use. That is, “steals” the property.  Since the trucks that were burned belonged to the arsonists it is difficult to conceive how State Farm argued that there was a conversion. A lender does not own property but simply has an interest in the property to secure its loan. Its rights in the vehicle cannot be converted.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

 

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Limit on Non-Economic Damages Constitutional

No Right to Unlimited Non-Economic Damages

In Kansas, determining whether a statute violates the constitution is a question of law subject to unlimited review. In Amy C. Miller v. Carolyn N. Johnson, M.D, No. 99,818 (Kan. 10/05/2012) Miller claimed that the $250,000 statutory cap on non-economic damages was unconstitutional.

The Kansas Supreme Court disagreed and upheld the constitutionality of the statute. It reasoned that under the Kansas separation of powers doctrine courts presume a statute is constitutional and resolve all doubts in favor of the statute’s validity. Section 5 of the Kansas Constitution Bill of Rights preserves the right to jury trial as it historically existed at common law when the Kansas Constitution came into existence. The right to a trial by jury for personal injury is protected by Section 5.

A statutory limit on the amount that may be recovered for non-economic damages by a personal injury plaintiff, such as that required by K.S.A. 60-19a02, may not unconstitutionally obstruct the right to jury trial. Section 18 of the Kansas Constitution Bill of Rights provides an injured party a constitutional right to be made whole and a right to damages for economic and non-economic losses. K.S.A. 60-19a02 is subject to Section 18′s protections because it prohibits personal injury plaintiffs from recovering more than $250,000 for non-economic damages.

The Kansas Supreme Court has never recognized a vested right in common-law rules governing negligence actions, and the legislature may modify those rights as long as an adequate substitute remedy is provided. The Kansas Supreme Court as a court of last resort will follow the rule of law it established in its earlier cases unless clearly convinced the rule was originally erroneous or is no longer sound because of changing conditions and that more good than harm will come by departing from precedent.

DECISION

Under the facts of this case, the Supreme Court held:

  1. The comprehensive legislation comprising the Health Care Provider Insurance Availability Act, K.S.A. 40-3401 et seq., and K.S.A. 60-19a02 carry a valid public interest objective; and
  2. the legislature substituted an adequate statutory remedy for modification of a medical malpractice plaintiff’s common-law rights under Sections 5 and 18 of the Kansas Constitution Bill of Rights.

ANALYSIS

The statutory restriction on non-economic damages in K.S.A. 60-19a02 is social and economic legislation triggering application of the rational basis test. When a party attacks a statute as facially unconstitutional for failing to satisfy the rational basis standard, that party must demonstrate that no set of circumstances exists that survives constitutional muster. The heavy burden placed on the party seeking a finding of unconstitutionality must negate every conceivable rational basis that might support the classification.

The doctrine of separation of powers is an inherent and integral element of the republican form of government. By dividing the government into three branches, each of which is given the powers and functions appropriate to it, a dangerous concentration of power is avoided and the respective powers are assigned to the branch best fitted to exercise them. This doctrine prevents one branch of government from usurping another branch’s powers. Usurpation occurs when one branch of government significantly interferes with the operations of another branch.

The statutory cap on non-economic damages imposed by K.S.A. 60-19a02 does not violate the separation of powers doctrine, although the cap does limit when it would be sensible for a trial court to order a new trial. The Kansas Supreme Court has long recognized that the legislature may regulate the granting of new trials.  The decision to grant a motion to alter or amend a judgment under K.S.A. 2011 Supp. 60-259(f) is within the district court’s sound discretion and will not be disturbed unless there is an abuse of discretion.

Judicial discretion is abused if judicial action is:

  • arbitrary, fanciful, or unreasonable, i.e., if no reasonable person would have taken the view adopted by the trial court;
  • based on an error of law, i.e., if the discretion is guided by an erroneous legal conclusion; or
  • based on an error of fact, i.e., if substantial competent evidence does not support a factual finding on which a prerequisite conclusion of law or the exercise of discretion is based.

To warrant recovery of damages, there must be some reasonable basis for computation that will enable the trier of fact to arrive at an estimate of loss. When considering a motion for judgment as a matter of law under K.S.A. 60-250, the district court must resolve all facts and inferences reasonably to be drawn from the evidence in favor of the party against whom the ruling is sought. When reasonable minds can reach different conclusions based on that evidence, the motion must be denied. When no evidence is presented on a particular issue or the evidence presented is undisputed and is such that reasonable persons may not draw differing inferences and arrive at opposing conclusions, the matter becomes a question of law for the court’s determination.

Appellate courts apply a similar analysis when reviewing the grant or denial of such a motion. A majority of the court upholds K.S.A. 60-19a02 as applied to Miller-a medical malpractice victim.

THE STATUTE’S CONSTITUTIONALITY

K.S.A. 60-19a02 was enacted in 1988. L. 1988, ch. 216, sec. 3. It limits the total amount recoverable to $250,000 for non-economic loss in any personal injury action, including medical malpractice claims. “Non-economic losses include claims for pain and suffering, mental anguish, injury and disfigurement not affecting earning capacity, and losses which cannot be easily expressed in dollars and cents.” This was not the first restraint on non-economic damages imposed by the legislature in common-law tort cases in Kansas. The first was enacted in 1986 and applied exclusively to medical malpractice lawsuits. In 1987 the legislature enacted a $250,000 non-economic damages cap limiting recovery for pain and suffering in all other personal injury actions. L. 1987, ch. 217, sec. 1. That statute did not apply to medical malpractice actions and did not include a cost-of-living adjustment. The following year, the legislature merged these two damages caps into the statute the Kansas Supreme Court was called upon to interpret.  The statute now places a $250,000 limitation on non-economic damages in all personal injury actions, including medical malpractice claims, accruing on or after July 1, 1988.

The legislature’s expressed goals for the comprehensive legislation comprising the Health Care Insurance Provider Availability Act and the non-economic damages cap have long been accepted by the Supreme Court to carry a valid public interest objective.

Miller argued that the passage of time has rendered the statutory cap unconstitutional. And admittedly, the legislature’s failure to increase the $250,000 cap on non-economic damages over the more than 20 years since it first set that amount is troubling to this court.  But despite its concern the court could not say that the legislature’s failure to increase the statutory cap has sufficiently diluted the substitute remedy to render the present cap clearly unconstitutional when viewed in light of the other provisions in the Act that directly and exclusively benefit a medical malpractice plaintiff. It held, however, that the legislature has substituted an adequate statutory remedy for the modification of the individual rights at issue, which in this case concern the constitutional protections afforded to Miller by Section 5 and Section 18.

ZALMA OPINION

States, like Kansas, were faced with excessive and punishing medical malpractice suits that caused medical malpractice insurers to raise their rates to cover the exposure to amounts that were unaffordable by practicing doctors. As a result, to keep doctors practicing in their state by causing a reduction in insurance premiums because of a limitation on non-economic damages. Some plaintiffs with serious injuries were inadequately compensated but the state as a whole profited from the limitation.

Plaintiffs have long hated the limitation and continue to try constitutional arguments to avoid the limitation. This decision, with long and vituperative dissents, upheld the limitation and refused to change the decision of the legislature.

If people like Ms. Miller are to receive greater recovery of non-economic damages it will be necessary for the Legislature to change the law. In Kansas, at least with this case, the Supreme Court has honored the doctrine of separation of powers and upheld a statute that was facially constitutional.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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It is Expensive to Fight Insurance Fraud & Worth Every Penny

No Mercy for Insurance Fraud

When a police officer arrests a person for insurance fraud with the assistance and cooperation of the insurance industry only to find that the prosecution fails he, and the insurers who helped him, will find themselves sued by the person arrested. In Texas, after an arrest and failed prosecution the police, the investigators, the insurers and everyone within reach were sued by the person arrested for more than $20 million.

FACTS

After an investigation and prosecution related to allegedly illegal business practices in repairing damage to automobiles the defendants appealed. The Plaintiffs at trial, DSW Masters Holding Corp. (DSW) and Mike LeBlanc (LeBlanc), who is DSW’s president, asked the Texas Court of Appeal to reverse the trial court’s judgment granting the motions for summary judgment filed by the Detective Tyree and the NICB. The Texas Court of Appeal resolved the dispute in DSW Masters Holding Corp. and Mike Leblanc v. Detective J. Tyree, Individually, National Insurance Crime Bureau, Jay, No. 02-11-00296-CV (Tex.App. Dist.2 10/04/2012).

DSW and LeBlank pled in their first amended original petition that eight of the nine appellees had acted “in unison and with a joint purpose to ruin the business reputation of [DSW and LeBlanc] and to destroy…” their auto repair business.  They also alleged that Tyree and NICB  had purposely caused damage, humiliation and harm to DSW and LeBlanc. They claimed, among other assertions, that Detective J. Tyree had made false statements while obtaining search warrants for LeBlanc’s residence and DSW’s business and that Kenneth Burton, as Haltom City’s police chief, was Tyree’s supervisor, and was therefore “accountable” for Tyree’s actions. Appellants also pled that NICB, Norris, Roberts, Boyd, Allstate, and GEICO had contributed to Tyree’s investigation of appellants’ business practices or had conducted their own investigations; that upon execution of the warrants, some vehicles had been seized, had been placed in the car storage lot owned by AA Wrecker Service, and had been improperly sold; that NICB agents had notified the media of the raid on appellants’ repair shop; and that LeBlanc had been falsely arrested but was later exonerated of all charges against him. Against all except for AA Wrecker Service, appellants brought claims for libel per se, false imprisonment, malicious prosecution, intentional infliction of emotional distress and tortious interference with business contracts. They  sought compensatory damages of $5,000,000, comprising lost income, loss of earning capacity, loss of business reputation, mental anguish, and out-of-pocket expenses (such as attorney’s fees that LeBlanc incurred while contesting the criminal charges against him) and sought $10,000,000 in punitive damages.

The defendants all moved for summary judgment separately and the trial court granted each motion for summary judgment filed without stating the grounds upon which the court based its rulings. The trial court also sustained all of the objections to the response to the summary judgment evidence that had been filed by each moving party.

THE RESOLUTION OF APPELLANTS’ ISSUES

The appeal brief contained a factual background about the investigation into appellants’ business practices, the search of DSW’s business site and LeBlanc’s residence, and the criminal charges against LeBlanc. The brief presents seven issues, contending that the trial court erred by “not finding that Appellants had No Privity of Contract with the two Appellee insurance companies”; “not finding that Appellants had a binding, enforceable Customer Repair Order contract with its customers”; “not finding that the two Appellee insurance companies had language in their own insurance policies that [forbade] Allstate and GEICO from specifying the brand, type, kind, age, vendor, supplier, or condition of parts or products used to repair the policyholder’s automobile”; “not finding that the Texas Insurance Code prohibits the two Appellee insurance companies . . . from specifying the . . . condition of parts or products used to repair the policyholder’s automobile”; “not following the Texas case of Berry v. State Farm Mut. Auto Ins. Co. that ruled that the Appellee insurance companies were legally prohibited from specifying the replacement parts for the repairs used by Appellants on their customers’ vehicles”; “not finding that Appellant Mike LeBlanc was ‘Entrapped’ by the Appellees”; and “not finding the Search Warrant . . . lacked probable cause.”

The remainder of appellants’ brief discusses these seven issues, along with aspects of the insurance and automobile body shop businesses, in an apparent effort to demonstrate the legality and overall propriety of appellants’ business practices and to show that appellees generally violated state law and otherwise acted improperly.

ANALYSIS

In no part of appellants’ brief, however, have they particularly discussed the grounds on which those they sued moved for summary judgment, specifically described their own causes of action and each of the elements of those claims, cited authority concerning those causes of action. In a case where the trial court’s summary judgment does not specify the ground or grounds relied upon for its ruling, the summary judgment must be affirmed if any of the theories advanced is meritorious. In such a case an appellate court must affirm the trial court’s decision to grant summary judgment if a party fails on appeal to challenge all grounds upon which the decision could have been based.

Although the appeal raises seven issues, they fail to show how a finding in their favor on those issues would have defeated any ground, much less all grounds, for summary judgment raised in the trial court. Also, it does not assert an issue generally challenging the trial court’s grant of summary judgment in its entirety. Because each motion for summary judgment contains grounds for summary judgment that appellants have failed to challenge in their appellate brief, we must affirm the trial court’s decision to grant summary judgment.

ZALMA OPINION

Fortunately for the defendants the plaintiffs failed to effectively dispute their multiple motions for summary judgment and, when they appealed, failed to argue effectively that the trial court wrongfully granted the motions for summary judgment.

Although expensive litigation it was important to fight this case to judgment and on appeal because if the suit succeeded people accused of fraud or related actions to deceive insurers will be encouraged to continue wrongful activities and hope they would then be able to profit by suing those who accused them.

Most states provide a limited immunity to insurers who report fraud and in a case like this one where there was probable cause to arrest the plaintiffs there was probable cause for the report and there was no cause of action available against those who helped the police arrest them. The insurers and the NICB should be commended for fighting this case through to the court of appeal.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Insured Who Rushed to Sue Must Submit to Appraisal

APPRAISAL IS A CONDITION PRECEDENT TO SUIT

In 2010, Patricia Gainey brought a claim under her homeowner’s insurance policy with American Integrity Insurance, claiming that her residence was damaged by a water leak. After an inspection, American issued a check to Gainey for damages in the amount of $16,349.13.

Displeased with the decision of the insurer Counsel for Gainey sent American a letter advising that the payment was “significantly inadequate” to cover the losses. That same month, Gainey filed and served American with a breach of contract complaint. Gainey also served request for admissions and documents in support of her claim for damages. American asserted by letter that its investigation was ongoing and that it reserved the right to demand appraisal. It also requested that Gainey provide a sworn proof of loss statement.

In response to Gainey’s complaint, American filed a motion to dismiss, urging the trial court to abate litigation in favor of appraisal. Once Gainey provided the sworn proof of loss statement, American requested appraisal, advising Gainey that it did not agree with her estimate.

American moved to abate the proceedings in favor of appraisal, and the motion was initially granted. However, Gainey then moved to enjoin the appraisal and lift the stay of litigation, arguing that American had waived its right to appraisal by failing to provide timely notice of mediation under section a Florida statute.

Adopting Gainey’s position, a  judge granted Gainey’s motion to enjoin appraisal, and the insurer appealed. The Florida Court of Appeal was called upon to resolve the dispute in American Integrity Insurance v. Patricia Gainey, No. 2D11-5118 (Fla.App. 09/28/2012).

THE ISSUE

The issue to be resolved was whether the notice provision of the state mediation statute applied under these circumstances where the insured sued the insurance company before proof of loss or attempt at mediation.

The appellate court noted that when the language of the statute is clear and unambiguous and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation and construction; the statute must be given its plain and obvious meaning. Enacted in 1993 the statute provides an alternative procedure for resolution of disputed property insurance claims. From its inception, the statute required that when a first-party claim is filed, the homeowner’s residential insurer shall notify the claimant of the right to participate in the mediation program provided in the statute. In 2005, the statute was amended to provide that an insurer “which fails to give the notice of mediation required is barred from insisting that the insured participate in the appraisal process provided in the insurance policy as a precondition to suit.

Gainey sought to enforce the following provision of the statute, section 627.7015(7), to preclude American from proceeding to appraisal:

“If the insurer fails to comply with subsection (2) by failing to notify a first-party claimant of its right to participate in the mediation program under this section or if the insurer requests the mediation, and the mediation results are rejected by either party, the insured shall not be required to submit to or participate in any contractual loss appraisal process of the property loss damage as a precondition to legal action for breach of contract against the insurer for its failure to pay the policyholder’s claims covered by the policy.”

The express language of the statute describes mediation as a viable option before an insured resorts to litigation. It states:

“The procedure set forth in this section is designed to bring the parties together for a mediated claims settlement conference without any of the trappings or drawbacks of an adversarial process. Before resorting to these procedures, insureds and insurers are encouraged to resolve claims as quickly and fairly as possible. This section is available with respect to claims under personal lines and commercial residential policies for all claimants and insurers prior to commencing the appraisal process, or commencing litigation.”

CONCLUSION

The Court of Appeal concluded that Gainey prematurely commenced litigation against American. As a result the appellate court concluded that the notice requirement does not apply. Accordingly, Gainey cannot rely on the statute to avoid appraisal proceedings where her filing of the lawsuit rendered the statute inapplicable.

ZALMA OPINION

Florida enacted the mediation statute to avoid litigation between insureds and insurers. Ms. Gainey, rather than attempting to resolve her dispute with her insurers, raced to the courthouse and filed suit only to then try to use the statute to avoid appraisal. It failed because the Ms. Gainey, the insured, failed to act fairly and in good faith with her insurer, American. Assuming her dispute as to the amount of loss was proper, viable and based in fact, she should have availed herself of the opportunity to mediate the dispute or go to appraisal to obtain a prompt resolution of the difference between her claim and the insurer’s filing.

She preferred to sue and although she convinced a trial court that appraisal had been waived the appellate court properly compelled appraisal.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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.com.

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Statute Revokes Beneficiary Designation

Ex-Wife Loses

In Pennsylvania, if a spouse is named as a beneficiary of a life insurance policy, can lose those rights after a divorce if the beneficiary designation or divorce settlement agreement fails to deal with the issue. A simple statement that the spouse whose life is insured wants the designation to be irrevocable or considered an asset of the family estate dissolved by the divorce or lose it.

On August 12, 1992, Decedent was issued a life insurance policy by Conseco Life Insurance Company (“Conseco”) on which his then spouse, Cindy D. Hoffman, a/k/a Cindy Thurman, was named the sole beneficiary. Thereafter, Decedent and Ms. Thurman were divorced and, on February 14, 2003, Decedent married Appellant Hoffman. On December 21, 2003, Decedent executed an application requesting a change of beneficiary relating to the Conseco life insurance policy, naming Hoffman as a primary beneficiary to receive eighty percent (80%) of any subsequent insurance payout and his daughter, Tara Frances Hoffman, as a primary beneficiary to receive the remaining twenty percent (20%) of the insurance payout.

On August 12, 2008, Decedent and Hoffman were divorced.

Approximately three months later, on November 15, 2008, Decedent died, and his former wife, Ms. Thurman, was appointed administratrix of his estate. On February 24, 2009, Conseco notified Hoffman that it would not make any payments to her because, although she remained a named beneficiary on the life insurance policy, she was a “former spouse” of Decedent and, as such, her designation as beneficiary was effectively extinguished by a Pennsylvania statute. In In Re: Estate of Robert D. Hoffman, 2012 Pa.Super. 209 (Pa.Super. 10/01/2012) the Pennsylvania Appellate Court was asked to resolve whether the ex-wife or the estate gets the benefits of the life insurance policy.

On March 5, 2010, Hoffman filed a petition for declaratory judgment seeking a declaration that she is entitled to an 80% payout from Decedent’s life insurance policy, and on March 23, 2010, Ms. Thurman, as administratrix of Decedent’s estate, filed an answer requesting 80% of the life insurance proceeds be distributed to Decedent’s estate instead of to Hoffman.  Hoffman filed a reply, and on August 2, 2010, the Orphans’ Court denied Hoffman’s petition for declaratory relief.

At the time of Decedent’s death on November 15, 2008, the statute stated:

§ 6111.2 Effect of divorce on designation of beneficiaries
        
        If a person domiciled in this Commonwealth at the time of his death is divorced from the bonds of matrimony after designating his spouse as beneficiary of a life insurance policy, annuity contract, pension or profit-sharing plan or other contractual arrangement providing for payments to his spouse, any designation in favor of his former spouse which was revocable by him after the divorce shall become ineffective for all purposes and shall be construed as if such former spouse had predeceased him unless it appears from the wording of the designation, a court order or a written contract between the person and such former spouse that the designation was intended to survive the divorce. Unless restrained by court order, no insurance company…shall be liable for making payments to a former spouse which would have been proper in the absence of this section. Any former spouse to whom payment is made shall be answerable to anyone prejudiced by the payment.

The appellate court noted that Decedent acquired contractual rights from Conseco on August 12, 1992, when he was issued a life insurance policy. He exercised those rights on December 21, 2003, when he designated Hoffman as his primary beneficiary to receive 80% of the life insurance proceeds. There is no dispute that Conseco accepted the designation whereby Hoffman received a contract expectancy which would result in vested rights against Conseco when Decedent died.

Analysis

Hoffman also asked the appellate court to determine whether the trial court erred in failing to properly apply the exceptions found in the statute, that, since neither the language of the beneficiary designation nor the parties’ property settlement agreement expressly revoked Decedent’s beneficiary designation of Appellant Hoffman upon the parties’ divorce, such an intent cannot be read into the documents.

The beneficiary designation reveals that, on the change of beneficiary form, Decedent specifically indicated Hoffman, Wife, 80%.  Additionally, although there was a box, which Decedent could have checked indicating the designation was “irrevocable,” he did not check the box. Therefore,  from the face of the beneficiary designation did not reveal that Hoffman’s designation as a beneficiary was intended to survive the divorce.

Likewise, it does not appear from the wording of the parties’ property settlement agreement that Appellant Hoffman’s designation as a beneficiary was intended to survive the divorce. Regarding the parties’ property settlement agreement the court ascertained the intent of the parties when interpreting the contractual agreement. The appellate court found that there is simply no express indication from the parties’ property settlement agreement that Decedent intended Appellant Hoffman’s beneficiary designation to survive the divorce.

ZALMA OPINION

It is essential that all lawyers, regardless of specialty, understand insurance and insurance issues. Statutes like the Pennsylvania statute quoted above changes contract law and makes void a life insurance beneficiary designation by means of divorce. Therefore, if life insurance exists, naming a spouse as beneficiary, the issue of who receives benefits after the divorce should be covered in the settlement agreement or in the decree of divorce.

Clearly, after his divorce, Mr. Hoffman could have changed his life insurance beneficiary. He did not, although he lived for three months after the divorce was effected, indicating he expected his second ex-wife to receive the benefits. The state, by statute, stepped in and deprived the second Mrs. Hoffman of the benefits and gave them to the first ex-Mrs. Hoffman who became administratrix of his estate.

This is a perfect example of the law of unintended consequences creating an unfair result when it intended to be fair.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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, “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.com.

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Evidence Of Physical Manifestation Required

Emotional Distress Alone Not

“Bodily Injury”

People continue to bring cases to the courts asking that the court rewrite a policy to provide coverage that the insurer never promised to provide. Even when the plaintiffs have suffered greatly they cannot cause a court, even the Ninth Circuit, to change the clear and unambiguous meaning of a policy.

Dale and Karen Conley (the “Conleys”) appealed the district court’s order denying their motion for summary judgment and granting defendant’s cross motion for summary judgment in Dale Conley; Karen Conley, In the Name of the Estate of Steve A. v. First National Insurance Company of America; American States Insurance, No. 11-35577, (9th Cir. 09/27/2012) against First National Insurance Company and American States Insurance Company (“Insurers”). The Insurers cross-appealed the district court’s finding that there was a covered “occurrence” under the subject policy.

The Dispute

The relevant insurance policy covered “bodily injury.” Under Montana law, “bodily injury” includes mental or psychological injury that is accompanied by “physical manifestations.” Such conditions include those which are susceptible to medical diagnosis and treatment in a manner which distinguishes them from mental injuries.

The Conleys contend their allegation of “anxiety” triggered Insurers’ duty to defend because, unlike emotional distress or mental anguish, anxiety is commonly understood to include physical manifestations. They further argued this duty was triggered by their October 1, 2009, letter to the  Insurers, which explained, the dread of the tax liability that the Conleys face has taken a serious toll on their health.

Analysis

Even if anxiety typically includes such things as headaches, sleeplessness, muscle tension, and nausea, an insurer need not assume physical manifestations rising to the level of “bodily injury” whenever “anxiety” is alleged. The Ninth Circuit noted that at a minimum, there must be allegations of physical manifestations supported by sufficient documented evidence in order for insurance coverage to be triggered.

The district court held that the Conleys’ letter failed to make even a generalized reference to physical injury and that it was reasonable to read a serious toll on their health in context with the rest of the paragraph, which discussed only the emotional cost of bad advice.

The Conleys argued that, at the very least, their complaint and letter triggered a duty to investigate and that such an investigation would have revealed their extreme weight loss and chronic diarrhea. Montana law supports the district court’s holding that it was not the Insurers’ responsibility to affirmatively disprove a bodily injury where none had been alleged.

As a result the Ninth Circuit concluded that the Insurers fulfilled their duty to investigate by reading the complaint and submitted information and requesting additional information, documentation or authority that would in any way help support the claim for coverage. Since the Insurers did not receive the information needed The Ninth Circuit found that the district court was correct in granting summary judgment, because there was no genuine dispute as to any material fact relating to the asserted duty to defend, and defendants were entitled to judgment as a matter of law.

Because the Ninth Circuit decided the Insurers had no duty to defend, it had no reason to reach other issues on appeal or cross appeal.

ZALMA OPINION

A claimant cannot make a Guava into a steak dinner. Clearly the claimants in this case incurred emotional distress and were frightened that they would incur a tax liability they were not ready to deal with but they could not and did not allege any physical manifestation of injury that could be diagnosed by a medical professional. An insurance policy, even when brought to the Ninth Circuit, must be read as written.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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, “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.com.

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Insurer v. Insurer Suits Should Be Avoided If Possible

Employers Liability Policy Promises Limited Duty to Defend

In a state like New Jersey where coverage disputes are limited to the four corners of the facts alleged in a suit, before disputing coverage it is essential that the insurer analyze the allegations of the suit carefully with the four corners of the policy. If there is a potential for coverage the insurer will be required to defend. If it finds it has a potential for coverage it is never prudent to attempt to pass of that obligation to another insurer. This is especially true when a trial court tells an insurer it must defend and the other insurer has no duty. Only the lawyers for the insurers will profit from such a dispute unless the two insurers sit down and resolve their differences amicably.

Hrleysville Insurance Company of New Jersey (Harleysville), ignoring the hazard of one insurer suing another and its insureds, appealed from trial court orders compelling it to defend and indemnify Rode’s Fireside Restaurant and Tavern, David Rode, Joyce Rode, Emily Rode, and Earl C. Rode, Jr., Inc. (the Rode defendants) in an underlying negligence and wrongful death lawsuit; declaring that New Jersey Manufacturers Insurance Group (NJM) had no obligation to defend or indemnify the Rode defendants; and denying Harleysville’s request that NJM reimburse Harleysville’s defense costs and fees. The judge entered the orders after considering summary judgment motions filed by Harleysville, NJM, and the Rode defendants and the appellate court was called upon to resolve the dispute in Michael R. Beadling, As Administrator Ad Prosequendum of the Estate of v. Rode’s Fireside Restaurant and Tavern, David Rode, Joyce Rode, Emily, No. A-0873-11T4 (N.J.Super.App.Div. 09/28/2012).

The appellate court reviewed the trial court decision viewed most favorably to plaintiff, and found that the summary judgment record established the following facts:

  1. Nicole Beadling (Beadling) worked as a bartender for the Rode defendants. In November 2008, after reporting for work, she became physically impaired (apparently from intoxication), left work early, drove her vehicle, and sustained fatal injuries from an automobile accident.
  2. Beadling’s Estate (the Estate) brought suit against the Rode defendants, asserting claims for negligence, Dram Shop Act violations, wrongful death, and survivorship.
  3. The complaint further alleged that Emily Rode, the restaurant manager, “called [Beadling] into the office to discuss her behavior,” but “deemed [her] competent[,] and sent her back to work.”
  4. Apart from these factual and purely narrative references to Beadling’s workplace location and to her interactions with her supervisor, the complaint did not allege, either explicitly or in substance, that Beadling’s injuries “arose out of and in the course of her employment” with the Rode defendants.

TENDER OF DEFENSE

In December 2009, the Rode defendants tendered the defense to Harleysville, its general liability carrier, and NJM, its workers’ compensation carrier. Harleysville initially declined to defend the Rode defendants, stating that its policy only extended “coverage for ‘bodily injury’ that is caused by an ‘occurrence,’” and did not provide “coverage for any ‘bodily injury’ to “an employee of the insured arising out of and in the course of employment by the insured…”  Harleysville claimed that the complaint reveals that the allegations of injuries to Beadling arose out of and in the course of her employment.

NJM, concluding that the accident was not job related, declined to defend and indemnify the Rode defendants and claimed that coverage was precluded by a policy exclusion for intentional wrongs.

Harleysville, after obtaining good legal advice, eventually defended the Rode defendants subject to an express reservation of its rights.  On October 14, 2010, Harleysville filed a complaint for declaratory judgment against NJM and the Rode defendants, seeking a ruling that NJM was obligated to defend and indemnify the Rode defendants and reimburse Harleysville for costs.

After both parties filed summary judgment motions the trial judge ruled:

  1. Essentially, NJM argues that [Beadling's] death was a personal injury and not one connected to her employment.
  2. This court finds the arguments of NJM to be persuasive that these injuries did not arise out of her employment.
  3. Indeed, the alleged negligence asserted by the plaintiff would apply to Beadling whether or not she was an employee of Rode’s.
  4. At most, the language of the complaint when viewed most favorable to Harleysville is that Rode’s recognized that Beadling was impaired before she left her employment and failed to stop her from driving. The complaint does not state that this alleged duty on the part of Rode’s arose out of its contract of employment as various paragraphs of the complaint assert that this is an obligation allegedly owed to Beadling and to any business invitee.The complaint in the underlying lawsuit does not contain words which are to the effect that plaintiff’s impaired condition was a risk directly connected or indirectly connected to her employment at Rode’s.
  5. If Beadling had been back in on the 13th as a patron, plaintiffs would likely be asserting the same claim. That is, that Rode’s should have taken affirmative action in the nature that they did on the 10th and also on the 13th.
  6. The only connection to this case relating to Beadling’s employment is that her being at work on the 13th.

THE APPEAL

Whether an insurer has a duty to defend is determined by comparing the allegations in the complaint with the language of the policy. When the two correspond, the duty to defend arises, irrespective of the claim’s actual merit.

Section B.4. of “Part Two – Employers Liability Insurance” of NJM’s policy provides:

B. We Will Pay We will pay all sums you legally must pay as damages because of bodily injury to your employees, provided the bodily injury is covered by this Employers Liability Insurance.

The damages we will pay, where recovery is permitted by law, include damages:

4. because of bodily injury to your employee that arises out of and in the course of employment, claimed against you in a capacity other than as employer.

Importantly to the appellate court, applying the four corners rule, the complaint made no allegation that Beadling’s injuries arose “out of and in the course of employment.”  A reviewing court in a four corners state like New Jersey must search the complaint in depth and with liberality to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim, opportunity being given to amend if necessary.

Unlike NJM’s policy language, the complaint implicated Harleysville’s policy, which provides:

1. Business Liability. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury,” “property damage,” “personal injury” or “advertising injury” to which this insurance applies. . . .

a. This insurance applies only:

(1) To “bodily injury” or “property damage”:

(a) That occurs during the policy period; and

(b) That is caused by an “occurrence.” The “occurrence” must take place in the “coverage territory.”

The complaint alleged that the accident occurred during the policy period and was not job-related. The appellate court, therefore, rejected Harleysville’s argument that the employee exclusion of its policy should have excluded coverage. In relevant part, that exclusion applies only to “[b]odily injury” to “[a]n employee of the insured arising out of and in the course of employment by the insured.”

Although Harleysville urged an expansive interpretation of the exclusion’s “arising out of” language “to mean conduct ‘originating from,’ ‘growing out of,’ or having a ‘substantial nexus’ with the activity excluded” found that emphasis on the phrase “arising out of” disregards the phrase “in the course of.” Read in its entirety, the policy excludes “[b]odily injury . . . arising out of and in the course of employment” but does not exclude coverage just because someone is injured after leaving her place of employment.

ZALMA OPINION

Insurance companies should, if at all possible, avoid litigating with other insurers over coverage issues. In this case Harleysville was correct in agreeing to defend the insured – under a reservation of rights – because it’s policy clearly provided coverage for the defense of its insureds and filed the declaratory relief action to resolve the coverage issue. Its error was in attempting to make an Employers’ Liability policy (which is limited to course and scope of employment) pay for the defense of an automobile accident claim that occurred away from the place of employment and after the injured person was allowed to leave her employment.

Once Harleysville lost on the issue of the exclusion it was time to settle with the insured and work to defend the insureds against the third party claims. Taking the issue on appeal when it became clear that the decedent was not in the course and scope of her employment when the accident occurred was not prudent.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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, “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.com.

 

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Breach of Contract Not an Accident

Insurer Enforces Clear Exclusion

Liability insurance is a contract whereby the insurer agrees defend or indemnify the insured against contingent or unknown events subject to the terms and conditions of the policy. No insurance policy has ever insured against every possible risk of loss. Insurers and insureds have the right to agree to limit the extent of coverages applicable. After an insured is sued, however, buyer’s remorse sets in, the insured attempts to compel the insurer to pay for defense and/or indemnity of a risk the insurer did not agree to cover. Litigation between insured and insurer often result when the insurer refuses to defend or indemnify.

Plaintiff Heat Controller, Inc. (“HCI”) filed a one-count Amended Complaint for Declaratory Judgment against Defendant Westchester Fire Insurance Co. (“Westchester”) claiming that Westchester breached its duties under an insurance contract between the parties to provide a defense on behalf of, and to indemnify, HCI in an arbitration claim filed against HCI by a third party, Heat Controller International, LLC (“HC International”). In Heat Controller, Inc v. Westchester Fire Insurance Co, No. 11-14923 (E.D.Mich. 09/25/2012) the District Court for the Eastern District of Michigan was called upon to resolve the dispute when presented with competing motions for summary judgment.

THE DISPUTE

Westchester issued a Business and Management Indemnity Policy. On August 5, 2009, HC International submitted a demand for arbitration in the matter of Heat Controller International. HCI notified Westchester on August 28, 2009 regarding the demand for arbitration, seeking coverage and legal defense under the Policy. On October 8, 2009, Westchester denied HCI’s claim under the Policy on the basis that the Policy did not provide coverage for the claim submitted under the exclusions found in the policy.

On March 18, 2010, HCI sent a request with additional material to Westchester. HCI requested that Westchester at least tender a defense on HCI’s behalf to the arbitration. Many other letters were sent requesting a defense. Westchester did not respond to any of these letters until April 20, 2011 denying again the request for coverage.  HCI continued to send subsequent letters updating Westchester on the proceedings and requesting coverage in letters dated May 3, 11 and 25, 2011. HCI received no response to these letter from Westchester. On September 8, 2011, the Arbitrators issued an Award, holding HCI liable for payment to HC International, in the amount of $2,316,982.00, which HCI satisfied in its entirety on October 5, 2011.

ANALYSIS

A court’s analysis of coverage under an insurance policy must be grounded in the policy language.  Ambiguous provisions are construed in favor of the policyholder and in favor of coverage. The insured bears the burden of proving coverage, while the insurer must prove that an exclusion to coverage is applicable.  Courts are to construe exclusionary clauses strictly in favor of the insured. However, coverage under a policy will be lost if an exclusion applies to particular claims of the insured.

The insurance company’s duty to provide a defense to its insured is contingent on whether the conduct falls within the scope of the policy. When theories of liability which are not covered under the policy are raised with theories of liability that are covered under the insured’s policy, the insurer has a duty to defend.  The duty to defend is not contingent on the precise language of the pleadings, but rather, the insurer must examine the underlying allegations in the third-party or underlying complaint to determine whether coverage is possible.

When there is doubt regarding whether or not the complaint against the insured raises a theory of liability governed by the policy, the doubt is resolved in the insured’s favor. A court must focus on the cause of the underlying injury to ascertain whether coverage exists.

HCI asserts that at the minimum, Westchester has a duty to defend under the Policy since HC International’s claims are covered under the Policy. Westchester argues that it has not breached the insurance contract at issue since the underlying arbitration claim filed by HC International is not covered and is excluded under the Policy under the provisions governing liability exclusion. The provision governing Liability Exclusions provides:

EXCLUSIONS

2. Exclusions Applicable Only to Insuring Clause A3 Insurer shall not be liable for Loss on account of any Claim:

a) alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the actual or alleged breach of any contract or agreement; except and to the extent the Company would have been liable in the absence of such contract or agreement;

HC International’s Demand for Arbitration alleged that, Respondent [HCI] breached the contract through its failure and refusal to supply unitary equipment and other goods, failure and refusal to sell at prices stipulated to, selling goods for expert and refusing to pay claimant, failing to provide financing, failing to provide and maintain a link on its website for claimant, offering to sell and selling to claimant’s customers within three years following the contract’s expiration, offering to buy and buying from claimant’s vendors within three years following the contract’s expiration and other bad faith. HC International attached the Distribution Agreement between HCI and HC International. HCI argues that although HC International’s claims are based on the Distribution Agreement, HC International also alleged tortious claims against HCI, including bad faith, therefore Westchester had a duty to defend HCI during the arbitration proceedings.

Michigan law does not recognize an independent cause of action for breach of implied duty of good faith, although there is an implied duty of good faith in the performance of a contract.  The only reference of a tort in the Demand for Arbitration by HC International is the reference to “bad faith,” which is not a separate cause of action from a breach of contract claim. The Award of Arbitrators confirmed a breach of contract claim, finding that HCI breached Sections 1 and 7 of the Agreement. In its mediation brief, HC International expressly noted that the Distribution Agreement covered the parties’ business relationship.

Westchester carried its burden, based on the express language of the Policy and the Demand for Arbitration in the underlying arbitration claim, that the breach of contract claims are excluded from coverage. HCI argued that during the Arbitration proceedings, HC International alleged other theories of liability, apart from the breach of contract claim, such as tortious interference of a business contract and unjust enrichment. HCI submits its pre-hearing brief where HCI submits its version of the facts at issue before the Arbitration proceedings to establish what HCI asserts was HC International’s tortious interference liability theory. However, HC International expressly noted in its brief that the Distribution Agreement covered the parties’ relationship. HCI also submits an excerpt of a hearing transcript to show that HC International alleged an unjust enrichment theory of liability. However, the hearing transcript excerpt does not show that HC International agreed it had such a claim.

Michigan law requires that the Court must focus on the “cause” of the injury and the “substance” of the underlying pleading, rather than allegations, to ascertain whether coverage exists.

The insurance agreement between the parties expressly and clearly excludes any losses arising from a breach of contract claim against HCI. In the underlying Arbitration proceedings, from the beginning, HC International expressly and clearly asserted a breach of contract claim against HCI based on the Distribution Agreement between the parties. Although there may have been “allegations” of bad faith in the parties’ briefs and motions before the Arbitration panel, the Court found that the “cause” of HC International’s injury was based on a breach of the agreement claim and that the “substance” of HC International’s Demand for Arbitration was also based on a breach of contract claim.

HC International’s claim for breach of contract in the underlying Arbitration proceeding was excluded by the insurance contract at issue. Therefore, the District Court concluded that HCI’s Motion for Summary Judgment on its breach of insurance contract claim against Westchester must be denied and Westchester’s cross-Motion for Summary Judgment must be granted.

ZALMA OPINION

Insurers must treat their insureds fairly and in good faith and provide a defense to its insureds if there is a potential for coverage. However, if the clear and unambiguous language of the policy specifically excludes the loss claimed it is the essence of good faith and fair dealing to refuse to defend or indemnify the insured.

A breach of contract action is not, nor can it ever be, a tort. Insurance only insures against contingent or unknown events. When an insured breaches a contract to provide a product or service the resulting suit is not contingent or unknown but is certain. For that reason every liability policy I have seen excludes, as did Westchester’s policy, a breach of contract.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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. Mr. Zalma serves as a consultant and expert, 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, “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.com.

 

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INSURANCE FRAUD CONTINUES UNABATED

Zalma’s Insurance Fraud Letter — October 1, 2012

Continuing with the eighteenth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the October 1, 2012 issue about a fraud conference operated by the Louisiana Department of Insurance; Lloyd’s of London’s efforts to defeat insurance fraud; how the insurance industry is a business dangerous to its own assets; a new health care fraud law enacted in California; the second chapter of  “Candy & Abel” a serialized story about insurance fraud; and a report on a two new E-books from Barry Zalma, Rescission of Insurance in California – 2013 and Random Thoughts on Insurance, adapted from Barry Zalma’s Blog Zalma On Insurance, © 2012 that contains a collection of 268 of the posts that reveal his interest in insurance case law. For details 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 reports on the blog available at http://zalma.com/blog follow:

•    Sit On Your Rights — You Lose
•    Discrimination Not “Personal Injury”
•    Class Action Certified for Lender Requiring More Flood Insurance
•    Condition Precedent Must Be Read Strictly
•    Insurance Policy Means What It Says
•    Village of Kivalina Loses Another Environmental Case
•    Damages for Unsolicited Faxes Covered By Advertising Injury
•    Mortgagee Entitled to Appraisal
•    No Duty to Defend Intentional Torts
•    Chick Hearn Was Right — No Harm, No Foul

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 and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/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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Sit On Your Rights — You Lose

When a Lien Is Not a Lien

When a party has a lien against an insurer of a tortfeasor it must act diligently to protect its rights. That means it must do more than simply give notice to the insurer and the claimant, it must perfect the lien. Failure to do so deprives the hospital of the right to enforce its lien.

Parkview Hospital, Inc. (“Parkview”), in Allen County, Indiana, provided services to John G. Smith (“Smith”), purportedly related to injuries Smith had sustained in an automobile collision with Charles Gibbs (“Gibbs”) in the State of Tennessee. Geico General Insurance (“Geico”), Gibbs’ insurer, satisfied a Tennessee judgment in favor of Smith that arose from the collision, but no payment was made to Parkview. Parkview filed suit against Geico, claiming it had perfected a hospital lien upon the proceeds of Geico’s payment to Smith, by its filing of a notice of intent with the Allen County Recorder. The Allen County Superior Court dismissed the claim, with prejudice, for lack of subject matter jurisdiction, and Parkview appealed. The Indiana Court of Appeal was called upon to resolve the dispute in Parkview Hospital, Inc v. Geico General Insurance Company, No. 02A04-1201-PL-5 (Ind.App. 09/24/2012).

Facts and Procedural History

On March 15, 2007, Smith and Gibbs were involved in an automobile collision in Knoxville, Tennessee. On May 18, 2007, Smith underwent surgery at Parkview. On August 23, 2007, Parkview filed with the Allen County Recorder a “Sworn Statement of Intention to Hold Lien (Notice of Hospital Lien)” in the amount of $18,047.41.  The statement alleged that Gibbs and Geico were liable for damages arising from Smith’s injury.

Smith filed a complaint for damages against Gibbs in Knox County, Tennessee. Gibbs admitted liability but contested the amount of Smith’s claimed damages. Smith contended that his medical bills attributable to the automobile accident were in excess of $40,000; Gibbs presented testimony that Smith suffered from pre-existing conditions necessitating his post-accident surgery. On July 29, 2009, a jury awarded Smith $22,000.00 (hereinafter, “the Tennessee Judgment”).

Although Parkview had notified Geico of its filing with the Allen County Recorder, Parkview had entered no written notice on the judgment docket in Knox County, Tennessee of its intent to hold a lien upon the Knox County judgment. On August 24, 2009, Geico paid the Tennessee Judgment to Smith, without reduction for any claim by Parkview.

On August 12, 2011, Geico moved to dismiss Parkview’s complaint, alleging that the Allen Superior Court lacked jurisdiction to modify the Tennessee Judgment or to extinguish Smith’s property interest in the Tennessee Judgment. On December 6, 2011, the Allen Superior Court entered an order dismissing Parkview’s claim, with prejudice, for lack of subject matter jurisdiction.

Discussion and Decision

The purpose of the Hospital Lien Act is to insure that hospitals are compensated for their services by giving the hospital a lien, charge, security, or incumbrance upon any action, compromise or settlement later obtained by the patient.  The lien has been described as a “specific interest” and a “direct right” in insurance proceeds paid to the patient by the person claimed to be liable for the patient’s injuries or that person’s agent. Notwithstanding the use of the term “lien,” a hospital lien is not actually a “lien,” but instead is an action authorized by statute based on an implied contract or quasi contract. The interest created by the Act is merely a legal right which may appropriately be enforced against an insurance company doing business in Indiana. The Act creates a direct cause of action against an insurance company.

The resolution of Smith’s claim against Gibbs was not by release or settlement, but by the Tennessee Judgment. Indiana Code Section 32-33-4-1 addresses the enforcement of a hospital lien against a judgment, and provides in pertinent part:

A person, a firm, a partnership, an association, a limited liability company, or a corporation maintaining a hospital in Indiana or a hospital owned, maintained, or operated by the state or a political subdivision of the state is entitled to hold a lien for the reasonable value of its services or expenses on any judgment for personal injuries rendered in favor of any person who is admitted to the hospital and receives treatment, care, and maintenance on account of personal injuries received as a result of the negligence of any person or corporation. In order to claim the lien, the hospital must at the time or after the judgment is rendered, enter, in writing, upon the judgment docket where the judgment is recorded, the hospital’s intention to hold a lien upon the judgment, together with the amount claimed.

Parkview did not enter, in writing, upon the Knox County, Tennessee judgment docket, its intention to hold a lien on the Tennessee Judgment. Whatever entitlement to payment Parkview may have had, its lien was not brought to the attention of the Tennessee court before judgment was rendered and, indeed, satisfied.

Parkview claims Geico impaired Parkview’s lien by paying Smith $22,000, precisely complying with the Tennessee Judgment. Thus, the instant complaint presents a collateral challenge to the Tennessee Judgment. But the Act does not provide Parkview with the self-executing, expedient avenue for relief against Geico that Parkview seeks. Geico’s liability arising from the March 15, 2007 automobile accident involving Geico’s insured has been determined by a Tennessee court. Geico’s insured was ordered to pay a judgment in a Tennessee court and Geico indemnified its insured. The Tennessee court had jurisdiction to enforce its judgment.

The remedy Parkview sought was recognition of a perfected lien, and attachment to a Tennessee judgment, without proof of causation and without prior notice upon the docket of that court. Although an Allen County, Indiana court can – pursuant to the Act – determine the amount Parkview is due from Smith personally on account of services provided to him, the Allen County court lacks jurisdiction to order a Tennessee judgment reinstated such that Parkview’s hospital lien could attach.

The Act does not confer jurisdiction upon an Indiana court to entertain a “claim” of a hospital lien against a judgment unless the hospital has entered, in writing, upon the judgment docket where the judgment is recorded, the hospital’s intention to hold a lien upon the judgment, together with the amount claimed.

ZALMA OPINION

Insurance companies are obligated to protect a perfected lien or to reimburse Medicare if it pays for the treatment of a Medicare beneficiary injured in an accident for which the insurer’s insured was responsible. It has no obligation, however, to pay for a lien that was not perfected or recorded in court before a judgment was entered. Geico properly paid the judgment entered against its insured. Although it knew of the “lien” it could not honor it because the Tennessee court had not been made aware of the lien. The Indiana court had no ability to change a Tennessee judgment and, therefore, the hospital because of its lack of diligence was out of luck.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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.com/ZIFL-CURRENT

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Discrimination Not “Personal Injury”

If Primary Has No Coverage for Defense Umbrella Must Drop Down and Defend

When insurers sue each other the result is seldom what is expected. Since insurers are, by definition, professional risk takers, when there is a dispute between insurers it is invariably better for the insurers and their insured that the insurers resolve their disputes amicably. The case that follows is proof that an amicable resolution – rather than taking a hard position – is better for the bottom line of all.

The United States brought an action against the insureds – the Sterling defendants – for discrimination under the Fair Housing Act (Sterling action). The primary insurance carriers, Steadfast Insurance Company (Steadfast) and Liberty Surplus Insurance Corporation (Liberty), insured against claims for “wrongful eviction,” “wrongful entry,” and “invasion of the right of private occupancy” under their personal injury coverage. The excess and umbrella insurance carrier, Federal Insurance Company (Federal), insured against those claims and specifically insured against claims for discrimination. In Federal Insurance Company v. Steadfast Insurance Company, No. B227301 (Cal.App. Dist.2 09/24/2012) the California Court of Appeal was called upon to determine which, and in what order, defense was due the insureds.

At different times in the Sterling action, Steadfast and Federal provided a defense for the Sterling defendants.

Federal sought a determination that it had no duty to defend in the Sterling action and claimed reimbursement from Steadfast and Liberty for defense fees and costs it expended on behalf of the insured defendants in the Sterling action. Steadfast, sought reimbursement from Federal and Liberty for the defense fees and costs it expended in that action. The trial court granted summary judgment and summary adjudication against Federal who appealed.

BACKGROUND

In 2006, the United States, by the United States Department of Justice, filed the Sterling action against Mr. Sterling and others, asserting a single cause of action under, and to enforce, the Fair Housing Act. The United States alleged in the complaint that the Sterling engaged in a pattern or practice of discrimination on the basis of race, national origin, and familial status in connection with the rental of dwellings owned by some of the defendants in violation of the Fair Housing Act.

The Sterling defendants tendered the defense of the Sterling action to Steadfast, Liberty, and Federal. At different times, Federal and Steadfast agreed to provide a defense under a reservation of rights. Federal expended $316,907.02 in defense fees and costs before withdrawing its defense and Steadfast expended $5,285,699.54 in defense fees and costs and paid $1,000,000 in settlement costs. Liberty did not provide a defense or otherwise expend any sums in connection with the matter.

The Steadfast policy did not include “discrimination” in the definition of “personal injury. The Liberty policies did not include “discrimination” in the definition of “personal injury.” However, the Federal Policies provided coverage for “discrimination, harassment or segregation based on a person’s age, color, national origin, race, religion or sex.”

DISCUSSION

Federal contended on appeal that the trial court erred in denying its motion for summary judgment. Federal argues that the housing discrimination allegations in the Sterling action, in effect, constituted claims for wrongful eviction, wrongful entry, and invasion of the right of private occupancy and thus gave rise to a potential for coverage under the Steadfast and Liberty policies.

Application of Relevant Principles Concerning Insurance Coverage

Primary insurance provides coverage immediately upon the occurrence of a loss or an event giving rise to liability, while excess insurance provides coverage only upon the exhaustion of specified primary insurance. Insurance policies sometimes include both excess and umbrella insurance. Umbrella insurance provides coverage for claims that are not covered by the underlying primary insurance. An umbrella insurer drops down to provide primary coverage in those circumstances.

In California, determining whether an insurer has a duty to defend under the terms of its policy, the court looks both to the allegations in the complaint and to the extrinsic facts known to the insurer that suggest that a claim might be covered. The duty to defend exists when a third-party complaint can fairly be amended to state a covered liability based on the facts alleged, reasonably inferable, or otherwise known. If, as a matter of law, however, there is no potential for coverage based on the allegations in the complaint or the extrinsic facts known to the insurer, then there is no duty to defend. This is so because the duty to defend is contractual, and the insurer did not contract to defend claims that were not even potentially covered.

Intentional Acts

Liberty unsuccessfully contended that the claims in the Sterling action were excluded from coverage under the terms of its policies and by Insurance Code section 533 because the acts alleged in the Sterling action were intentional and willful. Liberty’s policies excluded from coverage personal and advertising injuries that were “[c]aused 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.’” Section 533 provides, “An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.”

The Court of Appeal concluded that the insurance policy exclusion and section 533 do not apply because the Sterling action complaint included allegations that the Sterling defendants could be found liable on a theory of vicarious liability as well as for their own acts. Neither Insurance Code section 533 nor related policy exclusions for intentionally caused injury or damage preclude a California insurer from indemnifying an employer held vicariously liable for an employee’s willful acts. Insurance Code § 533 prohibits indemnification, not defense, of intentional tort claims. Whether the insurer must defend a complaint charging intentional misconduct by the insured depends on whether the acts could potentially give rise to liability for negligence.

Discrimination Under The Fair Housing Act

The gist of the alleged misconduct was that the defendants interfered with the tenants’ use and enjoyment of their property interests through the defendants’ discrimination; and discovery showed that the vast majority of aggrieved persons in the Sterling action moved out of the defendants’ properties.

The jurisdiction provided to the United States by statute is the enforcement of the anti-discrimination provisions of the Fair Housing Act. That jurisdiction does not extend to landlord-tenant disputes in the form of wrongful eviction, wrongful entry, or invasion of the right of private occupancy that are not based on housing discrimination under the Fair Housing Act. Although the discrimination alleged in the Sterling action may have been based in part on acts that might involve wrongful evictions, wrongful entries, or invasions of the right of private occupancy, the gravamen of the action itself solely was for housing discrimination under the Fair Housing Act. Only the tenant can claim wrongful eviction, wrongful entry, or invasion of the right of private occupancy.

The lack of coverage under the Steadfast and Liberty policies is based on the allegations that are for discrimination under the Federal Housing Act. Claims under the Fair Housing Act do not necessarily involve common law claims. The United States had no right of occupancy. It was not a victim of any violation of property rights.  The United States could not include in or amend its complaint to add causes of action based on common law theories of wrongful eviction, wrongful entry, or invasion of the right of private occupancy because an individual plaintiff must show injury in fact. The United States only had to show a “pattern or practice” – more than an isolated or sporadic act – of discrimination or that a group of persons has been denied rights and such denial raises an issue of general public importance.

Because there was no coverage or potential for coverage under the Steadfast or Liberty policies for violations of the Fair Housing Act based on the allegations in the Sterling action complaint or the extrinsic facts known to the insurers, neither Steadfast nor Liberty had a duty to defend in that action.

Federal, however, did have a duty to defend the insureds. Because the Sterling action was based on discrimination and only the Federal policies, and not the Steadfast or Liberty policies, provided coverage for discrimination claims, the umbrella coverage in the Federal policies dropped down to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the Sterling action.

ZALMA OPINION

Federal and its counsel tried to avoid the massive cost of defending the Sterling Action by claiming that a discrimination action by the United States was really a suit for wrongful eviction. It was not, nor could it be, and it exposed itself to this trial and appellate decision where it will be required to pay the other insurers it tried to get to reimburse the $316,907.02 it paid to defend before it withdrew its defense and now must pay the $5,285,699.54 plus interest paid by the insurer it tried to stick with the full bill.

It is always best to protect the insured and for insurers to work together to resolve their differences and avoid litigation. The only people who profited from this case are the lawyers and the discriminator.

I can only expect that Federal will remove the coverage for discrimination from their umbrella policies.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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.com/ZIFL-CURRENT

Posted in Zalma on Insurance | 1 Comment

Class Action Certified for Lender Requiring More Flood Insurance

THE MISCHIEVIOUS CLASS ACTION

Home mortgage lenders are always concerned that their security is appropriately protected by insurance. As a result, by the terms and conditions, of the mortgage the lender keeps to itself the right to compel the borrower to buy sufficient insurance. In Stanley Kolbe v. Bac Home Loans Servicing, LP, D/B/A Bank of America, N.A, No. 11-2030 (1st Cir. 09/21/2012) the bank asked that the borrower, Stanley Kolbe (“Kolbe”) and Susan Lass v. Bank of America, N.A., and Bac Home Loans Servicing, L.P, No. 11-2037 (1st Cir. 09/21/2012), increase the amount of flood insurance he carried by the amount of $46,000. Kolbe did not allege, and the record is devoid of facts that show how much additional premium he paid, but even if he was paying an egregious 10% rate it would only have cost an additional $460 for the increase in flood insurance.

Kolbe filed on his behalf, and those similarly situated, a class action claiming that they were improperly forced to increase flood insurance coverage on their properties. Kolbe asserted that Bank of America’s demand that he increase his flood coverage by $46,000 breached both the terms of his mortgage contract and the contract’s implied covenant of good faith and fair dealing. The district court concluded that the pertinent provision of the mortgage unambiguously permitted the lender to require the increased flood coverage and, granted the defendants’ motion to dismiss the complaint.

FACTS

Kolbe borrowed $197,437 from a mortgage company to finance the purchase of his home in Atlantic City, New Jersey. The loan is guaranteed by the Federal Housing Administration (“FHA”), an agency within the Department of Housing and Urban Development (“HUD”), and Kolbe’s mortgage in all material respects tracks the FHA’s Model Mortgage Form for single-family homes. Paragraph 4 of both the model mortgage form and Kolbe’s agreement describes the borrower’s obligation to maintain hazard insurance, in pertinent part, as follows:

Fire, Flood and Other Hazard Insurance. Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary [of HUD].

Federal law required Kolbe to obtain flood insurance because his property is located in an area designated as a special flood hazard zone under the National Flood Insurance Act (“NFIA”). The minimum amount of such insurance also is mandated by law. Under the NFIA, the flood coverage for a residential property securing a mortgage issued by a federally regulated lender must be in an amount at least equal to the outstanding principal balance of the loan, or $250,000, whichever is less.  Kolbe’s complaint states that he purchased coverage in an unspecified amount in excess of the minimum.

Through appellee Balboa Insurance Company, the Bank sent Kolbe notices in October and November 2009 stating that he was required to increase his flood insurance by $46,000 so that the total coverage would equal the replacement cost of his property as identified in his homeowner’s insurance policy. The Bank warned that it would purchase the additional insurance itself, at an estimated cost to Kolbe of $237, if he did not acquire the insurance by December 6. The Bank further advised that the insurance it would purchase — commonly known as “force-placed” or “lender-placed” insurance,” might cost more and would likely be less comprehensive than coverage Kolbe could obtain on his own. In response to these notices, Kolbe bought the additional $46,000 in flood insurance.

In February 2011, Kolbe filed this action against Bank of America and Balboa on behalf of himself and others similarly situated for breach of the mortgage contract and breach of the contract’s implied covenant of good faith and fair dealing. He claimed that his mortgage contract did not permit the Bank to demand increased coverage, and he alleged that the Bank had implemented a nationwide policy of compelling borrowers to maintain greater flood insurance than required by their mortgages or federal law. Kolbe’s complaint asserted that the Bank was profiting from this improper policy because it often arranged for force-placed insurance to be purchased through its own affiliated companies and brokers.

In its written decision, the district court agreed that the hazard-insurance provision can only be reasonably interpreted to afford discretion to the lender. The court concluded that the reference to “any hazards” in the first sentence of the paragraph encompasses flooding, and, consequently, it held that the second sentence gives the lender the right to require that flood insurance, like other types of hazard coverage, “be maintained in the amounts and for the periods that [the] Lender requires.”

THE ISSUE

The issue in this case is one of straightforward contract interpretation. Appellant Kolbe asserts that the hazard and flood insurance sentences in the mortgage are independent and mutually exclusive.

Breach of Contract

The paragraph at issue is structured to address two different categories of insurance, with the first and third sentences containing identical introductory language directing the borrower to insure “all improvements on the Property, whether now in existence or subsequently erected.”

Floods unquestionably are a type of hazard, and they are thus literally within the scope of the first sentence. Moreover, the third sentence can be reasonably understood to declare the borrower’s obligation to obtain flood insurance as required by the NFIA regardless of whether the lender requires any other form of hazard insurance, but not to override the lender’s exercise of discretion to require more. Finding that the language is not decisive, we consider what the available extrinsic evidence tells us about the meaning of the provision.

The Extrinsic Evidence

HUD’s practice of treating flood coverage separately reflects Congress’s specific concern about such insurance, which led to the enactment of the NFIA in 1968. HUD’s practice of treating flood insurance independently is pertinent to our interpretation of the FHA’s model language.

Lenders may have good reason to require full replacement coverage. Nonetheless, in mandating minimum coverage in an amount “equal to the outstanding principal balance of the loan,” Congress in the NFIA appears to have incorporated an assumption that, at times, a more limited amount of flood insurance may be reasonable and appropriate.

The First Circuit concluded that a rational jury could construe the mortgage in favor of either Kolbe or the Bank. Though the text of Paragraph 4 and the extrinsic evidence both provide strong support for Kolbe’s interpretation, his reading is not the only reasonable one. Kolbe has therefore stated a plausible breach of contract claim, and, hence, the district court erred in dismissing his complaint on the ground that the mortgage unambiguously permitted the Bank to demand the additional $46,000 in coverage.

The Covenant of Good Faith and Fair Dealing

The allegations plausibly support such a contention of improper motivation: Kolbe alleges that the Bank demanded flood insurance in excess of his obligations under the contract, that it did so in bad faith, and that the Bank or its related entities would profit through the purchase of force-placed insurance. These allegations, in effect, amount to a claim that the Bank’s motivation for demanding additional flood insurance coverage was to increase corporate profits by funneling new coverage to its own affiliates.

The First Circuit concluded that the complaint alleges sufficient facts to establish a breach of the covenant of good faith and fair dealing that is plausible on its face. Hence, the claim should not have been dismissed.

Defendants argue that the district court’s judgment in favor of Balboa should be affirmed even if the complaint is reinstated against Bank of America. The First Circuit agreed. Balboa’s alleged involvement in the matters underlying Kolbe’s lawsuit was limited to preparing and sending the letters notifying Kolbe that he needed to purchase additional flood insurance.

For the foregoing reasons, the judgment of the district court was affirmed in part, vacated in part, and remanded for further proceedings consistent with this opinion. Costs are awarded to the appellant.

The Dissent

The dissent argued that “It is one thing to read ambiguous language in favor of the borrower; it is quite another to disregard clear language that has only one sensible reading supported by salient practical reasons for why that reading was intended. Language of the same ilk appears to be common in loan agreements. To let this case proceed will be the source of great mischief.”

ZALMA OPINION

Class actions allow a plaintiff, like Kolbe, who has very little damages as a result of the actions of the lender, to bring a major lawsuit by combining with all other borrowers similarly situtated. If there is a flood I am certain Mr. Kolbe will be happy that he had full replacement cost insurance and the lender will be happy that their security was fully protected. He just didn’t want to pay for it.

The issues were also confused by the action of the United States Congress who, knowing nothing about insurance or the hazards faced by lenders lending money to borrowers in flood zones. As a result of strained wording the class action will go forward and as the dissenting justice noted there will be “great mischief” created by this action.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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.com/ZIFL-CURRENT.htm.

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Condition Precedent Must Be Read Strictly

The Letter – Not Spirit – of Law Must Be Applied

Surety is a type of insurance where the surety agrees to step into the shoes of a contractor to guarantee payments to subcontractors and materialmen for any work done pursuant to the general contract. It is a contract usually controlled by statute that, because of the intricacies of a general construction contract, the terms and conditions of the Surety agreement are usually strictly construed.

In Minnesota a surety, Westfield Insurance Company (Westfield), challenged the trial court’s denial of summary judgment to Westfield and grant of summary judgment to respondent subcontractor on respondent’s payment-bond claim in Safety Signs, LLC v. Niles-Wiese Construction Co., Inc, No. A12-0370 (Minn.App. 09/17/2012).

FACTS

The City of Owatonna hired Niles-Wiese Construction Company as the general contractor for the construction of an airport runway and taxiway. Pursuant to Minnesota law Niles-Wiese obtained a payment bond from Westfield. The payment bond – a contract between Westfield and the city – requires Westfield to pay subcontractors and materialmen for any work done pursuant to the general contract for which Niles-Wiese does not pay.

After Westfield issued the payment bond, Niles-Wiese entered into a subcontract with respondent Safety Signs, LLC to perform traffic-control and pavement-marking work on the airport project. In February 2009, Safety Signs sent a notice of payment-bond claim (notice) to Niles-Wiese and Westfield by certified mail. Safety Signs sent the notice to Niles-Wiese’s primary business address rather than the address listed on the payment bond, as required by the Minnesota statutes. Despite this failure to comply with the statute, both Niles-Wiese and Westfield acknowledged receipt of the notice, and Niles-Wiese paid the requested amount.

On January 7, 2010, Safety Signs sent notice of another payment-bond claim to Niles-Wiese and Westfield by certified mail. As it did in February 2009, Safety Signs sent notice to Niles-Wiese’s primary business address. This time, the notice was returned as undeliverable. Westfield received its notice on January 11, 2010, and acknowledged receipt thereof.

Although it was undisputed that Safety Signs satisfactorily completed its work and Niles-Wiese failed to pay, Westfield refused to pay the claim. Safety Signs commenced this action seeking to recover the amount due under the subcontract plus interest.

Westfield moved for summary judgment, asserting that the payment-bond claim failed because the notice was untimely and was not served on Niles-Wiese at the address listed on the payment bond. The district court denied this motion, reasoning that the notice was timely because it was mailed within the statutory notice period and failure to serve Niles-Wiese at the address listed on the payment bond was not fatal to Safety Signs’ claim. Safety Signs subsequently moved for summary judgment, which the district court granted, ordering Westfield to pay the amount due under the subcontract along with penalty interest, attorney fees, costs, and disbursements.

ISSUES ON APPEAL

  1. Was Safety Signs’ notice timely because it was mailed, though not received, within the 120-day statutory period?
  2. Was Safety Signs’ service of notice fatally defective because the notice was sent to Niles-Wiese’s primary business address rather than the address listed on the payment bond?

ANALYSIS

The Public Contractors’ Performance and Payment Bond Act (the bond statute) requires contractors to obtain payment bonds for public-works contracts. The purpose of the bond statute “is to protect laborers and materialmen who perform labor or furnish material for the execution of a public work to which the mechanics’ lien statute does not apply.” Recovery on a payment bond is conditioned upon the claimant providing timely notice of its claim to both the contractor and the surety.

A payment-bond claim may not be maintained unless, within 120 days after completion the claimant serves written notice of claim under the payment bond personally or by certified mail upon the surety that issued the bond and the contractor. The 120-day deadline is strictly enforced. One case held that notice mailed 122 days after completion of work was untimely.

The appellate court concluded that service of notice of a payment-bond claim is effective upon mailing. Because Safety Signs mailed the notice within 120 days after it completed its work, the notice was timely.

However, to recover on a payment bond, the claimant must provide notice of the claim to the surety and the contractor at the addresses listed on the payment bond. The parties agreed that Safety Signs did not comply with the statute because it mailed the notice to Niles-Wiese’s primary business address rather than the address listed on the payment bond.

Generally, a party may challenge a failure to comply with statutory notice requirements if the notice statute is designed to protect that party. Since a payment-bond claim is only recoverable against a surety, all of the statutory notice requirements are for the benefit of the surety. The requirement that notice be sent to the contractor benefits the surety by encouraging the contractor to pay the claim, eliminating the surety’s obligation to pay it, and by enabling the contractor to inform the surety of inaccuracies in the claim, preventing the surety from paying an invalid claim.

Condition Precedent

Compliance with the notice requirements is a “condition precedent” to a payment-bond claim. The general rule is that if a condition precedent prevents the accrual of a right, performance of the condition precedent may not be waived by a defendant to an action. As a result, sureties have repeatedly prevailed on the argument that a payment-bond claim failed for lack of notice upon another required party.

Westfield argues that substantial compliance with the notice requirements is insufficient to sustain a payment-bond claim. A materialman’s right to bring an action on the bond is nonexistent in the absence of strict compliance with the statutory requirement of filing notice. The bond statute requires strict observance on the claimant’s part of the filing of such notice with the proper officer.

The remedial purpose of the statute answers the question. Although the remedial intent of legislation may be considered, the clear language of a statute cannot be disregarded in the name of pursuing the spirit rather than the letter of the law.  If the legislature had merely intended to require that notice be sent to an address where it would likely be received by the contractor, it could have said so. It did not. Instead, it laid out clear notice requirements that Safety Signs did not meet. The Court of Appeal concluded that it was required to uphold the clear language set forth by the legislature.

The general rule in Minnesota is that if a condition precedent prevents the accrual of a right, performance of the condition precedent may not be waived by defendant to an action. Since strict compliance with the entire notice provision in the bond statute is a condition precedent to a payment-bond claim, any defect in the notice or service thereof cannot be waived.

Because the service defect is fatal to Safety Signs’ payment-bond claim, the appellate court reversed the district court’s summary judgment in favor of Safety Signs.

Because strict compliance with the notice requirements of the bond statute is a condition precedent to a payment-bond claim and because failure to strictly comply with the statutory notice requirements results in a defect that cannot be waived, the district court erred in denying summary judgment to Westfield and granting summary judgment to Safety Signs.

ZALMA OPINION

I have preached until I am blue in the face that parties to insurance or surety contracts must read and understand the contract before making claim or filing suit. The surety agreement, by statute, made notice to both the surety and the contractor at the addresses stated in the agreement was a condition precedent to recovery of payment from the surety if the contractor fails to pay. The claimant, Safety Signs, mailed their claim on the last possible day and failed to mail it to the proper address. It convinced the court that its notice was timely but – since facts are stubborn things – could not change the fact of the address to which the notice was sent.

Claimants against a surety in Minnesota must read the surety agreement, send its claim immediately upon completing the work, and must always send the claim to the address listed on the surety. This is such simple advice it is a wonder that Safety Signs did not comply and even more of a wonder that the trial court ruled in its favor. A condition precedent must be fulfilled in any contract before seeking the benefits of the contract whether a surety agreement or a policy of insurance.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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.com/ZIFL-CURRENT.htm.

 

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Insurance Policy Means What It Says

It Is Always Fair to Apply Clear Policy Wording!

For reasons known only to litigants, people who are insured continue to ask courts and courts of appeal to ignore the clear and unambiguous language of an insurance policy and provide it with “justice” rather than apply the law. The Sixth Circuit Court of Appeal, in Goodyear Tire and Rubber Company v. National Union Fire Insurance Company of Pittsburgh, Pa, No. 11-4145 (6th Cir. 09/17/2012) noted that it has been presented with a series of such lawsuits and analyzed whether it should apply the clear and unambiguous wording of the policy than what the insured claimed was fair. Goodyear asked the Sixth Circuit to disregard the plain terms of its insurance agreement.

FACTS

Goodyear Tire and Rubber Company announced on October 22, 2003 that it would restate its earnings for some prior years. The day after the announcement, shareholders filed class-action lawsuits against Goodyear and several of its officers and directors under the securities laws. The SEC also commenced an investigation. Eventually, the lawsuits were dismissed and the investigation terminated. Meanwhile, Goodyear incurred some $30 million of legal and accounting costs.

Goodyear sought recovery of those costs from two of its insurers: National Union Fire Insurance Company and Federal Insurance Company. National Union’s policy with Goodyear had an aggregate liability limit of $15 million, with a $5 million retention to be paid by Goodyear. Federal’s policy had an aggregate liability limit of $10 million in excess of the National Union policy and retention. Both insurers disputed, however, whether Goodyear’s costs – particularly those relating to the SEC investigation – were reimbursable under their respective policies’ terms.

Goodyear sued the two insurers. After several years of litigation, Goodyear released its claim against National Union in exchange for a payment of $10 million. But that settlement created a new problem for Goodyear’s claim against Federal: Goodyear’s excess policy with Federal states that coverage attaches only after National Union pays out the full amount of its liability limit – which was $15 million rather than the $10 million that National Union paid. Federal argued as much to the district court, which resolved the case in an order granting summary judgment to Federal.

Analysis

The Sixth Circuit found that the relevant provision of Federal’s policy is undisputedly clear and unambiguous. It provides: “Coverage hereunder shall attach only after [National Union] shall have paid in legal currency the full amount of the Underlying Limit [i.e., National Union's policy limit of $15 million] for such Policy Period.”

Even Goodyear admits that this provision is clear: Federal pays nothing unless National Union first pays $15 million – “in legal currency[,]” no less. Indeed Goodyear admits that the provision could not be more clear. But Goodyear has persisted in this lawsuit nonetheless, arguing that the Sixth Circuit should enforce Ohio’s public policy favoring settlements.

Succumbing to a need for humor, the Sixth Circuit noted that “the provision at issue here is where the rubber hits the road…” and concluded that Goodyear’s arguments were without merit, the first $15 million had not been paid and Goodyear had no right to claim against the Federal policy.

ZALMA OPINION

The Sixth circuit — its slight attempt of humor nevertheless — applied the law carefully and appropriately. This decision, and those before it, where insureds asked courts to ignore the policy wording and apply what the insured’s believed were fair and application of justice. Equity requires fairness. Contract interpretation requires application of the clear and unambiguous language of the policy.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Village of Kivalina Loses Another Environmental Case

As readers of Zalma on Insurance are aware we wrote about an environmental case brought by the Native Village of Kivalina at http://zalma.com/blog/?p=1792.

The village has not give up but continues to lose. The Ninth Circuit Court of Appeal found in Native Village of v. United States, 687 F.3d 1216 (9th Cir. 08/09/2012) resolved the dispute applying Alaska law and finding that the Village failed to produce evidence it was entitled to compel action by the EPA.

Although this case has nothing to do with insurance it amplifies the problems created by people who litigate for environmental reasons without firs establishing evidence that proves their case.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Damages for Unsolicited Faxes Covered By Advertising Injury

Excluded After Loss Means Coverage Existed Before

Because of the need to write insurance policies in easy-to-read, Sesame Street, English precision is often missing from insurance policies. As a result the easy-to-read policies generate more litigation than those most people complained were difficult to understand. When an insurer meets an argument that its policy is not clear the next edition of the policy will clarify the issue. Changing a policy’s wording, after a loss, to exclude what the insurer believed was not covered, can convince a court that the change was an admission that the loss was covered before the new exclusion was added. In Owners Insurance Company; Auto-Owners Insurance Company v. European Auto Works, Inc., Doing Business As Autopia; Percic, No. 11-3068 (8th Cir. 09/17/2012) the Eighth Circuit was called upon to resolve whether an unsolicited fax was covered by a Commercial General Liability (CGL) policy’s Advertising Injury coverage and considered not only the meaning of the policy wording but also the next edition of the policy that contained a detailed exclusion on point with the issues raised by the suit.

THE DISPUTE

Owners Insurance Company and Auto-Owners Insurance Company brought this declaratory judgment action seeking a ruling that their insurance policies issued to European Auto Works, Inc., doing business as Autopia, do not cover class claims brought in state court by Percic Enterprises, Inc. The state court complaint alleged that Autopia violated the Telephone Consumer Protection Act (TCPA) by sending unsolicited fax advertisements.

In this federal action the insurers argue that such claims do not fall within the policy provisions for “advertising injury” or “property damage.” After a settlement was reached in the state action, the federal district court concluded that damages sustained by sending unsolicited fax advertisements in violation of the TCPA are covered under the advertising injury provision in the policies.

FACTUAL BACKGROUND

Autopia, an auto repair company, hired a firm called Business to Business Solutions to fax 5,000 advertisements to prospective customers in 2005. According to Autopia, Business to Business Solutions had represented that its services complied with faxing guidelines and that it only sent faxes to persons who had consented to receive them. Percic Enterprises was one of the recipients of these fax advertisements and alleges that it never consented to receive them.

Percic brought a class action lawsuit against Autopia in Minnesota state court, claiming that Autopia had violated the TCPA and committed the common law tort of conversion by sending unsolicited fax advertisements to it and other class members.

The TCPA prohibits the sending of unsolicited fax advertisements and provides a private right of action to recipients of such faxes. Injured parties may sue for actual damages or for a statutory amount of $500 per violation.

Autopia had purchased a commercial general liability policy and garage liability coverage from Owners and a commercial umbrella policy from Auto-Owners. The policies contained identical language for purposes of this case. In relevant part the policies covered sums that “the insured becomes legally obligated to pay as damages because of . . . ‘advertising injury.’” The policies defined “advertising injury” as “injury arising out of one or more” of four listed offenses. The policy section at issue in this case is “oral or written publication of material that violates a person’s right of privacy.”

Percic, Autopia, and the insurers settled the state court litigation in March 2011. The settlement agreement stated that Autopia had faxed 5,851 unsolicited advertisements, of which 3,903 had been received. The parties also agreed to the entry of judgment against Autopia in the amount of $1,951,500, which represented $500 for each unsolicited fax received by class members. The settlement agreement stated that it was enforceable only against the insurers if coverage were found in the federal action, not against Autopia individually. The state court certified the class and approved the settlement.

The district court granted summary judgment to Autopia and Percic and denied the insurers’ motion. It concluded that the TCPA claim was a claim for advertising injury and was thus covered under the “plain and ordinary meaning” of the policies. Specifically, the court held that sending unsolicited fax advertisements in violation of the TCPA was an “oral or written publication of material that violates a person’s right of privacy.” Since it found coverage under the advertising injury provision of the policies, the district court did not reach the question of whether the property damage provision also provided coverage.

THE APPEAL

The insurers appealed, arguing that the district court erred in determining that TCPA violations were advertising injury. They also contend that TCPA violations are not covered under the property damage provision.

The primary issue presented here is whether the advertising injury provision for “oral or written publication of material that violates a person’s right of privacy” covers the sending of unsolicited fax advertisements in violation of the TCPA. The parties do not dispute that TCPA violations for sending unsolicited faxes may violate some form of privacy right, but they disagree as to whether the type of privacy violation on which Percic’s TCPA claim is based is covered by the policies. Privacy law distinguishes between:

  1. secrecy based torts that punish disclosure of private information about someone other than the recipient, and
  2. seclusion based torts that involve intruding on another’s solitude.

The insurers contend that the plain language of the policies’ advertising injury provision covers only the secrecy interest, since that provision is concerned with the content of the material being published. The insurers further argue that the TCPA and the allegations in the complaint concern only the intrusion on solitude caused by unsolicited fax advertisements, not the content of those advertisements. The insurers contend in sum that the unambiguous language of the policies protects only secrecy based privacy violations and not the seclusion based privacy interests protected by the TCPA.

ANALYSIS

Courts which have examined similar policy provisions disagree on whether the policies cover damages caused by the type of privacy violations raised in TCPA claims. The majority of circuits which have considered the question have held that the phrase is not limited to secrecy based privacy violations and that the phrase covers TCPA violations.

Minnesota law directs that general principles of contract interpretation apply to insurance policies. The advertising injury provision at issue covers damages the insured becomes legally obligated to pay because of “oral or written publication of material that violates a person’s right of privacy.” Since the policies do not define the key terms of “publication” and “right of privacy,” the Minnesota court accorded them their plain and ordinary meaning.

The ordinary meaning of the term “right of privacy” easily includes violations of the type of privacy interest protected by the TCPA. Our court has previously stated that violations of the TCPA are invasions of privacy under the ordinary, lay meaning of the phrase.  The policies’ phrase violating a right of privacy encompasses violations of privacy rights protected by the TCPA. Moreover, the plain meaning of “publication” is broad enough to include the dissemination of fax advertisements.

The policies’ reference to violating a “right of privacy” encompasses the intrusion on seclusion caused by a TCPA violation for sending unsolicited fax advertisements, and the term “publication” includes dissemination of faxes. After examining the provision as a whole, Minnesota concluded that oral or written publication of material that violates a person’s right of privacy covers the sending of unsolicited fax advertisements.

Had the insurers wanted to exclude TCPA violations from the advertising injury provision, they could have specifically so defined the term. The appellate record showed that in a subsequent version of the policy a specific exclusion was added for “advertising injury” arising “directly or indirectly out of any action or omission that violates or is alleged to violate  the TCPA.  The Circuit Court of Appeal concluded, therefore, that it would not have been difficult for the insurers to make such an intention clear by writing the policies specifically to exclude TCPA violations as they did in subsequent policies. The policies issued by the insurers to the insured do not have such an exclusion, nor do they define the key terms in their advertising injury provision.

Under Minnesota law “oral or written publication of material that violates a person’s right of privacy” covers the TCPA claim at issue here for the sending of unsolicited fax advertisements.

ZALMA OPINION

The people who write insurance policies are often the insurer’s worst enemy. Trying to interpret a policy’s simple, easy-to-understand language like we cover “invasion of a right of privacy” to limit that invasion to a specific type of invasion of privacy without defining the term. Because one court indicated that there was a limitation to “secrecy” type invasion of privacy and not “seclusion” type of privacy invasion, after changing the wording of future policies was fraught with danger and deserved to lose.

The insurer knew, or should have known, that it changed its policy terms to avoid coverage for TCPA losses which would lead any reasonable analyst to believe that such losses were covered before the exclusion was added.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Mortgagee Entitled to Appraisal

Amount of Loss to Be Determined as of Date of Loss

Northern National Bank (“Northern”), an insured mortgagee claiming under a homeowner’s insurance policy issued by respondent, challenged a district court order confirming an appraisal award, arguing that the district court was wrong when it concluded:

  1. that the policy provision for payment of the actual cash value of a fire loss is determined as of the date of the loss and
  2.  concluding that the claim was resolved in the appraisal proceedings and thus declining to award attorney fees and costs for denial of benefits without a reasonable basis.

North Star Mutual Insurance Company (“North Star”), by notice of related appeal, argued that the district court erred in finding:

  1. that it did not have a reasonable basis for denying benefits, and
  2. that Northern was the prevailing party.

The Minnesota Court of Appeal resolved the dispute in Northern National Bank, N/K/A Frandsen Bank & Trust v. North Star Mutual Insurance Company, No. A12-0182 (Minn.App. 09/17/2012).

FACTS

Brian and Jayne Hanson owned a home in Walker, Minnesota, which was damaged by fire on January 10, 2008. Although named as parties, the Hansons did not participate in the litigation below or in this appeal.

Northern was the mortgagee on the home at the time of the loss. North Star insured the home against, among other risks, fire damage. The Hansons contacted North Star after the fire and reported the fire loss. North Star concluded after an investigation that the fire loss had been sustained as a result of a fire intentionally set by the Hansons and denied their claim.

The insurer determined that the RCV of the loss was $142, 644.22 and the ACV of the loss was determined to be $118,847.40. Northern arranged for a different company to prepare an estimate to repair the property. The estimate obtained by Northern was dated October 6, 2008, and indicated an RCV of $228,112.72. Northern did not promptly notify North Star of this estimate.

North Star tendered a payment to Northern as named mortgagee in the amount of $118,847.40 based upon the ACV at the time of the loss. Almost a year after obtaining the independent estimate. Northern sent North Star a letter requesting an appraisal hearing to value the loss.  North Star refused.

The Litigation

Northern sued seeking a declaratory judgment that Northern was entitled to an appraisal hearing, and also seeking damages for breach of contract. The district court, upon motion by Northern, ordered the parties into appraisal proceedings to determine the value of the loss. Before the appraisal hearing, Northern sold the home “as is” to a third party.

On January 17, 2011, the appraisal panel determined that the ACV at the time of loss was $147,931.06 and the RCV at the time of loss was $176,108.40. The appraisal panel determined that the ACV at the time of the hearing was $178,996.59 and the RCV at the time of the hearing was $213,091.16.

On March 21, 2011, North Star deposited a check for $29,083.65 with the Cass County Administrator’s Office pursuant to Minnesota statutes representing the difference between the amount originally tendered and the ACV at the time of the loss as determined by the appraisal panel. On April 21, 2011, the district court granted Northern’s motion to confirm the appraisal award in the amount of $147,931.06 (the ACV at the time of the loss), and awarded Northern costs and disbursements as a prevailing party.

Although it found that North Star acted in bad faith in not agreeing to the appraisal process and for the delay in making payment, the district court nevertheless concluded that taxable costs under that section were not appropriate because the claim was resolved or confirmed by appraisal.

Decision

The appellate court concluded that the only reasonable interpretation of the policy is that it requires the insurer to pay actual cash value, calculated pursuant to the Actual Cash Value terms until actual repair or replacement takes place. Reading the policy in this fashion necessitates concluding that actual cash value is calculated at the time of the loss. This interpretation of the policy language is consistent with long-standing case law. A party’s rights to insurance proceeds are determined by the status of the party’s interests at the time of the fire.

Northern’s argument goes against logic and public policy. In determining the actual cash value, payable before repair or replacement, it would make no sense to make the parties bear the risk and uncertainty of an increased or decreased recovery based on the date of a hypothetical future appraisal hearing that may never come to pass. Such an arrangement would invite abuse, as one side would often have an incentive to delay proceedings to increase its recovery or reduce its liability.

In this case, North Star ultimately paid Northern $29,083.65 more than it had originally tendered, after Northern brought suit and moved the district court for an order compelling an appraisal hearing. Given this result, and despite Northern having not prevailed on the question of the proper measure of recovery under the policy, the district court could reasonably conclude that Northern succeeded in the action. North Star argued that the district court erred in finding that it knowingly denied Northern the benefits of the insurance policy without a reasonable basis. Here, it is undisputed that North Star promptly adjusted the loss and tendered a payment of $118,847.40 to Northern before Northern acquired title to the property through foreclosure proceedings. It was almost two years after the loss before Northern gave any indication to North Star that Northern was disputing the amount paid.

There was a dispute between the parties as to the availability of arbitration or appraisal in the circumstances of a mortgagee claiming under a policy issued to the named mortgagors. That dispute was resolved in favor of Northern upon its motion to the district court. Once the arbitration panel made its award, North Star deposited funds with the district court in the amount of the difference between what it had already paid and the appraised ACV at the time of the loss. That was the amount that North Star owed under the policy. Had Northern been willing to accept the amount it was properly owed, rather than advancing an incorrect and indeed strained interpretation of the policy language, it could have received the funds deposited with the court.

Nearly all of that delay was occasioned by matters unquestionably not under North Star’s control. Northern acquired the property by foreclosure and was awaiting expiration of the redemption period. It received prompt payment for the ACV arrived at by North Star’s initial adjustment of the loss. Northern commissioned a second estimate of the loss, but opted for reasons of its own not to disclose that estimate for over a year. The essence of the dispute between the parties was the proper measure of recovery under the policy, an issue on which North Star prevailed based upon the plain language of the policy and settled Minnesota law.

Almost two years had passed after the date of the loss before North Star received an appraisal demand from Northern. Nothing in the record indicates that, prior to requesting an appraisal, Northern had even informed North Star that it had obtained a different valuation of the loss. Thus North Star could not possibly have understood that there was disagreement on the value of the loss until its receipt of Northern’s motion to compel appraisal proceedings. The record does not support the district court’s finding of bad faith as there is no evidence that North Star’s declination to submit to arbitration was without a reasonable basis.

Based on this unique set of circumstances, and despite viewing the evidence in the light most favorable to Northern, the appellate court concluded that the district court erred in finding that North Star’s conduct in not agreeing to the appraisal process and for the delay in making payment amounted to bad faith. Therefore, the district court’s finding of bad faith was clearly erroneous.

ZALMA OPINION

This case is important because it makes clear that the amount of loss with regard to fire or other insured peril in a first party property policy must be determined as of the date of loss not some later date.

What the case ignored was the fact that the bank sold the property “as is” nor does it report the amount it received. Since the most the bank could recover was its interest in the property if it received the full amount, or less, at the foreclosure sale that amount received reduced its interest in the property. In fact, if there was a full credit bid made at the foreclosure sale its interest was paid in full and it was entitled to nothing from the insurer.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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No Duty to Defend Intentional Torts

Eight Corners Rule Controls

Wendy Rutherford Branham appealed after  a summary judgment was granted in favor of State Farm Lloyds in Wendy Rutherford Branham v. State Farm Lloyds, No. 04-12-00190-CV (Tex.App. Dist.4 09/12/2012) after the trial court concluded that State Farm Lloyds had no duty to defend or indemnify Branham in relation to a claim against her for misrepresentations she allegedly made in selling her home. Branham claimed that the trial court erred in granting the summary judgment because:

  1. State Farm Lloyds had a duty to defend the claim;
  2. Branham is entitled to indemnity despite voluntarily settling the claim because State Farm wrongfully denied a defense of the claim; and
  3. the intentional act exclusion of Branham’s policy did not apply.

BACKGROUND

Branham sued State Farm Lloyds for failing to provide a defense and indemnity with regard to a lawsuit filed against her by Patrick and Melissa McCullough. The McCulloughs’ lawsuit was based on a contract they entered into with Branham to purchase a home from her. In their petition, the McCulloughs alleged a litany of intentional torts, including:

  1. that Branham falsely represented that there was no previous flooding into the home,
  2. that there was no water penetration into the home,
  3. that there was no active infestation of termites or other wood destroying insects,
  4. that no previous termite or wood destroying insect damage had been repaired, and
  5. that there was no termite or wood destroying insect damage needing repair.
  6. that Branham failed to disclose previous problems with water penetration and damage to the home and
  7. that Branham had filed a homeowners’ insurance claim for water damages sustained in the home.
  8. that although Branham was paid on these water damage claims by her homeowners’ insurance carrier, she did not make proper repairs to the home or if she did, only made cosmetic repairs to conceal the damages.

The parties filed competing motions for summary judgment. State Farm Lloyds’s motion asserted it had no duty to defend or indemnify Branham because:

  • the McCulloughs’ petition did not allege damages arising from a covered occurrence;
  • the McCulloughs’ petition did not seek property damages as defined by Branham’s policy; and
  • the policy excluded coverage for intentional conduct.

The trial court granted State Farm Lloyds’s motion and entered a take nothing judgment on Branham’s claims.

DUTY TO DEFEND

Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy. If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured.

The McCulloughs’ factual allegations assert Branham made false representations and made cosmetic repairs to conceal the prior damage for which she received insurance proceeds to repair.

CONCLUSION

Based on the allegations in the McCulloughs’ petition and the definition of occurrence in Branham’s insurance policy, we conclude State Farm did not have a duty to defend Branham against that petition.

ZALMA OPINION

If a plaintiff wants the funds of an insurer to be involved in the defense and indemnity of the defendant, in a state like Texas that applies the eight corners rule, should never limit the pleadings to intentional torts. Unfortunately for the insured and those suing her, the only basis for their suit was her intentional acts. No coverage was available for the insured and she will have to pay from her own assets the costs of defense and damages to the plaintiffs.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Chick Hearn Was Right — No Harm, No Foul

Two Trials & Two Appeals – Agent Escapes $5 Million Verdict

Sometimes, even when an insurance agent is negligent, when an insurance agent makes a stupid mistake, when an agent acquires insurance for which he is not licensed, when the agent fails to explain to the insureds that the insurance he acquired was with a financially unstable non-admitted insurer, the agent still does no harm and walks without punishment. Sometimes the agent who is negligent is punished severely. An insured, suing an agent, is always required to prove the actions of the agent was not only negligent but caused the insured damage.

In George E. Guidry and Dwight W. Andrus Insurance, Inc v. Environmental Procedures, Inc. and Advanced Wirecloth Inc, No. 14-11-00090-CV (Tex.App. Dist.14 09/13/2012) the Texas Court of Appeal, on the second appeal from the parties, resolved the dispute on the basic elements of negligence.

FACTS

Two companies sued the insurance agent and agency that procured their insurance from 1991 to 1994. The insured companies asserted that the agent sold them insurance in Texas from a non-admitted carrier. They also claimed the agency neither had a license or training to procure insurance from a non-admitted insurer. The companies alleged that one of their insurers became financially unstable, and that the agent’s failure to disclose this lack of stability harmed them when the insurer initially did not contribute anything toward settling claims against them related to patent infringement and unfair competition.

The non-admitted insurer ultimately reached a settlement with the insured companies. Regardless, the companies alleged that the insurer was financially unable to pay their claims although it paid the amount of the agreed to settlement. The companies successfully argued to a jury that the agent sold them “bad insurance” and therefore was liable to them for the full $5 million that they asserted the insurer should have contributed to the settlement of the claims against them, together with punitive damages, and attorneys’ fees. The agent and his employer challenged the judgment.

The Coverage Suit

A declaratory-judgment action was filed by an insurer that is not a party to this case, but the Insureds added claims against many other insurers for reimbursement of the costs of defending and settling earlier litigation. For the purpose of this suit, the only relevant insurer involved in the Coverage suit was Ocean Marine Indemnity Company, referred to at trial as “OMI.” OMI provided the Insureds $5 million in umbrella coverage for the one-year period from October 1, 1992 through September 30, 1993. OMI disputed coverage, and in 2001, the Insureds settled their claims against OMI for $500,000.

The Broker-Liability Suit

The Coverage suit was followed by this suit, the “Broker-Liability suit.” In 2003, the Insureds sued the Brokers, alleging that they were liable for the costs of defense and settlement of the third party litigation to the extent that any of these expenses were or should have been covered by insurance but remained unpaid. The trial court granted partial summary judgment in the Brokers’ favor on the Insureds’ claims of negligence, negligent misrepresentation, and violations of a Texas statute. The remaining claims were tried before a jury in 2005. The trial court granted a directed verdict in the Brokers’ favor on the Insureds’ claims for breach of fiduciary duty and rendered judgment on the jury’s verdict in the Brokers’ favor on the Insureds’ fraud claims. On appeal the appellate court reversed the summary judgment, but affirmed the judgment in all other respects.

OMI was a Louisiana insurance company and was admitted to business there, but Guidry sold the Insureds the policies in Texas, and OMI was not admitted to do business in Texas. The Insureds faulted Guidry not only for placing their umbrella coverage with a surplus-lines carrier, but in particular, for obtaining insurance from OMI. When Guidry procured the insurance, OMI was eligible for admittance to the business of insurance in Texas and had a rating of “A-” (signifying “Excellent”) in Best’s Insurance Reports, most commonly referred to at trial simply as Best’s. Best’s is considered “the most authoritative guide that insurance agents look to for information by the insurance companies.”

Based on the conduct described above, the Insureds asserted that Guidry was liable (and his employer was vicariously liable) under various theories of liability for (1) $5 million, representing OMI’s limit of liability for all covered claims; (2) the difference between the policy’s value and the $75,000 premium paid for its coverage; (3) punitive damages; and (4) attorneys’ fees. At trial, however, the Insureds successfully argued to the trial court that the jury should not be allowed to see their settlement agreement with OMI or hear testimony that they had settled their coverage dispute with OMI for $500,000. They then argued to the jury that they had paid $75,000 for $5 million of coverage, evidenced by a cover note that “was not worth the two pages it was written on.”

ANALYSIS

The trial court awarded actual damages consisting of the $5 million that the jury found was the amount of the earlier settlement that should have been paid by the OMI policy, reduced by the $500,000 that OMI paid to settle the Insureds’ claims against it.

The Agent’s Errors

It was undisputed that Guidry is not licensed to sell insurance in Texas; that he is not licensed to sell surplus-lines insurance anywhere; that OMI is a surplus-lines carrier; that the cover note did not contain the warning required by statute; and that Guidry did not disclose any of this information to the Insureds. Based on the testimony presented, a reasonable jury also could conclude that Guidry did not attempt to procure insurance from an admitted carrier before placing the insurance with a surplus-lines carrier; did not look at Best’s report on OMI; and did not review the Louisiana edition of Surplus Lines Reporter.

The Insured’s Obligation

In order to prove causation of damages from the failure to place the coverage with an admitted carrier, the Insureds had to prove that an admitted carrier would have contributed more to the Derrick settlement than OMI did. Without such evidence, the Insureds could not show that Guidry’s failure to place the insurance with an admitted carrier caused the Insureds to receive anything less than they otherwise would have done. To make such a showing, the Insureds had to present evidence that (a) they could have obtained insurance from an admitted carrier, and (b) the admitted carrier would have paid more toward the Derrick settlement than OMI did.

In order to prove that Guidry’s failure to hold the proper licenses caused them to receive a lower contribution to the Derrick settlement, the Insureds had to produce evidence that they would have received more if their umbrella insurance had been purchased through a licensed agent. There was no such evidence.

Based on the jury’s finding that Guidry misrepresented an insurance policy or the financial condition of an insurer, the trial court awarded the Insurers attorneys’ fees of $350,000 and exemplary damages of $1 million, as found by the jury.  A plaintiff who does not recover actual damages cannot recover attorneys’ fees under the Insurance policy or exemplary damages.

CONCLUSION

No evidence supported the Insureds’ claim that their insurance agent’s acts or omissions caused them to be paid less in indemnity for the Derrick settlement than they otherwise would have received. The Court of Appeal, therefore, reversed the trial court’s judgment and rendered judgment that the Insureds take nothing by their claims.

ZALMA OPINION

This case proves that luck sometimes overcomes lack of skill, experience, knowledge and license. No matter how badly Guidry serviced his clients his error did not damage them. Escaping this judgment was based upon the skill of his the lawyers retained to defend him and his employer. He should be happy that the Court of Appeal were fans of the late Chick Hearn, the radio announcer for the Los Angeles Lakers who coined the phrase “No Harm, No Foul.” Although not codified if the plaintiffs cannot prove an essential element of the tort of negligence: damages proximately caused by the action of the agent. The insureds failed and their $5 million verdict was reversed.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Happy Birthday U.S. Constitution

Every member of the U.S. Armed Forces and the U.S. Government takes an oath to defend the Constitution of the United States. I was proud to do so when I volunteered to serve in the U.S. Army in 1964 and take that oath seriously.

On this September 17th in  1787 world-changing event occurred. The signing of the United States Constitution.

Long may it be honored and defended.

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No Coverage For Participant In Drag Race

“Chutzpah” — Filing Suit for Speed Contest Injuries

The danger of operating a motor vehicle in a race on city streets is obvious and well known. No insurer writes an insurance policy against injuries caused by participation in such a dangerous risk. Every automobile liability insurance policy I have ever seen excludes the risk of loss. In Corey T. Hines, A Minor, et al v. Branden R. Camper, et al, 2012 -Ohio- 4110. (Ohio App. Dist.3 09/10/2012), an attempt was made to avoid the impact of the standard exclusion.

Corey Hines, a minor, and Gina Hines (“Hines”), appealed the judgment of the Court of Common Pleas of Auglaize County, Ohio granting summary judgment in favor of Allstate Insurance Company (“Allstate”), on Hines’ uninsured/underinsured motorist claim.

FACTS

The suit was filed following a drag race in Auglaize County. On May 14, 2010, a group of young men, including Hines, gathered at the house of Nick Forbess. At some point, the group traveled together to a nearby gas station. After getting gas, they decided to head towards Washington Pike where they could race their cars.

Branden Camper and Forbess drove the cars involved in the race. Hines was a passenger in Camper’s car, which lacked an operative safety belt for the front side passenger. To procure a working safety belt, Hines decided to sit in the back seat, where he buckled in. After the race commenced, Camper lost control of his automobile. It veered off the road and flipped upside down in a nearby field. Hines suffered several injuries, including lacerations and back and neck injuries.

At the time of the accident, Camper’s parents had an automobile insurance policy with Allstate (the “Policy”) that covered the car that Camper was driving. The Policy contained an uninsured/underinsured motorist provision. This provision was subject to a number of exclusions, including the following:

Allstate will not pay any damages an insured person or an additional insured person is legally entitled to recover because of bodily injury:

6. arising out of the participation in any prearranged, organized, or spontaneous:

a. racing contest;

b. speed contest; or c. use of an auto at a track or course designed or used for racing or high performance driving . . . . (Docket No. 52, Policy, p. 13).

After the accident, Hines sought recovery from Allstate under the uninsured/underinsured provision of the Policy. Allstate refused to pay Hines’ claim, citing the applicability of the speed contest exclusion.

After the case was at issue Allstate filed a motion for summary judgment. Allstate asserted the applicability of the speed contest exclusion and Hines’ purported assumption of the risk of injury. Attached to the motion were several of Hines’ written admissions and a copy of his police statement regarding the accident. The written admissions reflect that Hines admitted he was “aware prior to this accident that it was the intention of [Camper] and [Forbess] to race their automobiles.” Meanwhile, the police statement shows that when the responding officer asked whether his intention was to race when he reached the road, Hines responded in the affirmative.

TRIAL COURT DECISION

The trial court granted Allstate’s motion for summary judgment finding that Hines was a participant in the drag race that led to the accident and that he was consequently excluded from the uninsured/underinsured coverage under the Policy.

The appellate court found that the issues revolves around the meaning of “participation” in the Policy. “Participation” is not a defined term in the Policy. But this fact, standing alone, does not render the term ambiguous. The mere absence of a definition in an insurance contract does not make the meaning of the term ambiguous. Participation is neither a term of art nor a word that is amenable to multiple interpretations. Rather, it is a common word and the appellate court can consequently construe it without resorting to any of the above construction rules benefitting insureds.  The appellate court used the ordinary and commonly understood definition of participation, which is the “act or state of participating: as a: the action or state of partaking of something . . . [or] b: the association with others in a relationship or an enterprise…” while citing to Webster’s Third New International Dictionary 1646 (2002).

Under this definition, the evidence in the record manifestly shows that Hines was participating in the common scheme to drag race. Before the race, he spent time with Forbess and Camper at Forbess’ home. Hines then traveled with the group to a gas station and admitted that during this time, the group formed the drag racing idea. Further, he willingly got into Camper’s automobile intending to be part of a drag race. This all shows the existence of a joint enterprise in which Hines was a willing participant.

Hines claimed that there is a triable issue as to whether he was a participant under the policy because he did not drive a car during the drag race. Under its common and ordinary meaning, participation encompasses more conduct than driving. Here, by forming the plan to drag race and then willingly getting into an automobile that he knew would be involved in the race, Hines was a participant.

In light of Hines’ failure to present additional evidence besides the fact that he was not the driver, Hines is unable to show the existence of a triable issue of fact regarding his status as a participant in the drag race. Consequently, the trial court properly granted summary judgment to Allstate on the basis of the Policy’s exclusion for participation in car races.

ZALMA OPINION

The only surprise to me in this case is that the litigants bothered to take the case to the appellate court. It could not be more obvious on the facts elicited at the time of the motion for summary judgment that Mr. Hines participated in the drag race. He knew of the danger since he decided to sit in a back seat where there was an operable seat belt rather than the front seat where he would have a better view of the race or he would probably have been killed in the accident.

To bring suit with such a clear and unambiguous policy exclusion on such facts defines the Yiddish term “Chutzpah.”

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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FAILURE TO NAME AN ENTITY AS INSURED MEANS NO COVERAGE

Penny Wise & Pound Foolish

Insurance is a personal contract between an insurer and its insured. If the insured is a commercial entity with multiple divisions, joint ventures, limited liability corporations and partnerships all operating under the same management team it must be careful when acquiring insurance to cover all of the entities. Failure to do so can be expensive. In Tooling, Manufacturing and v. Hartford Fire Insurance Company, No. 10-2480 (6th Cir. 09/11/2012) the Sixth Circuit Court of Appeal was called upon to resolve a dispute where the named insured failed to name, as an insured, an entity on its policy because the way the unnamed entity was operated was under the absolute control of the named insured.

The Sixth Circuit recognized that an insurance policy is simply a contract between the insurer and the insured, with each entitled to the benefit of the bargain. There are, therefore, two self-evident but fundamental tenets of contract law:

  1. the benefit of the bargain directly accrues only to the parties to the contract, unless the contract otherwise provides; and
  2. the parties are entitled only to the benefit of their bargain, that is, the bargain represented in the written contract.

FACTS

The insured is Tooling, Manufacturing & Technologies Association (TMTA) and the insurer is Hartford Fire Insurance Company (Hartford). The insurance policy at issue, known as the CrimeShield Policy (Policy), is a type of employee fidelity policy designed to transfer the risk of employee theft from the TMTA to Hartford. The TMTA’s decision to insure against employee theft was prescient – almost immediately after the parties signed the Policy a TMTA employee began diverting funds into his own accounts that would have otherwise, in the fullness of time, accrued to the TMTA.

The pilfering employee, Mark Tyler, diverted funds not from the TMTA but from the TMTA Insurance Agency (Agency) – a limited liability corporation controlled by the TMTA and from which the TMTA receives a significant portion of its income. The Agency is not a named insured under the Policy. Hartford refused to pay the policy because of its view that the Agency, not the TMTA, suffered the loss and the Agency is not a named insured.

The TMTA appealed to the Sixth Circuit to enforce its interpretation of the Policy, arguing that the Agency is covered because the TMTA is covered, and that any loss to the Agency is actually a direct loss to the TMTA.

The TMTA is a Michigan trade association whose members are engaged primarily in the manufacturing and tooling industry. The TMTA arranges the sale of insurance policies to its members as part of its normal activities, but because Michigan law does not permit the TMTA to collect commissions directly from insurance companies, the TMTA created the Agency as a licensed producer to facilitate receipt of the commissions.

The Agency is a Michigan limited liability company that brokers insurance policies for TMTA members. TMTA is the Agency’s sole member and TMTA’s entire revenue derives primarily from the Agency in the form of commissions from insurance companies paid directly to the Agency for brokering policies to TMTA members. The Agency has no employees and its property consists only of the commissions paid to it by insurance companies for sales of policies to TMTA members. TMTA accounts for all of the Agency’s income as part of its federal and state filings. Thus, each year, TMTA receives the entire benefit or loss from the Agency’s operations.

The TMTA hired Tyler to be the Agency’s general manager “for the purpose of brokering life, health, disability, and accident insurance for TMTA members,” but Tyler was paid and employed by the TMTA, not the Agency.

In September 2003, the TMTA – then known as the Michigan Tooling Association – procured the Policy from Hartford. The Policy covered employee theft (up to $300,000), depositor’s forgery, non-employee theft, disappearance and destruction, and computer and funds-transfer fraud. In addition to the TMTA, the Policy and its amendments listed six other named insureds – but not the Agency – and the Policy provided that “[a]n ‘employee’ of any Insured is considered to be an ‘employee’ of every Insured.” The employee theft provision of the Policy provided that: “We will pay for loss of or damage to ‘money’, ‘securities’ and ‘other property’ which results directly from ‘theft’ by an ‘employee’, whether or not identifiable, while acting alone or in collusion with other persons.”

In early 2007, Tyler resigned from his position at the TMTA. Soon thereafter, the TMTA discovered that, using entities that he owned, Tyler had re-directed to himself commission payments that were due to the Agency, in effect stealing over $715,000 in commissions that would have eventually accrued to the TMTA.

THE DECLARATORY RELIEF ACTION

The parties filed cross-motions for summary judgment and agreed that there were no issues of disputed fact and that judgment could be rendered as a matter of law.

The parties dispute whether the injury suffered by the TMTA arose “directly” from Tyler’s illegal conduct while he was an employee of the TMTA. In essence, the TMTA argued that the injury was direct because the TMTA’s injury was a natural and unavoidable consequence of Tyler’s conduct, and Hartford argued that the injury was indirect because the commissions were diverted from the Agency and the Agency is not a named insured under the policy.

TRIAL COURT DECISION

The district court granted summary judgment to Hartford, holding that:

(1)     the TMTA cannot have a direct interest in the commissions due to the Agency because the Agency is a separate entity under Michigan law;

(2)     the Agency is not a named insured in the Policy;

(3)     the exclusion clause barring recovery for indirect losses applies to the commissions stolen by Tyler; and

(4)     Tyler only had a duty to turn the stolen commissions over to the Agency, not to the TMTA.

ANALYSIS

The court applies a two-part test to determine whether an insured is entitled to insurance benefits:

  • Determine if the policy provides coverage to the insured.
  • If it does, the court must then ascertain whether that coverage is negated by an exclusion.

The fact that the Agency was not named on the policy might normally end a court’s inquiry. However, the court recognized that the Agency and the TMTA are unusually closely related. The TMTA argues that this close relationship essentially erases any difference between the TMTA and the Agency for the purposes of the contract, that any injury to the Agency under the contract is an injury to the TMTA, that the entities are separate only to fulfill a technical legal requirement, and that to bar recovery because the TMTA and the Agency are technically separate would be mere sophistry.

The Policy states that “this Policy is for your benefit alone and no other person has any rights or benefits,” and that “[t]hroughout this Policy the words ‘you’ and ‘your’ refer to the named Insured in the Declarations.” Since the Agency actually is separate from TMTA for legal purposes, both for the purpose of receiving insurance commissions and under the Policy, the phrase “for your benefit alone” could not have been referring to the Agency.

The Sixth Circuit found it significant that although the Agency is not listed as a covered insured under the Policy six other entities closely related to the TMTA are named as insureds. Not only is there nothing in the contract that would contemplate that the Agency would be covered by the Policy, by adding these six additional entities the parties implicitly demonstrated an intent not to cover the Agency.

The meaning of the word “direct” has been applied differently in different jurisdictions. The Sixth Circuit found that the weight of authorities across the country define “directly” as meaning “immediate” – known by some as the “direct is direct” approach – although other jurisdictions espouse a “proximate cause” approach.

As the Agency is a separate entity from TMTA, both legally and for the purposes of the Policy, Tyler’s theft of commissions intended for the Agency does not directly result in a loss to TMTA – there was an intermediate step between Tyler’s theft and TMTA’s loss, no matter how closely aligned the Agency and TMTA are, and the Policy did not demonstrate that the parties intended to cover the TMTA’s losses due to Tyler’s misdirection of Agency commissions.

ZALMA OPINION

The insured, TMTA, made the following serious errors:

  • It created the Agency, a limited liability corporation, for the sole purpose of complying with local licensing laws.
  • It did not separately insure the Agency for its exposures to loss.
  • It did not name the Agency as an insured on its basic policy although it named six other related agencies.

Every insured who buys insurance protection or a fidelity bond must first determine what entity it controls can incur a loss. Failing to do so will put the insured in the place the TMTA found itself. Had TMTA asked the Hartford to also insure the Agency there is little possibility that the Hartford would have refused. At the worst Hartford might have added additional premium for the additional risk.

It is rather odd – unless TMTA was trying to save premium – that the TMTA did not name the agency on an employee dishonesty policy since the Agency provided the TMTA with most of its income.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Future Speculative Damages Not Subject to Judicial Ruling

No Diminution In Value After Accident in New Jersey

Courts deal in damages that have occurred. Applying the unwritten rule of law that an insurance company is always wrong, a group of New Jersey plaintiffs attempted to obtain an order requiring New Jersey insurers to pay diminution in value after repairs of automobiles damaged by an uninsured or underinsured motorists for all members of the class. Originally the Plaintiffs wanted all insurance claims to pay diminution in value damages until the New Jersey court, in Kieffer v. High Point Insurance Co., 422 N.J. Super. 38 (App. Div. 2011), held that plaintiffs could not maintain first-party claims against their insurers for alleged diminution in value to their motor vehicles involved in collisions.

The Suit

Plaintiffs, Lauren Kaufman, Bettina Freeland, Phillip T. Burrus, Vanga Stoilov, and Anthony Rosetti (Plaintiffs), in Lauren Kaufman, Bettina v. Allstate New Jersey Insurance Company, Liberty Mutual Fire Insurance, No. A-3704-10T1 (N.J.Super.App.Div. 09/07/2012) the Plaintiffs appealed from the trial court order dismissing their class action complaint in which they sought prospective injunctive relief that would prevent defendants, Allstate Insurance Company (Allstate), Liberty Mutual Fire Insurance Company (Liberty Mutual), and Government Employees Insurance Company (GEICO), from denying coverage for alleged diminution in value of their vehicles under the uninsured motorist (UM) and underinsured motorist (UIM) provisions of their respective policies in the future, should their vehicles be involved in an accident with an uninsured or underinsured motorist that causes diminished value to their automobile.

Trial Court Decision

The motion judge found the claims were barred and that the claims for relief are in futuro and seek relief presently would not be proper, because they are claims that are not ripe for decision.

Plaintiffs originally sought relief against defendants in the context of first-party claims as well as third-party claims. In light of the decision in Kieffer, Plaintiffs abandoned their claims for diminution of value damages solely as it pertains to first-party claims. As to the remaining claims, it is undisputed that alleged damages to Plaintiffs’ vehicles arose out of accidents occurring in 2007. It is also undisputed that Plaintiffs have not alleged that following the accidents, they submitted claims based upon diminution of value under their respective UM/UIM coverages with defendants. Indeed, before the motion judge, Plaintiffs’ counsel represented that Plaintiffs “were not involved in a UM/UIM claim” and they were “not making a claim for damages” under their UM/UIM coverages.

The essence of the relief plaintiffs sought was an order that they are entitled to assert such claims under their UM/UIM coverages against defendants in the future, should they ever be involved in an accident with an uninsured or underinsured motorist that causes diminished value to their automobiles.

New Jersey jurisprudence has traditionally applied a liberal standard in determining whether a litigant has standing to assert a cause of action. Nonetheless, a plaintiff must satisfy the essential elements in order to maintain a cause of action:

(1)     sufficient stake in the outcome of the litigation;

(2)     genuine adverseness regarding the subject matter of the action; and

(3)     a substantial likelihood that the plaintiff will suffer harm in the event of an unfavorable decision.

Some of the Plaintiffs had no standing because they had replaced their policies with the insurer defendants. As to the remaining plaintiffs a sufficient stake in the outcome may exist if for no other reason than the fact that they are policyholders with UM/UIM coverage. However, because, as they assert in their brief, “[t]here simply is no question that for more than eighty-five (85) years, our courts have recognized diminution of value as a valid component of damages recoverable from a third-party tortfeasor[,]” the issue is not whether a third-party action for diminution in value may be maintained. Rather, plaintiffs seek a declaration that at some date in the future, should their vehicles still suffer a diminution in value, notwithstanding the repair of their vehicles or compensation for their loss based upon the fair market value of the vehicles immediately prior to sustaining damage, defendants will pay their diminution in value claims.

A claim based upon such a theory is purely speculative and lacks adverseness, an essential element for establishing standing. Plaintiffs’ vehicles have not been involved in an accident. As such, repairs have not been undertaken. Therefore, plaintiffs cannot submit proof that the value of their vehicles was diminished after the repairs. Nor can they submit proof that they submitted claims under their UM/UIM coverages to recover diminution in value damages that defendants thereafter refused to honor.

Since Plaintiffs’ claims are premised upon a hypothetical situation which does not establish the requisite adverseness needed to seek the declaratory relief and injunctive relief they seek their suit must fail. In addition, in Lauglin v. Allstate Insurance Company, Case No. 02-2-10380-0 (Wash. Sup. Ct. March 7, 2000) the plaintiffs filed a multi-state putative class action on behalf of themselves and other Allstate insureds, including Allstate New Jersey insureds whose vehicles suffered damages arising out of collisions with uninsured or underinsured motorists. The plaintiffs alleged that Allstate failed to pay for the diminution in value of their vehicles under the plaintiffs UM/UIM endorsements. The parties reached a settlement that covered insureds, including New Jersey insureds, maintaining UM/UIM coverages who reported valid property damages claims between August 20, 1996 and October 19, 2007.

Under the terms of the settlement, each class member released all claims against Allstate based upon diminution in value arising under their UM/UIM coverages and, therefore, have no potential for filing a claim.

ZALMA OPINION

Since the Georgia Supreme Court issued its opinion in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) claims for diminution in value of automobiles after repair have become a cause célèbre across the country with various attempts to get state courts to agree with Georgia. As I have written in my e-book, Zalma on Diminution in Value — 2012  the attempts have been mostly unsuccessful. Although quite imaginative seeking a judgment on what an insurer should do in the event of a future loss was a total waste of time.

If the Plaintiffs really wanted coverage for diminution in value they should have negotiated with their insurer for the coverage and paid a premium rather than seeking coverage not purchased for no payment of premium.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Exhaustion by Judgment Or Settlement Does Not Include Defense Costs

Insurance Policy Must be Read in its Entirety

Multi-National businesses purchase liability insurance in multiple layers starting with a primary insurer that agrees to defend and indemnify the entity and multiple layers of liability insurance above the first layer. In such a situation one or more of the excess layers only agree to pay indemnity since the primary insurers’ limits for cost of defense are usually unlimited.

When a multi-national corporation like Intel Corporation (“Intel”) is involved in a major lawsuit where one or more of its layers of insurance coverage disputes its obligation to the insurer must read and analyze all available insurance coverage before entering into a settlement agreement with one layer of insurance for less than the full policy limits or face a break in its layers of insurance coverage.

Such a problem arose in Intel Corporation v. American Guarantee & Liability Insurance Co. , No. 692, 2011 (Del. 09/07/2012) where the Delaware Supreme Court was called upon to resolve an insurance policy interpretation dispute between Intel  and American Guarantee & Liability Insurance Co. (“AGLI”), a fourth layer excess insurer, to resolve a dispute over the interpretation of an excess insurance policy under California law.

Trial Court Decision

AGLI sought and obtained a declaration from the Superior Court that AGLI had no duty to reimburse Intel for defense costs or indemnity claims in connection with Intel’s defense of various antitrust lawsuits, because the underlying insurance policy limits of $50 million were not exhausted as required by the AGLI policy. Intel contended that the Superior Court erred as a matter of law in holding that AGLI’s following form excess liability policy (the “AGLI Policy”) could reasonably be interpreted to include a duty to defend. Intel claimed that the AGLI Policy allowed Intel to exhaust the limits of its underlying policy with XL Insurance Company (the “XL Policy”) by adding Intel’s own contributed payments for defense costs to the amount of Intel’s settlement with XL. Under Intel’s interpretation, the XL Policy was exhausted and AGLI’s duty to defend was triggered. AGLI responded that its policy unambiguously required the exhaustion of the XL Policy by “payments of judgments or settlements,” and that this language does not encompass Intel’s own contributed payments for defense costs.

FACTS AND PROCEDURAL HISTORY

During the 2001-2002 policy period at issue, Intel had multiple levels of “stacked” insurance. Intel’s first-line policy from Old Republic Insurance Company had a $5 million limit. That policy is not in dispute here. Intel’s next-in-line policy was the XL Policy, which provided an additional $50 million in coverage. Above the XL Policy lay various excess insurance policies, starting with the AGLI Policy.

This coverage dispute arises from antitrust litigation brought in 2005 against Intel in the United States District Court for the District of Delaware. The antitrust litigation spawned numerous similar class actions against Intel in other jurisdictions. In 2006, Intel filed a declaratory judgment action in a California state court against XL seeking a declaration that XL had a duty to defend and possibly indemnify Intel. Before the California state court action was judicially resolved, XL and Intel reached a settlement agreement under which XL paid Intel $27.5 million of its $50 million policy limits.

It is undisputed that Intel incurred significantly more than $50 million in defense costs, which it paid out-of-pocket. Having done that, Intel then turned to its excess insurer, AGLI, for reimbursements of defense costs in excess of the underlying XL limits.

AGLI refused coverage and filed the instant action in the Superior Court. AGLI sought a declaration that it had no liability to Intel under the policies AGLI issued between 2001 and 2009. In the Delaware action, the Superior Court granted AGLI’s motion for summary judgment. Shortly after the Superior Court granted AGLI’s motion for summary judgment, the California District Court granted Intel’s motion for summary judgment, finding the XL Policy had been exhausted. But, after AGLI submitted the Delaware Superior Court’s opinion reaching a different result, the California District Court vacated its prior order and entered partial summary judgment in favor of AGLI.

Intel appealed the Superior Court ruling to this Court, and appealed the California District Court’s adverse ruling to the Ninth Circuit.

ANALYSIS

Intel contends that the Superior Court erred in holding that the AGLI Policy was not reasonably susceptible to Intel’s reading, and erroneously granted summary judgment in AGLI’s favor. Intel argues that the AGLI Policy is unambiguous, and allows Intel to exhaust the underlying XL Policy limits by adding Intel’s own payments for defense costs to XL’s settlement payments. In the alternative, Intel argues that, on the question of exhaustion, the policy is at least ambiguous, warranting a construction against the insured under California law.

In California, as in Delaware, interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation. Courts generally must interpret a contract so as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful. [MacKinnon v. Truck Ins. Exchange, 73 P.3d 1205, 1212 (Cal. 2003)] Courts must consider the contract as whole, rather than analyzing specific provisions in isolation. Words should be construed according to their ordinary meaning, unless used by the parties in a technical sense, or unless a special meaning is given to them by usage.

Policy Language

The AGLI Policy consisted of a Declarations Page, a Following Form Excess Liability Policy (the “Following Form Policy”), and a series of endorsements to the Following Form Policy.

The Following Form Policy contains two particularly relevant sections. Section III is entitled “Defense.” It provides in part:

        A. We will not be required to assume charge of the investigation of any claim or defense of any suit against you.
            
        B. We will have the right, but not the duty, to be associated with you or your underlying insurer or both in the investigation of any claim or defense of any suit which in our opinion may create liability on us for payment under this policy.

Section V is entitled “Conditions.” Condition H in Section V, “When Damages are Payable,” states:

        H. When Damages are Payable
        
        Coverage under this policy will not apply unless and until the insured or the insured’s underlying insurance has paid or is obligated to pay the full amount of the Underlying Limits of Insurance …

The Following Form Policy Is an Indemnity-Only Policy

AGLI and Intel agree that the Following Form Policy disclaimed any duty to defend, and provided only for a duty to indemnify. The Delaware Supreme Court concluded that the Following Form Policy was and remained an indemnity-only policy. Paragraph C of an endorsement plainly states that nothing in the Endorsement can be read to obligate AGLI to provide a duty to defend before the $50 million underlying limits have been “exhausted by payments of judgments or settlements.” Paragraph C is directly on point in the dispute, and ultimately controls the determination of whether the XL Policy was exhausted.

The Supreme Court concluded that the phrase “payments of judgments or settlements” in Paragraph C cannot be construed under California precedent to encompass an insured’s own payment of defense costs. The term “judgments” generally refers to a decision by some adjudicative body as to the parties’ rights.The term “settlements” envisions some agreement between parties as to a dispute between them. The Supreme Court concluded: “Defense costs paid by the insured out-of-pocket do not fall within the plain meaning of either term.”

The interplay between the Following Form Policy, the Endorsement, and the underlying XL Policy is admittedly complex. The Following Form Policy itself refuses to adopt the duty to defend provided by XL’s policy, but a duty to defend is nonetheless added-to a limited extent-through the Endorsement. A complicated policy does not mean, however, that there is no single reasonable interpretation of its language, or that every proffered interpretation will be a reasonable one.

Reasonable Expectations of Insurer and Insured

In these circumstances, the Supreme Court reasoned, it would be objectively reasonable for the insured to expect that AGLI’s excess coverage would be triggered only after the underlying policy is exhausted. AGLI was a fourth-level excess insurer, requiring exhaustion of a $50 million policy beneath it. It would be reasonable to expect that, in most circumstances, the AGLI Policy would be triggered for indemnity payments and not defense costs. Conditioning the excess insurer’s duty to defend by first requiring exhaustion by “payments of judgments or settlements” also increases the likelihood that the underlying insurer will be monitoring the litigation.

Supreme Court Conclusion

AGLI’s construction gives meaning to the entire policy. Under the language of Condition H, Intel’s payments of damages may trigger AGLI’s duty to indemnify. But nothing in Paragraph C suggests that Intel’s direct payment of defense costs may trigger AGLI’s duty to defend. AGLI’s construction comports with the plain meaning of the phrase “judgments or settlements.”

ZALMA OPINION

Even the most experienced and expensive group of lawyers capable of defending a corporation against multiple class actions lawsuits and reasonably and appropriately charge the client more than $50 million know little or nothing about insurance. By entering into a settlement with XL, the first layer of limits over the $5 million primary policy for less than its $50 million limit of liability, and then claim exhaustion of the XL policy because Intel paid the difference between the settlement amount in defense costs to the lawyers even though the AGLI policy was an indemnity only policy and clearly and unambiguously stated that exhaustion could only be done by payment of settlement or judgment.

Since XL did not pay $50 million in indemnity or settlement there was no exhaustion of its policy.

If Intel had retained knowledgeable insurance coverage counsel it could have papered its agreement with XL in such a way that its limits were exhausted and avoided the litigation in Delaware.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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No Insurance Today

This is September 11, 2012.

It is time to pray for those lost on September 11, 2001 and those who are risking their lives, even today, to protect us.

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September 11, 2001

Insurance and The Act of Infamy

Zalma on Insurance in top 50

Tomorrow Is the 11th Anniversary of the act of infamy at the World Trade Center (WTC) in New York City. Not only did the event awaken the country about the danger of  radical Islam, it also resulted in serious insurance issues.

The timing of the attacks were within days of the negotiations for placing insurance for the operators of the WTC. No policies had been issued but insurers had placed insurance and agreed to insure against the risk of loss of the building.

The WTC policies defined “occurrence” as follows:

“Occurrence” shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur. [World Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, 345 F.3d 154 (2nd Cir. 2003).]

Because WTC insurance issues are surrounded by the horrendous facts of the attack, and due to the fact that some policies had yet to be printed and delivered to the insured before September 11, 2001, the decisions interpreting the policies had far-reaching impact.

The rulings in the WTC cases are changing how insurance policies are interpreted. Since policy interpretation is essential to the presentation of any insurance claim, the following discussion is important to all those concerned with insurance claims.

Reasonable Expectations

A case decided over 200 years ago made the point that the reasonable expectations of the insured include the understanding that every insurer is presumed to be acquainted with the practice of the trade he insures. [Hazard’s Administrator v. New England Marine Insurance Co., 33 U.S. 557 (1834) ] If he does not know it, he ought to inform himself. Similarly, more than 150 years ago the US Supreme Court in  adopted the rule. It concluded that “no injustice is done if insurers are presumed to know their insureds’ industry because it is part of their ordinary business.”

Negotiations for the WTC Insurance

In the spring of 2001, Silverstein Properties was the successful bidder on a 99 year lease for a piece property from the Port Authority. In July 2001, Silverstein Properties obtained primary and excess insurance coverage for the WTC complex from about two dozen insurers in the total amount of approximately $3.5 billion “per occurrence.”

In World Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, (2d Cir. 09/26/2003), 345 F.3d 154 (2d Cir. 09/26/2003), the Second Federal Circuit Court of Appeals attempted to settle some of the differences between the property owners and the insurers on how to apply the wording of the policies to the facts of the destruction of the WTC. It found that a binder (temporary insurance pending issuance of a policy) is an enforceable contract in its own right.

The primary issue for the Second Circuit to decide was the amount of insurance recoverable for the total destruction of the WTC that occurred after the buildings were struck by two fuel-laden aircraft that had been hijacked by terrorists. Silverstein Properties sought the proceeds of various insurance policies and claimed there were two separate crashes, allowing them to collect the policy’s limit for each separate incident. Since policies had not been issued and coverage was held covered under binders, the meaning of the wording, and the wording itself, was disputed.

Hartford, Royal, and St. Paul Insurance Companies

The ground for summary judgment was the trial court’s conclusion that each of the three insurers (Hartford, Royal, and St. Paul Insurance Companies) had issued a binder that incorporated the terms of the WilProp form. Under the WilProp form’s definition of “occurrence” there was only one occurrence on September 11, 2001.  Because the only policy form before the parties during these negotiations was the WilProp form furnished by Willis, the district court concluded that as a matter of law each of the three insurers had bound coverage on the basis of the WilProp form, rather than, as the Silverstein Parties contended, the Travelers form.

In reaching its decision the Second Circuit noted that the general practice among insurers was that:

[I]n many instances an excess insurer will voluntarily bind itself to another insurer’s policy form that has been issued but that it has chosen not to look at despite the opportunity to do so, and that courts will presume the insurer knows and assents to the terms of the unseen document … A binder is, by definition, incomplete in some respect or a later formal policy would be unnecessary. New York courts have long recognized, terms must often be implied to determine the obligations to which the parties intended to be bound. [Hicks v. British Am. Assurance Co., 56 N.E. 743, 744 (N.Y. 1900).]

Concluding that the policies of the three insurers were based on the WilProp form, the Second Circuit stated:

Our conclusion is supported by the fact that until the total destruction of the WTC on September 11th, it was in Silverstein Properties’ interest to incorporate into their insurance coverage a definition of “occurrence” that would minimize the number of “occurrences” in order to minimize the number of deductibles that would apply in the event of a loss or series of losses. This goal was accomplished by the WilProp form’s inclusive definition of “occurrence.” When Travelers held out for using its own form in its negotiations with Willis in August 2001, Timothy Boyd, a vice president of Willis, reported that fact to a co-broker, stating, “Although other players have signed binders based on WilProp, Travelers is insisting we use their form and this is under review.” Apart from its potential as a party admission, the statement that “players [other than Travelers] have signed binders based on WilProp,” made by the Silverstein Parties’ agent on August 3, 2001 — after the binders were in place and before the WTC was destroyed — is consistent with our review of the binder negotiations.

The WilProp Definition of “Occurrence”

The Second Circuit refused to create an ambiguity where none existed. It concluded that the definition of “occurrence” in the WilProp form was, in light of the facts surrounding the September 11, 2001, terrorist attack, clear and unambiguous since the attacks were “attributable directly or indirectly to one cause or to one series of similar causes.”   The Second Circuit held:

Although the Silverstein Parties attempt to argue that this definition is ambiguous, we agree with the district court that no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack was, at the least, a “series of similar causes.” Accordingly, we agree with the district court that under the WilProp definition, the events of September 11th constitute a single occurrence as a matter of law.  [World Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, (2d Cir. 09/26/2003), 345 F.3d 154 (2d Cir. 09/26/2003)]

Analysis of the Policy

In a first-party property case the policy insures against external perils such as fires, floods, and intentional acts that cause damage to the insured’s property, and against which the insured can take adequate measures to protect his or her investment in advance of any loss. If a peril insured against causes damage (subject to conditions, exclusions, and limitations), coverage is triggered. The goal of a first party policy is to provide financial protection against damage to property from certain defined perils or risks of loss. The second Circuit concluded:

Accordingly, we conclude that given the significant distinction between first-party and third-party insurance policies, the fact-specific nature of the inquiry, and the fact that it is the parties’ intent that controls, the district court properly concluded that the meaning of “occurrence” in the Travelers binder is sufficiently ambiguous under New York law to preclude summary judgment and to warrant consideration by the fact finder of extrinsic evidence to determine the parties’ intentions. We therefore affirm the denial of summary judgment against Travelers.

Essentially, the Second Circuit analyzed the meaning of the key term at issue, “occurrence,” based upon a thorough investigation and a review of the facts surrounding the acquisition of the policy and the reasonable expectations of the parties to the contract. It did not rely upon the dictionary or any other definitions not found in the policy.

California often takes the lead in insurance policy interpretation cases. In MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (2003), the California Supreme Court first stated the primacy of the “reasonable expectations” test when interpreting insurance policies. It decided that since the pollution exclusion of the CGL “does not plainly and clearly exclude ordinary acts of negligence involving toxic chemicals such as pesticides…” the reasonable expectations of the insured required coverage to exist for an ordinary act of negligence even if it involved pollutants.

ZALMA OPINION

I stood on the roof of the WTC in August 2011 and flew home to California from Boston in August. But for a few weeks my wife, daughter and I would have been there when the planes struck. There has been a flag flying at my home and office, flags sit on each door of my car, and I have worn a flag pin since September 11, 2001. I have not forgotten and no American should forget what happened that day.

Because of insurance the WTC is rising again. Because of litigation it took longer than it should. Because it was such a large account spread over many insurers and because the planes struck the WTC before the policies could be issued disputes arose over the interpretation of the policies. Therefore, a silver lining surrounded the cloud of the infamous act — the reasonable expectations of the insured and the insurer became the test for the interpretation of insurance policies.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Subrogation Against Tenant by Landlord’s Insurer

Poor Lease Wording Cause Litigation

Zalma on Insurance in top 50

Almost every modern commercial property insurance policy allows the landlord to waive its insurer’s right of subrogation as long as the waiver happens before a loss. Some even allow an insured landlord to waive subrogation as to its tenants even after a loss. Almost every commercial lease contains a clause that waives the right of subrogation by the landlord’s insurer against the tenant. In Ram Mutual Insurance Company v. Rusty Rohde D/B/A Studio 71 Salon, No. A10-2146 (Minn. 09/05/2012) a $17,500 claim went all the way to the Supreme Court of Minnesota. Two lines in the lease or a letter waiving subrogation by JD Property Management would have avoided this litigation.

RAM Mutual Insurance Company asked the Minnesota Supreme Court to allow it to recover payment it made to its insured for the repair of water damage allegedly caused by the negligence of respondent Rusty Rohde, the commercial tenant of RAM’s insured. The district court granted Rohde’s motion for summary judgment, dismissing RAM’s subrogation claim as a matter of law.

The suit was based upon a landlord and tenant relationship between JD Property Management, LLC, and Rusty Rohde. JD Property owns a rental property in Sauk Centre, Minnesota, containing three business suites. Rohde rents one of the suites and operates a salon business, the Studio 71 Salon, in the leased premises. Rohde’s rental is governed by a 5-year commercial lease agreement (the “lease”) with JD Property.

After taking possession of the leased premises, Rohde replaced two pedicure chairs in his salon and installed water lines serving the chairs. In February 2008, one of the water lines allegedly burst, causing water damage to the Studio 71 Salon suite as well as an adjacent suite. JD Property filed an insurance claim with its property insurer, RAM, requesting payment for the water damage. RAM paid JD Property $17,509, the full amount of JD Property’s claim, to repair the damage. Because Rohde had installed the water line, allegedly without JD Property’s knowledge in violation of the lease, RAM filed a subrogation action against Rohde, asserting breach of contract, negligence, and promissory estoppel.

Mutual Benefit Insurance

Rohde brought a motion for summary judgment, relying upon a line of cases that appeared to bar RAM’s subrogation claim, regardless of whether Rohde was at fault for the losses occasioned by the water damage, because Rohde “as a tenant, is a co-insured under the RAM policy.” The court of appeals affirmed. The court determined that the lease placed no express obligation on either JD Property or Rohde to procure property insurance providing coverage for the water damage at issue, and that under Bruggeman, Rohde was a co-insured under the RAM insurance policy. Because Rohde was a co-insured, the court held that “RAM cannot maintain a subrogation action against Rohde.”

The Issue

This case presents the question of whether an insurer may maintain a subrogation action against the insured’s negligent tenant.

Subrogation

Subrogation is the substitution of another person in place of the creditor to whose rights he or she succeeds in relation to the debt, and gives to the substitute all the rights, priorities, remedies, liens, and securities of the person for whom he or she is substituted.  In the insurance context, subrogation involves the substitution of an insurer (subrogee) to the rights of the insured (subrogor). Upon payment of a loss, the insurer is subrogated in a corresponding amount to the insured’s right of action against any third party whose wrongful conduct caused the loss.

Analysis

Early Minnesota decisions applied what they described as the majority position. Finding that the landlord and the tenant were co-insureds because each had an insurable interest in the property-the landlord a fee interest and the tenant a possessory interest. The court grounded this result in its determination that by paying rent, tenants indirectly pay a landlord’s insurance premiums.

Rohde obtained an insurance policy providing third-party liability coverage as required by the lease.  Rohde’s liability insurance insured the premises that Rohde leased, and through an endorsement included coverage for property damage to “[p]roperty you own, rent or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property.”

Unlike most commercial leases there was no express agreement between the parties as to who would bear the financial responsibility for the damage caused by the leaking pedicure stations.

Courts have followed three different approaches in answering the question of whether an insurer may maintain a subrogation action against an insured’s negligent tenant. Some courts, like the Minnesota Court of Appeal, have adopted a no-subrogation rule, barring insurers from pursuing subrogation claims against negligent tenants in the absence of an express agreement to the contrary. A second group of courts has adopted the opposite approach-a pro-subrogation rule that allows insurers to pursue subrogation claims against their insureds’ tenants, absent an express agreement governing the provision of property insurance. Other jurisdictions have pursued a middle ground, adopting a case-by-case approach to subrogation claims in the landlord-tenant context, by which courts determine the availability of subrogation based on the reasonable expectations of the parties under the facts of each case.

The Minnesota Supreme Court concluded that the case-by-case approach provides an adequate and supportable analytical framework that is the best method to evaluate when an insurer has a subrogation right against an insured’s tenant.

  1. The case-by-case approach is best suited to the areas of law implicated by the subrogation question posed by this case. The question presented by RAM’s subrogation action arises at the intersection of insurance law and landlord-tenant law governing the relationship of landlords and tenants. Both areas of law are grounded in contractual relationships, making a rule that reaches a result by examining the parameters of the relationship between an insurer and insured and a landlord and tenant, as defined in the parties’ respective contracts, superior to one that makes legal assumptions that do not comport with the parties’ reasonable expectations.
  2. The case-by-case approach best effectuates the intent of the contracting parties while still taking into account the equitable principles underlying subrogation actions. Because, as a matter of subrogation law, an insurer merely steps into the shoes of its insured, it would be inequitable to allow, as pro-subrogation courts do, subrogation in cases in which the parties to the lease did not reasonably expect that the tenant would be liable to the landlord for the type of damage at issue.
  3. The case-by-case method is more consistent with Minnesota’s public policy of holding tortfeasors accountable for their actions than the no-subrogation approach. The case-by-case approach achieves the purpose by allowing an insurer to bring a subrogation action when the reasonable expectations of the parties, as evidenced by the lease, reveal that the parties did not intend to limit application of the general rule of a tenant’s tort liability. Therefore, the case-by-case approach is consistent with the policy that a loss should typically be borne by the person responsible for that loss.

To determine whether RAM’s subrogation claim is barred under the case-by-case approach, the district court must ascertain the expectations of the parties as to which party bears responsibility for a particular loss. The case-by-case analysis begins with the written documents executed by the parties. Examining the lease agreement to determine the expectations of the parties rests on the well-established principle that leases are contracts to which we apply general principles of contract construction. The district court should interpret provisions in a lease governing a tenant’s liability for a particular loss according to the fundamental principle that the goal of contract interpretation is to ascertain and enforce the intent of the parties.

Finally, because subrogation is an equitable remedy, in determining whether an insurer may bring a subrogation action in a particular case, courts must weigh the principles of equity and good conscience. In balancing the equities, the court may consider, among other factors, whether the lease is a contract of adhesion, and if the provisions allocating responsibility are found to be unfair, may declare such provisions invalid as being in violation of public policy. Moreover, the fact that the leased premises are part of a large multi-unit structure may be relevant to the equities and the parties’ reasonable expectations regarding responsibility. This factor may be relevant because, in the absence of a very clear contractual obligation to the contrary, the tenant likely is not thinking beyond the leased premises and may not as a practical matter be able to afford, or possibly even obtain, sufficient liability insurance to protect against such an extended loss.

ZALMA OPINION

This suit and appeal to the Supreme Court could have been totally avoided by the adding to the lease an express waiver of subrogation or a requirement that the landlord and all the tenants were named as insureds in the RAM policy. It did not and now, for less than $18,000 the parties are going back to the trial court and will both spend more in lawyers fees than could have been recovered. The parties should be commended for clarifying the law in Minnesota about subrogation. The counsel for the landlord and tenant should be ashamed for not clarifying the subrogation issue at the time the lease was signed.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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NATIONAL FLOOD INSURANCE POLICY MAY NOT BE CHANGED

Standard Flood Policy Must Be Enforced

Zalma on Insurance in top 50

The National Flood Insurance Program (“NFIP”) is a federal program created by the National Flood Insurance Act of 1968 (“NFIA”).  Noting that private insurers were not providing adequate flood insurance in many areas, Congress designed the NFIA to increase the availability of flood insurance by offering subsidized insurance.  The NFIP is administered by the Federal Emergency Management Agency (“FEMA”) and backed by the federal treasury, which is responsible for paying claims that exceed the revenue generated by premiums paid under policies issued pursuant to the program. FEMA established a standard form of insurance that must be used, without modification, by a private insurer issuing a flood insurance policy protected by the NFIP. It does not cover all damages caused by flood. It only covers the damages promised by the FEMA created standard policy.

The First Circuit Federal Court of Appeal was called upon to resolve a dispute over the scope of a flood insurance policy in Mary Jane Mcgair; Joseph Mcgair v. American Bankers Insurance Company of Florida, No. 11-2179 (1st Cir. 09/04/2012). In July 2006, appellants, Mary Jane and Joseph McGair, purchased a flood insurance policy from appellee, American Bankers Insurance Company of Florida (“American Bankers”) only to find most of the damaged property in their basement was not covered by the policy.

The policy was issued pursuant to NFIP under which private insurers issue and administer standardized flood insurance policies, and all claims are paid by the government. After a 2010 flood damaged their home in Warwick, Rhode Island, including the contents of their basement, the McGairs sought compensation. American Bankers disallowed much of the amount claimed, asserting that the contents of the McGairs’ basement were not covered by their policy. The McGairs brought suit in federal court, arguing that the Declarations Page of their policy created an ambiguity as to the scope of coverage and that, under federal common law and general insurance law principles, this ambiguity should be resolved in their favor. The district court disagreed, entering summary judgment in favor of American Bankers.

The National Flood Insurance Program

The McGairs’ flood insurance policy was written pursuant to the National Flood Insurance Program (“NFIP”), a federal program created by the National Flood Insurance Act of 1968 (“NFIA”).  FEMA provides a standard text for all NFIP policies and forbids Write Your Own Policy (WYOP) companies from making changes; FEMA’s interpretations of the policy bind all WYOP participants; FEMA decides what rates may be charged; all premiums are remitted on to FEMA (minus a small fee); if WYOP companies pay out on a claim they get reimbursed by FEMA; likewise with litigation costs.

Two limitations on coverage provided by the Standard Flood Insurance Policy (SFIP) are relevant to the McGairs’ claim. The SFIP states that coverage for items located in the basement of a dwelling is limited, and it identifies seventeen categories of fixtures (e.g., central air conditioners, furnaces, insulation) covered under the policy. The SFIP similarly limits coverage for personal property in a basement and identifies only three covered categories of personal property (all major appliances). By the terms of the SFIP, these items are the only contents of a basement for which a policy-holder may seek reimbursement.

The McGairs’ policy, purchased from American Bankers in 2006, is a Preferred Risk Policy (“PRP”) incorporating the SFIP.  The McGairs’ policy also included a Declarations Page indicating the coverage purchased, the policy limits, and the deductible. The “Rating Information” section of the Declarations Page indicates that the McGairs have a finished basement and states that the contents of their home are located in the “basement and above.” The Declarations Page also provides that the contents of the home are covered by the policy, up to $100,000, and identifies none of the limitations stated in the SFIP.

Although American Bankers issued a check to the McGairs based on the amount determined by its adjuster the McGairs refused to accept the payment. Claiming $40,614.52 in damages, the McGairs sent American Bankers documentation of the repair estimates totaling this amount. The primary disagreement between the parties concerned the scope of the policy’s coverage of the contents of the McGairs’ basement.

Trial Court Decision

The district court granted summary judgment for American Bankers, explaining that the regulations governing the NFIP provide that parties cannot alter the terms of the SFIP and that the McGairs were charged with knowledge of that prohibition. Thus, it found that the SFIP’s limitations on coverage of the contents of a basement applied in this case.

Analysis

The McGairs’ policy is labeled as a “Standard Flood Insurance Policy” and states that it “provides flood insurance under the terms of the National Flood Insurance Act of 1968 and its amendments, and Title 44 of the Code of Federal Regulations.” Accordingly, the policy itself belies the assertion that it is anything other than an SFIP. Furthermore, as noted, FEMA regulations require that all WYO policies issued pursuant to the NFIP use the SFIP.

Even if the court was willing to acknowledge that the Declarations Page creates an ambiguity as to the scope of coverage, which it was not, general insurance law principles applicable to the interpretation of ambiguities must give way in light of the prescription by federal regulation of the terms of the SFIP. Because American Bankers had no authority to alter the terms of the SFIP through the Declarations Page, there is no need to resolve any supposed inconsistency between the SFIP and Declarations Page. The terms of the SFIP control and the trial court’s decision was affirmed by the appellate court.

ZALMA OPINION

Governments are not insurers. They are unconcerned with profit. A government controlled plan, like the NFIP, is bound by what the Congress and FEMA say it is and nothing more. FEMA requires that all private insurers writing a NFIP backed flood insurance program must use the SFIP without modification. The insurer in this case did so and, as a result, had an unhappy insured who did not read or understand the limitations of the SFIP.

The insureds tried to change the policy by stating there existed an ambiguity in the policy the insurer issued to them. Since the flood insurance issued was, as the law required, the SFIP terms, conditions and limitations applied and no federal court has the ability to change it.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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ARBITRATION FAVORED IN THE LAW

Litigation Must Be Stayed Pending Arbitration

Zalma on Insurance in top 50

It is axiomatic that resolving disputes through arbitration is generally favored in the law. There is a strong presumption in favor of arbitration and courts will resolve any in favor of arbitrability. This rule of law is applied universally and most importantly to those who insure people in the construction business, it limits the exposure to defense and indemnity costs.

Burton Scot Contractors, L.L.C. and Westfield Insurance Company (collectively “Burton Scot”) appealed from the trial court’s judgment denying Burton Scot’s motion to stay proceedings pending arbitration in Jatsek Construction Co., Inc. v. Burton Scot Contractors, LLC, et al., 2012 -Ohio- 3966. (Ohio App. Dist.8 08/30/2012). The insurer and its insured asked that the court of appeal reverse the trial court and allow them to resolve the dispute by inexpensive and quick arbitration.

Facts

Jatsek Construction Company, Inc. (“Jatsek”) sued the Burton Scot defendants and three other defendants: Cuyahoga County, Lorain County, and the city of Warren. According to the complaint, Burton Scot was the general contractor for three separate public improvement projects. The first project was for the resurfacing of Russia Road in Lorain County; the second project was for the resurfacing of Usher Road in Cuyahoga County; and the third project was for work to be completed for the Greenway bike trail (“Greenway project”) in the city of Warren. The Greenway project is the subject of this appeal.

According to Jatsek’s complaint, it was contacted by Burton Scot to submit a subcontractor bid for the Greenway project. Jatsek submitted a bid, but Burton Scot informed the company that it was attempting to find a different contractor for the work. Jatsek’s complaint further alleged that Burton Scot contacted Jatsek again and submitted a proposed subcontract agreement for some, but not all, of the work previously bid on by Jatsek. After much back and forth negotiation the two parties failed to sign an agreed upon contract but did agree that Jatsek could do the work and that Jatsek, in fact did the work called for by the unsigned contract.

Jatsek began working at the Greenway project on October 18, 2010, and on October 30, 2010, issued its first invoice for work performed on the project. According to the vice president, on November 7, 2010, Jatsek executed and returned the written contract. In executing the contract, however, Jatsek made handwritten modifications to certain provisions in the contract. The modifications were not acceptable to Burton Scot and Burton Scot did not consent in writing to them.

Burton Scot also submitted the written contract in support of its motion to stay. Paragraph 31 of the contract provided in relevant part as follows:

        At the sole option of Contractor, any and all claims, disputes, controversies, demands, and causes of action of whatever nature, kind or description arising from or relating to this Agreement, including without limitation contract, equity, tort or legal claims, and further including without limitation claims relating to rights of payment or interpretations hereof, shall be submitted to mandatory and binding arbitration in the Cleveland Tribunal of the American Arbitration Association in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. The decision and Award of the Arbitrator(s) shall be final and binding on Contractor and Subcontractor, and the decision and Award may be reduced to judgment and enforced in any Court of competent jurisdiction. (Emphasis added)

The contract was signed and dated (November 7, 2010) by Jatsek’s vice president, but was not signed by a Burton Scot representative. The contract had handwritten changes, but not to the arbitration provision. Jatsek opposed the motion to stay. The company argued that Burton Scot never executed the agreement, but even if a contract was formed, Jatsek was entitled to judgment because there was no dispute that it performed the work agreed to under the contract, but had not been paid.

The trial court ruled that no contract existed for the Greenway project. The motion for stay was therefore denied as it related to that project. For its sole assigned error.

Law and Analysis

Burton Scot notes that there is a split of authority on whether this court’s standard of review is abuse of discretion or de novo. Burton Scot contends that the split is “immaterial” to this case because reversal is required under either standard. Jatsek, on the other hand, contends that this court has “consistently reviewed the denial of a motion to stay proceedings under an abuse of discretion standard.”

In this case, the trial court ruled that no contract existed for the Greenway project; that is, that the parties did not agree to submit to arbitration any disputes relative to the project. The issue to be decided by the appeal is whether a contract existed between Jatsek and Burton Scot for the Greenway project.

It was undisputed that Jatsek performed work on the Greenway project. On the authority of Herschman, upon the start of the work by Jatsek, an actual implied contract was formed to which the parties acquiesced.

The party seeking to enforce the arbitration provision, Burton Scot, did not initiate the action rather it was defending against the action. Jatsek filed the action in June 2011, and Burton Scot filed its motion to stay in July 2011.  Because Burton Scot filed its motion to stay approximately one month after Jatsek filed the action, pretrial proceedings here were scant.  Disallowing arbitration in this case would not advance public policy considerations of judicial economy.

In light of the above, the appellate court found that the trial court erred in denying Burton Scot’s motion to stay pending arbitration.

ZALMA OPINION

Arbitration clauses are important in all construction contracts and allow the parties to resolve their disputes quickly and inexpensively. If there is a valid contract – whether executed in writing or by the actions of the parties – the arbitration provision must, as it was here, be enforced and the litigation stayed until the arbitration is completed.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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INSURANCE IS A CONTRACT OF PERSONAL INDEMNITY

Insurer Must Approve Assignment of Policy to be Effective

Zalma on Insurance in top 50

Insurance is a contract of personal indemnity. It is, by definition, a contract between the person insured and the insurer. It is axiomatic that an insurer has the right to select who it will insure. Because it is a personal contract almost every insurance policy prohibits the assignment of an insurance policy without the permission and consent of the insurer.

The California Court of Appeal was called upon in Fluor Corporation v. the Superior Court of Orange County, Hartford Accident & Indemnity Company, Real Party in Interest, Court of Appeals of California, Fourth District, Division Three (2012) to resolve whether one Fluor corporation could effectively assign its rights under several liability insurance policies to another Fluor corporation as a result of a complex corporate restructuring. The Hartford objected because the Fluors failed to secure its approval under the consent-to-assignment clauses in the insurance policies.

In Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 (Henkel), the California Supreme Court enforced an identical consent-to-assignment clause under a similar fact pattern. According to the Fluors the court should divert from Supreme Court precedent  because the Legislature has adopted a contrary rule — a “statutory directive” which “conclusively draws the line . . . .”

In California, by statute, “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss . . . .” (California Insurance Code, § 520.) During the 130 years since its enactment, the 1872 statute has been cited only once. No one raised it in Henkel. This decision will be the second judicial opinion in the history of the state to even mention the statute, and the first to address it.

Factual and Procedural Background

Fluor Corporation (here called Fluor-2) is the second of two corporations named “Fluor Corporation.” Fluor-2 was incorporated in the fall of 2000 as the result of a corporate restructuring transaction called a “reverse spinoff.” The preexisting Fluor Corporation (here called Fluor-1) was created in 1924.

In the reverse spinoff, Fluor-1 transferred its engineering, procurement, construction and project management services to Fluor-2 as part of a “new strategic direction” to realign Fluor “as a single, highly focused company.” Fluor-1 retained various coal mining and energy operations and renamed itself as “Massey Energy Company.” Fluor-1 and Fluor-2 became independent public companies, with neither having an ownership interest in the other.

Between 1971 and 1986, real party in interest Hartford Accident & Indemnity Company (Hartford) provided comprehensive liability insurance coverage to Fluor-1 through 11 different policies. Since 1985, Hartford has participated in the defense of these asbestos lawsuits. Between 2001 and 2008, Hartford paid defense and indemnity costs in connection with its defense of the asbestos lawsuits, including a defense of both Fluor-1 and Fluor-2.

In August 2009, Hartford amended its cross-complaint to allege new defenses to coverage. Hartford alleged that only Fluor-1 was its named insured on the policies in question and the policies each contained consent-to-assignment provisions prohibiting any assignment of any interest under the policy without Hartford’s written consent. Hartford further alleged that neither Fluor-1 nor Fluor-2 “ever sought or obtained Hartford’s consent to the purported assignment of insurance rights under the Distribution Agreement.” Hartford sought a declaration that it was neither obliged to defend nor indemnify Fluor-2 for the subject asbestos claims, and it asked to be reimbursed for defense costs and indemnity payments already made on Fluor-2′s behalf.

As to Fluor-2, respondent court declined the opportunity to disregard Henkel based on the 1872 statute. It said: “[The Supreme Court] can be dead wrong, but they are still the Supreme Court.”

The Court of Appeal is Duty-Bound to Follow Henkel, Which Does Not Contradict Any Express Legislative Policy

The Supreme Court’s issuance of a grant and transfer signifies the high court’s determination that the matter is appropriate for appellate review, but it does not constitute a direction to the Court of Appeal to ignore, limit, or reexamine Henkel.

A. The Supreme Court’s Decision in Henkel Is On Point and Cannot Be Distinguished

The Court of Appeal agreed with the trial court that Henkel directly applies to the Hartford policies. Indeed, the language of the consent-to-assignment clause is identical — not a surprising coincidence since Hartford also was the insurer in Henkel. The Hartford consent-to-assignment clause provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” The mere fact that the events giving rise to liability — exposure to asbestos — took place before the reverse spinoff does not automatically expand the universe of insureds with whom Hartford owes a relationship to include both Fluor-1 and Fluor-2.

B. The 1872 Statute Does Not Constitute an Express Legislative Pronouncement Regarding the Assignability of Liability Insurance Policies that Undercuts This Court’s Duty to Follow Henkel

Insurance Code section 520 was first enacted in 1872 as Civil Code section 2599. The provision was recodified verbatim as Insurance Code section 520 when the Insurance Code was enacted in 1935.  Insurance Code section 520 is one of the more obscure provisions of the California codes. Insurance Code section 520′s obscurity survived through the appellate proceedings in Henkel. The Court of Appeal expressed a more mundane explanation why Insurance Code section 520 has remained hidden for so long.

Insurance Code section 520 was first adopted in 1872 when the industrial revolution and California statehood were in their childhood, seven years before California adopted its current constitution in 1879. At the time, liability insurance did not even exist as a concept. As such, the concept of “loss,” to which the 1872 statute referred, is easily identifiable for first-party property damage coverage.

The insurer has a right to know, and an interest in knowing, who it insures. The insurer may be willing to insure one person and unwilling to insure another while the owner of a particular parcel of property. The insurer may have confidence in the honesty and prudence of the one in protecting the property and thereby lessening the risk, and may have no confidence in the other. Without providing the insurer the opportunity to know — by not asking it to agree to an assignment — the insured deprives the insurer of its right to determine who it will insure and the risks it is willing to take.

After a first party loss, however, the insurer’s need to consent dissapears. Any assignment is only of money already due under the contract. Third party liability policies present more problematic concepts of “loss.”  To the 1872 Legislature, the idea of third party liability insurance was as alien as other yet-unborn developments like Orange County (split from Los Angeles County in 1889), and the California Court of Appeal (established by constitutional amendment in 1904). Not until the 1880′s was the first policy of liability insurance written in America, when an English company with a Massachusetts branch wrote a policy to cover bodily injuries accidentally sustained by an insured’s employees. The first mention of “liability insurance” does not appear in a California judicial opinion until 1908.

The 1872 Legislature drew no bright lines and made no controlling pronouncements about liability insurance, or about how “loss” in the context of such policies is to be defined.

The petition for writ of mandate is denied. Hartford is entitled to costs in this writ proceeding and may act as if it never insured Fluor-2.

ZALMA OPINION

Flour failed to protect itself in two respects:

  • It failed to seek and obtain the permission of the Hartford to an assignment of the coverage to Flour-2.
  • It failed to present evidence that Hartford would have agreed had it been asked.

Back in 1976 a first party claim was denied by Transamerica Insurance Company because when its insured sold its property to a University it did not obtain the permission of the insurer to the assignment of the policy in University of Judaism v. Transamerica Insurance Co., 61 Cal. App. 3d 937, 132 Cal. Rptr. 907 (Cal.App.Dist.2 09/15/1976). The insured succeeded in obtaining coverage, not because of an old statute, but because its underwriter testified that the insurer would have routinely accepted the assignment if it had been asked to do so before the loss. That was not the case with Hartford.

The Court of Appeal concluded that had notice been promptly given to Transamerica prior to the loss it would have routinely approved the assignment of the policy to the University. It found that there was no change in the nature of the activity carried on at the premises. There was no evidence that the change of ownership in any way increased the risk to defendants. The court of appeal concluded that: “Since the change of ownership did not increase the risk to defendants, and they would have routinely approved the assignment, they cannot claim they suffered any prejudice from the late notice.”

The Supreme Court in Henkel and the Court of Appeal in Fluor created different risks of loss. It could have simply been resolved by asking Hartford to insure the two entities at the time of the change. Hartford would either have agreed or not and the Fluors would have been insured either by Hartford or some other insurer. The people who created the reverse spinoff may have been extremely knowledgeable about corporations and ignorant about insurance. Had any of the people involved in the reverse spinoff known anything about insurance they would have asked for the assignment or obtained separate insurance for the two Fluors.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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NOT ENOUGH PROSECUTIONS FOR INSURANCE FRAUD

Zalma’s Insurance Fraud Letter  September 1, 2012

Continuing with the seventeenth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the September 1, 2012 issue about an unsuccessful attempt to sue an insurer for malicious prosecution when a criminal insurance fraud prosecution fails. Fortunately for the insurer the Florida statute that provides immunity for reporting fraud protected the insurer.

In addition Zalma reports on the fact that fraud detected in the U. K. Has reduced while fraud detected and successfully prosecuted in the U.S. seems to grow logarithmically. In a report on an appeal of a conviction ZIFL explains why the person insured was his own worst enemy and lost his civil suit only to become a criminal defendant for attempting a fraudulent jewelry loss claim

The issue also reports on a new E-book from Barry Zalma, Random Thoughts on Insurance, adapted from Barry Zalma’s Blog Zalma On Insurance, © 2012 that contains a collection of 268 of the posts that reveal his 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.  The e-book covers articles that summarize recent decisions of the courts of appeal and Supreme Courts across the United States on topics from rescission to bad faith, from what is an “occurrence” to subrogation, from uninsured motorist coverage to the CGL, from Medicaid’s right of reimbursement to insurance fraud, and almost every other issue that involves insurance. For details and a list of all the posts go to  http://www.zalma.com/RANDOMTHOUGHTS.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 reports on the blog available at http://zalma.com/blog follow:

•    Exclusion Applies to Accidental Death Policy
•    Tolling of a Statute of Limitations
• INDISPUTABLE EVIDENCE NEEDED FOR “FAIRLY DEBATABLE DEFENSE   “PERSONAL INJURY” COVERAGE IS BROAD WHEN “SUDDEN” IS NOT
•    Comparative Fault Requires Setoff-with-Contribution When One Joint Tortfeasor Settles
•    Insurer Must Control Defense in Good Faith
•    Workers’ Compensation Is Not Always an Exclusive Remedy
•    RIGHT TO JURY TRIAL IN DECLARATORY RELIEF ACTION
•    Waiver of Stacking Upheld

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 and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/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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POLICY CANCELLED NOT EFFECTED BY STATUTE

Statutes are Not Designed to Provide Coverage After Cancellation

Zalma on Insurance in top 50

Statutes requiring insurers to give notice of renewal or non-renewal within a certain period of time before expiration of a policy are designed to protect people insured from surprise cancellations and to give them time to find new insurance if the insurer wishes to get off the risk. The statutes are not designed, however, to force an insurer to continue to insure a person it does not wish to insure at a price it does not believe is adequate.

When Progressive offered to renew insurance at a premium increased by $14 dollars the insured ignored the offer and allowed the policy to expire. He then made a claim only to learn he had no insurance.

The Colorado Court of Appeal was asked to resolve a dispute between an insured and its insured in a declaratory judgment action. In Progressive Casualty Insurance Company, An Ohio Corporation v. S. Bryan Moore, 2012 COA 145 (Colo.App. 08/30/2012), the insured appealed a verdict in favor of the insurer claiming that a Colorado Statute caused his policy to be renewed automatically.

Background

Moore was involved in a car accident. When he sought insurance benefits from Progressive, he was told that his automobile insurance policy had expired months earlier. Progressive filed an action seeking a declaration of the parties’ rights and obligations under Moore’s policy. At a bench trial, the parties stipulated to the following:

  • Moore held an automobile insurance policy with Progressive from July 2009 to January 2010, at a premium of $910.50. The policy covered both liability and property damage.
  • Progressive sent Moore two notices offering to renew the policy for the next six-month period at a premium of $924.50 (an increase of $14). Both notices were sent less than forty-five days before the original policy expired.
  • Moore did not make a premium payment. He and Progressive did not communicate between the expiration date and the date of the accident.

Progressive asked the court to declare the following:

  1. Moore’s insurance policy expired for failure to pay the premium;
  2. the policy was not in effect on the date of the accident; and
  3. Moore was not entitled to any benefits under the policy.

Moore responded that, despite his nonpayment, the policy was still in effect. Relying on section a Colorado statute he argued that the policy had renewed automatically because Progressive had failed to comply with the statutory notice requirements. The trial court ruled that Moore’s policy was not affected by statute because that statute applies to commercial insurance policies only. Accordingly, the court concluded that Moore’s policy expired in January 2010.

Discussion

Moore contended that the trial court misapprehended the applicability of the statute. An appellate court’s goal is to effectuate legislative intent as expressed in the language of the statute. It must construe related statutes gathering legislative intent from the enactments as a whole. The court of appeal noted that if a term has different meanings in the abstract, its intended meaning in a specific instance will often be apparent from the context, or statutory scheme, in which it appears.
The statute requires insurers to provide notice when they unilaterally increase premiums on certain specified insurance policies. If the requisite notice is not provided, the insurer shall be deemed to have renewed the insured’s policy for an identical policy period at the same terms, conditions, and premium as the existing policy.

Like the trial court the Court of Appeal concluded that the statute applies only to commercial automobile insurance policies. The Court of Appeal’s conclusion rests on two observations:

  • By its plain terms the statute applies to policies that cover “commercial exposures.” By implication, the statute does not apply to policies that cover noncommercial (or personal) exposures.
  • If provisions in the same statutory scheme can be interpreted to result either in harmony or in antagonism, the court should adopt the construction that results in harmony.  In construing provisions of an act, a court must read the statute as a whole and, if possible, construe its terms harmoniously, reconciling conflicts where necessary.

Since the court found that Moore’s policy was not commercial it determined the statute did not apply.

ZALMA OPINION

People who receive a renewal offer cannot ignore it. Even if the renewal offer seeks a higher premium than that charged the year before the notice gives the insured two options:

First, the insured can accept the offer as made and pay the premium.

Second, the insured can shop the market and acquire insurance from another insurer.

What the insured of a personal insurance policy in Colorado cannot do is ignore the offer, pay no premium, acquire no substitute insurance and drive around without insurance at all. Statutes designed to protect people insured are a shield against wrongful actions by the insurer not a AK 47 to force an insurer to insure a risk it is not willing to take at a price it is not willing to accept.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Exclusion Applies to Accidental Death Policy

Death by Medical Malpractice

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The New Jersey Superior Court, Appellate Division, was called upon to resolve a dispute between Jeffrey Paul, decedent Richard Paul’s (“Paul”) son and New York Life Insurance Company (“NYLIC”) in Estate of Richard Paul, Deceased, By Jeffrey Paul, General v. New York Life Insurance Company, No. A-2648-10T4 (N.J.Super.App.Div. 08/27/2012). The trial court order granted summary judgment dismissing Paul’s complaint in which he sought to recover the accidental death benefits (ADB) payable under an insurance policy issued to Richard by NYLIC.

Richard, at the time of his death, was a nursing home resident. He suffered from a number of chronic medical conditions, including chronic heart failure, chronic obstructive lung disease, and atrial fibrillation. On December 27, 2007, a nurse employed by the nursing home mistakenly gave him another resident’s medication. After the error was discovered, Richard was transferred to the intensive care unit of a nearby hospital. His condition quickly deteriorated and he died on January 5, 2008. The death certificate listed the cause of death as lymphoma.

Plaintiff retained the services of Donald J. Corey, M.D., board-certified in internal medicine, who prepared two reports. In his first report, Dr. Corey expressed the opinion that within a reasonable degree of medical certainty, “the administration of the incorrect medications had a direct causative role in [Richard]‘s death[.]” In his second report authored several months later, he opined that the medications that Richard received in error caused a significant change in his mental status where he became lethargic and dull and less sharp. This was a significant insult to a frail and vulnerable individual with several serious chronic medical problems. This insult caused a marked decline in Richard’s general medical condition and he died shortly thereafter. Dr. Corey further opined that “the medication error that occurred . . . resulted in his death unnecessarily.”

THE POLICY

At the time of his death, Richard had a life insurance policy with defendant valued at $5,000. He added the ADB rider, which is valued at $25,000. The ADB defined “accidental death” as death occurring while you are insured under the POLICY and the ADB RIDER, that results solely from an accidental injury and: (a) such death is not excluded in the Exclusions section; (b) such death occurs within 365 days of such accidental injury; (c) such accidental injury occurs while YOU are insured under the POLICY and RIDER; and (d) such death is the direct result of the accident and is independent of all other causes.

The following exclusions were included in the ADB rider:

The Accidental Death Benefit is not payable . . . if YOUR death is the result of one of the following: . . .

(d) death that is caused or contributed to, by disease or infirmity, except for bacterial infections resulting directly from an accidental wound;

(e) use of a drug unless prescribed or administered by a doctor and taken in accordance with a doctor’s instructions . . .

(g) sickness or its medical or surgical treatment or diagnosis.

In February 2008, defendant paid $5,027.81 to plaintiff, the named beneficiary under the policy, but denied his claim for the $25,000 under the ADB rider. Plaintiff filed a complaint against defendant alleging it breached the terms of the ADB rider.

THE TRIAL COURT JUDGMENT

In an oral opinion rendered following oral argument, the motion judge granted summary judgment to defendant, chiefly relying upon the expert reports authored by plaintiff’s expert.

The trial judge said: “I think . . . that this unfortunate occurrence did happen when plaintiff was being treated for sickness or in his medical or surgical treatment or diagnosis and that’s when a malpractice occurred. So, I think it is accidental. . . . I think these exclusions prevent the recovery and that will be the order of the [c]court.”

ANALYSIS

Medical and surgical treatment is not limited to the actions of doctors and surgeons. The focus of the definition is not on the actor, but on the actions being performed and whether these actions are “taken to effect a cure of the injury or disease.”  Moreover, under New Jersey statutes the definition of nursing includes “executing medical regimens as prescribed by a licensed or otherwise legally authorized physician or dentist.”

In the present matter, Richard received the medication as a part of his treatment. That it was administered by the hand of a nurse and not a physician is of no consequence. Administering medication to Richard was “executing medical regimens as prescribed by a licensed . . . physician,” even if executed negligently. Thus, the motion judge properly concluded, as a matter of law, that exclusion (g) applied.

The appellate court was satisfied that “medical treatment” under exclusion (g) includes administering the wrong medication. Finally, plaintiff’s claim that defendant breached the covenant of good faith and fair dealing is without sufficient merit to warrant discussion in a written opinion.

ZALMA OPINION

When a seriously ill person dies as a result of a medical error by those engaged to care for him it is unfortunate and an act of malpractice for which the person making the error should pay in an appropriate tort action for wrongful death. However, even though the death is accidental, an Accidental Death policy does not cover every accidental cause of death.

An insurance company  is entitled to determine for itself what risks it will accept. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]. [Citation.].)” (64 Cal. App. 3d at p. 273.) In this case the insurer and insured agreed that accidental death caused by the use of a drug unless prescribed or administered by a doctor and taken in accordance with a doctor’s instructions. Since the drug given to Richard was not that instructed by the doctor although accidental was clearly excluded.

The heirs should have taken the money given by the insurer and spent their wits and energies to obtain as much as possible from the person responsible for giving the wrong drug to Richard. I understand the temptation of a bad faith suit and the possibility of punitive damages exists, but it should only be tried when the facts and policy wording support the decision.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Tolling of a Statute of Limitations

Whenever Payment Made to Claimant Advise When Statute of Limitations Will Run

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The California Court of Appeal was called upon to resolve a dispute over whether a statute of limitations had been tolled because an insurer that paid for a single session with a psychologist after which the insurer failed to advise the person of the running of the statute, in John Me Doe v. Defendant Doe 1 et al, No. B233498 (Cal.App. Dist.2 08/27/2012). Plaintiff John Me Doe appeals from the judgment dismissing his complaint against four Catholic Church entities for childhood sexual abuse by a parish priest in the 1980′s after the trial court sustained the church entities’ demurrers because the statute of limitations had expired. Because the plaintiff alleged that he received psychological counseling paid for by one church entity’s insurer, but did not receive notice of when the statute of limitations would run as required by Insurance Code section 11583, he claimed that the statute of limitations was tolled, making the complaint timely.

FACTS

In August 2010, plaintiff John Me Doe sued four Catholic Church entities as Doe defendants, alleging that his local parish priest sexually molested him in 1987 and 1988. Plaintiff alleged that he was born in 1975, and was between the ages of 12 and 13 when the abuse occurred. Plaintiff alleged that he did not discover that he had adult-onset psychological injuries that were caused by the childhood molestation until 2008, and that he first retained a lawyer that same year.

The plaintiff also alleged that the statute of limitations was tolled under Insurance Code section 11583 because in 1988, defendants Doe 1 and Doe 2 encouraged him and his parents to see a counselor for therapy to address the sexual abuse he had suffered, and that he attended one such session, which was paid for by Doe 1 and its insurance carrier. Plaintiff alleged that this therapy session, with a handpicked counselor who was sympathetic to the church, was part of a larger design to pacify the victims and shield the offending priest, whose activities were allegedly known by the church for some time, and who the church encouraged to flee before he could be arrested.

Respondents demurred to the complaint, contending it was barred by the statute of limitations because plaintiff did not sue in 2003 during the one-year revival period for claims that were barred under the previous statute of limitations. The trial court sustained the demurrer without leave to amend on the ground that Insurance Code section 11583 could not toll the statute of limitations beyond the plaintiff’s 26th birthday, and that the plaintiff missed his chance to sue during the one-year revival window for previously lapsed childhood sex abuse claims. The trial court then entered a judgment dismissing the complaint.

DISCUSSION

When the alleged molestations occurred, the statute of limitations for child victims was one year, which was tolled until the minor’s 19th birthday.  Effective January 1, 2003, the Legislature amended section 340.1 expanding the limitations period for certain childhood sex abuse claims against third parties to the later of the plaintiff’s 26th birthday, or three years from discovery that the abuse caused adult-onset psychological injuries. This expansion applied to only a limited class of defendants, however: those who knew, or had reason to know, or were otherwise on notice of any unlawful sexual conduct by an employee or other agent and failed to take reasonable steps and implement reasonable safeguards to avoid acts of unlawful sexual conduct by that person in the future. As to all other third party defendants, the age 26 cutoff still applied.

Unless some other tolling provision applied, the plaintiff’s claims became time-barred when he turned 19 in 1994. They were revived in 1999, but, absent tolling under Insurance Code section 11583, lapsed again when he turned 26 in 2001. At issue is whether they remained tolled after that time under Insurance Code section 11583, allowing the plaintiff to take advantage of the newly expanded limitations period that went into effect in 2003, or whether they lapsed in 2001, obligating him to sue during the 2003 revival window that was part of that year’s amendment of Code of Civil Procedure section 340.1.

Insurance Code section 11583 provides: 

“No advance payment or partial payment of damages made by any person, or made by his insurer under liability insurance as defined in subdivision (a) of [Insurance Code] Section 108, as an accommodation to an injured person or on his behalf to others . . . because of an injury or death claim or potential claim against any person or insured shall be construed as an admission of liability by the person claimed against, or of that person’s or the insurer’s recognition of such liability . . . . Any person, including any insurer, who makes such an advance or partial payment, shall at the time of beginning payment, notify the recipient thereof in writing of the statute of limitations applicable to the cause of action which such recipient may bring against such person as a result of such injury or death . . . . Failure to provide such written notice shall operate to toll any such applicable statute of limitations or time limitations from the time of such advance or partial payment until such written notice is actually given. That notification shall not be required if the recipient is represented by an attorney.

The complaint alleged that plaintiff was not represented by an attorney when he attended the counseling session respondents provided, and that he was not given notice of the limitations period as required by section 11583.

The statute is primarily designed to encourage early payment of damages without fear of admitting liability. The legislative purpose of the written notice requirement is to prevent an injury victim from being lulled into a false sense of complacency about the need to sue because an advance or partial payment by the defendant or his insurer shows their apparent cooperativeness.

The Doe defendants’ primary argument against the applicability of Insurance Code section 11583 is that payment for one counseling session does not constitute advance partial payment of damages under that section. According to them, unless the plaintiff would have been financially responsible for the counseling, the insurer’s payment for that session was not payment of a claim and was therefore not a payment of damages. A defendant’s voluntary assumption of the cost of providing treatment is the advance payment of damages under Insurance Code section 11583.

It is well-settled law that a newly enlarged limitations period applies to all claims that were not time-barred when the new time period took effect.

The court cautioned, however, that its analysis and decision was limited to the allegations in the complaint and does not foreclose the possibility that discovery may produce evidence concerning the nature and scope of both the insurance policy and the counseling session the plaintiff attended that shows Insurance Code section 11583 is not applicable.

ZALMA OPINION

The California Fair Claims Settlement Practices Regulations, California Code of Regulations Sections 2695 et. seq, and specifically Section 2695.7(f) provides:

Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitation or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant not less than sixty (60) days prior to the expiration date; except, if notice of claim is first received by the insurer within that sixty days, then notice of the expiration date must be given to the claimant immediately.

Although not mentioned in the appellate decision the Regulations set a minimum standard for all claims people in California. Therefore, if the insurer can prove that it complied with this regulation it will win at trial and if it cannot the statute will be tolled and the gentleman will be able to go forward with his suit against the church and the priest who abused him.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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INDISPUTABLE EVIDENCE NEEDED FOR “FAIRLY DEBATABLE DEFENSE

Get Evidence Before Denying a Claim

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The Supreme Court of Utah was asked to resolve whether a “fairly debatable” defense to a bad faith claim must be resolved by summary judgment in Chad Jones v. Farmers Insurance Exchange, 2012 UT 52 (Utah 08/28/2012). The issue arose when Chad Jones sued his insurance company, Farmers Insurance Exchange, for breach of contract, bad faith breach of contract, and intentional infliction of emotional distress after Farmers denied his claim. Farmers defended by arguing that it did not breach its contract because Mr. Jones’s claim was “fairly debatable” or, as declared in other jurisdictions, there was a “genuine dispute” between Jones and Farmers.

BACKGROUND

Mr. Jones was involved in an automobile accident with another driver on October 11, 2001. Mr. Jones was not at fault. In the accident, Mr. Jones injured his back, knee, ankle, and wrist. The at-fault driver had a liability insurance policy limit of $25,000, which Mr. Jones accepted. Mr. Jones was insured by Farmers with an underinsured motorists (UIM) policy limit of $30,000. Mr. Jones made a UIM claim with Farmers in 2005 for the full $30,000 policy limit. Ultimately, the only disputed aspect of the UIM claim was a dental bill for cracked teeth. Mr. Jones visited Richard Hughes, D.M.D., about four years after the accident. Dr. Hughes submitted a report to the insurance company stating that Mr. Jones required extensive dental repair including porcelain onlays to restore five teeth due to fractures; a root canal due to exposure; and six crowns due to premature wear, likely from stress or an altered bite. Dr. Hughes’s record states, “These fractures/breaks could have been caused by traumatic force. It was reported by the patient that he was in an automobile accident 4 years ago and injured his mouth. He was aware that he had broken his tooth but was involved with several medical procedures that took precedence.”

Farmers file noted there was no support, other than the Jones’ statement that the damage to his teeth resulted from this loss. Insured makes no mention of his teeth until he sees the dentist 4 years after the accident; there is no facial trauma noted in the ER report, Dr. Gordon’s report or the PT reports. Farmers, convinced that the dental problems were not related to the accident rejected the dentist’s estimate of $14,000 and offered Mr. Jones $5,000 for his UIM claim.

Mr. Jones rejected the offer, maintaining that he was entitled to $30,000. The case went to arbitration. The arbitrators determined that the total UIM award that Farmers owed Mr. Jones was $18,500. Farmers satisfied the arbitrators’ award.

Mr. Jones moved for partial summary judgment on two issues: (1) his claim was not fairly debatable when Farmers denied it and (2) Farmers had no good faith basis for denying his claim that his dental injuries resulted from the accident. Farmers opposed the motion and filed its own motion for summary judgment, arguing before the district court as it does before us that “if an insured cannot establish that it is entitled to summary judgment on the merits of his claim, that means the claim is fairly debatable” thereby relieving the insurer of a duty to pay the insured. The district court granted Farmers’ motion for summary judgment.

WHEN AN INSURER RAISES THE FAIRLY-DEBATABLE DEFENSE, THE CASE MAY PRESENT QUESTIONS OF FACT FOR THE JURY

In Utah, when an insured’s claim is fairly debatable, the insurer is entitled to debate it and cannot be held to have breached the implied covenant of good faith if it chooses to do so. This is because the duties imposed by the implied covenant of good faith plainly indicate that the overriding requirement imposed is that insurers act reasonably, as an objective matter, in dealing with their insureds. An insurer cannot be held to have breached the covenant of good faith on the ground that it wrongfully denied coverage if the insured’s claim, although later found to be proper, was fairly debatable at the time it was denied.

There is a notable distinction between a factual dispute about the validity of the underlying insurance claim and a factual dispute about what information the insurance company used to deny the claim.

The Supreme Court used this case to clarify that a bad faith claim need not be resolved on summary judgment whenever an insurance company argues that the claim was fairly debatable. Summary judgment is only appropriate if, viewing the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party the moving party is entitled to a judgment as a matter of law.  An analysis of whether an insurance claim is fairly debatable is closely related to an analysis of whether an insurer fulfilled its duty to evaluate the claim fairly.

When making the determination of whether a claim is fairly debatable, a judge should remain mindful of an insurer’s implied duties to diligently investigate claims, evaluate claims fairly, and act reasonably and promptly in settling or denying claims. Summary judgment is only available to an insurer when there is a legitimate factual issue as to the validity of the insured’s claim, such that reasonable minds could not differ as to whether the insurer’s conduct measured up to the required standard of care.

Decision

Viewing the facts and all reasonable inferences in the light most favorable to Mr. Jones, the Supreme Court could not say that reasonable minds could not differ on whether his claim was fairly debatable. Farmers argued that Mr. Jones’s claim is fairly debatable because he did not report injuring his mouth to paramedics, emergency personnel, medical providers, or the at-fault driver’s insurance company. Farmers argued that the dentist’s statements regarding the cause of the tooth damage were based on Mr. Jones misrepresenting that he had hurt his mouth in the accident and knew he had broken a tooth in the accident.

An insurer is entitled to question the credibility of its clients. Mr. Jones’s failure to make earlier complaints regarding the mouth injury throws his credibility into question. It does not destroy it completely, especially considering the other injuries Mr. Jones sustained in the accident. Farmers’ insurance claim log documented that the company doubted Mr. Jones’s claim based on an its expectation that the broken teeth — if broke in the accident — would have not taken four years to cause him to seek treatment.  However, the dentist replied to Farmers’ inquiries by stating that “the teeth were cracked during the accident and are still cracked.” After such a response from a medical expert, a jury could find that Farmers should not have considered it obvious that a person with multiple injuries would seek treatment for cracked teeth without delay. As a result Mr. Jones has presented a factual question for the jury regarding whether Farmers evaluated his claim fairly.

As a result the Supreme Court held that Mr. Jones’ claim was not fairly debatable as a matter of law and instead presented triable issues of fact. Claims that insurers have breached the implied covenant of good faith and fair dealing cannot always be determined as a matter of law at summary judgment, even when the insurer alleges that the insurance claim was fairly debatable. Mr. Jones’s allegations that Farmers handled his claim in bad faith present triable issues of fact that need the the assistance of a jury to resolve the factual dispute.

ZALMA OPINION

No one likes to have his or her insurance claim denied. Insurance companies would prefer to pay all claims. They are obligated, however, when they have a good faith belief there is not coverage to refuse to pay the claim.

Farmers investigation in this case was limited to writing a letter to the dentist and reaching a contrary view than the expert dentist. It did not — from the information shown in the appellate record — interview Mr. Jones about his injuries at the time of the accident or at the time he made a claim for dental services four years after the accident.

To prove their fairly debatable argument as a matter of law they needed evidence more than conclusions. Farmers, had it done a thorough investigation, could have, and may still at trial, show the court that at the time of the accident there was no history of an injury to the jaw. This, coupled with the arbitration award that was approximately half what Mr. Jones claimed, but three times what they offered, indicated a fairly debatable claim. The key failure was the lack of an early and thorough investigation. Jones may succeed in his claim for bad faith if he can show that the caused him to go through the arbitration because of their failure to conduct a thorough investigation and negotiate a fair and reasonable settlement.

 

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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“PERSONAL INJURY” COVERAGE IS BROAD

Invasion of Right of Private Occupancy of Land is Covered

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The Indiana Court of Appeals was called upon to resolve an insurance coverage for claims arising from the abandonment of foundry sand from the Indianapolis foundry of Daimler Chrysler Corporation, n/k/a Chrysler LLC, (“Chrysler”) by lessee International Recycling Inc. (“IRI”) on lessor FLM, LLC’s (“FLM”) property and the migration of the sand onto adjacent property in FLM, LLC v. the Cincinnati Insurance Company, No. 49A02-0902-CV-127 (Ind.App. 08/28/2012).

FLM sued its insurer seeking a declaration that IRI has coverage under IRI’s insurance policies with The Cincinnati Insurance Company (“Cincinnati”) for the environmental liabilities asserted against FLM and for FLM’s own action against IRI. Cincinnati filed a counterclaim, seeking a declaration that there was no coverage under the policy for the claims, and a third-party complaint for declaratory judgment that brought Chrysler into the case. Chrysler subsequently filed a counterclaim against Cincinnati for declaratory relief. The trial court granted summary judgment in favor of Cincinnati relating to the claims of FLM and Chrysler.

FACTS

FLM is an Indiana company that owns land located in Indianapolis, Indiana (“FLM’s Property”). On May 14, 1999, FLM leased the property to IRI, which planned to use FLM’s Property for the storage, mixing, and removal of sand, gravel, and similar materials. Pursuant to the terms of its lease, IRI was required to “comply fully with all federal, state, and local environmental, health, or safety statutes, rules, regulations, or ordinances.”  If IRI violated this provision, allowed the presence of hazardous material to contaminate FLM’s Property, or if contamination occurred from which IRI was liable to FLM for damages, IRI was required to indemnify FLM against all claims, judgments, damages, penalties, fines, costs, liabilities, or losses resulting from such contamination. The lease also contained another provision, where IRI agreed to indemnify FLM against all actions, claims, demands, costs, damages, or expenses of any kind that may be brought against FLM due to IRI’s negligent performance or failing to perform its obligations under the lease.

Chrysler owned and operated a foundry in Indianapolis, which generated large amounts of foundry sand. Chrysler entered into purchase order transactions with IRI for the collection, transportation, and beneficial reuse or other appropriate disposal of foundry sand generated from Chrysler’s Indianapolis foundry. IRI began depositing foundry sand from Chrysler’s facility onto FLM’s Property in May 1999. Chrysler paid IRI for the removal of the foundry sand; IRI had only one customer and one source of revenue – Chrysler.

The Indiana Department of Environmental Management (“IDEM”) characterized the foundry sand stored on FLM’s Property as Type III foundry sand. Type III sand may be used for certain purposes, including structural fill for roads, construction and architectural fill, and raw material in concrete, asphalt, and cement. IRI planned to mix the foundry sand with aggregate on FLM’s Property and then to transport it from FLM’s Property to be used as structural backfill for building and roadway projects. IRI intended that the foundry sand would only remain on FLM’s Property temporarily.

In the fall of 2002, Chrysler stopped paying IRI. As a result, IRI could no longer fund the removal of the foundry sand from FLM’s Property. In March 2003, IRI stopped paying rent to FLM and abandoned over 100,000 tons of foundry sand on FLM’s Property, where most remain. In the fall of 2002, CSX Transportation, Inc. (“CSX”), which owned property adjacent to FLM’s Property that was used to operate a railroad right-of-way, began complaining to IRI that foundry sand was migrating onto its property. The foundry sand had allegedly clogged drainage pipes, causing water to accumulate on CSX’s property and interfering with train and signal operations.

Cincinnati insured IRI under a Commercial General Liability (“CGL”) policy  (“the CGL Policy”) from May 1, 1999 until March 14, 2003. The CGL Policy provided coverage for “Bodily Injury and Property Damage Liability” and “Personal and Advertising Injury Liability.”

The CGL Policy defined “personal injury” as “injury other than “bodily injury” arising out of one or more of the following offenses: . . . The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies by or on behalf of its owner, landlord, or lessor . . . .” Cincinnati also insured IRI under a Commercial Umbrella Liability policy numbered CCC 446 16 01 (“Umbrella Policy”). The definitions for “personal injury” and “property damage” in the Umbrella Policy are the same as those in the CGL Policy.

DISCUSSION

FLM asserts that IRI wrongfully entered onto FLM’s Property by not removing the foundry sand after IRI stopped paying rent and violated the environmental compliance requirements in the lease. Specifically, FLM contends that IRI’s right to store foundry sand on FLM’s Property was contingent on IRI paying rent and obeying all environmental laws, and once IRI breached its lease contract, FLM claims that it no longer had a right to keep sand on its property and, therefore, committed a wrongful entry. Further, FLM argued that IRI’s failure to remove the foundry sand was an “invasion” of FLM’s “right to private occupancy” because the “right to private occupancy” includes the right to property that is free of tons of foundry sand belonging to another entity and left on your property.

FLM’s allegations involved sand initially brought onto property owned by FLM legitimately under the lease, but later abandoned by IRI when it could no longer pay its rent. The sand abandoned by IRI interferes with the right of FLM to use and enjoy its property.

Applying the standard rules of construction of insurance contracts the court of appeal found that the policy language at issue is clear that “by or on the behalf of” modifies “that a person occupies,” the language that directly precedes it, and not the “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy” language. Because this language in the policies is subject to more than one reasonable interpretation, it is ambiguous, and must be construed against Cincinnati and in favor of coverage.

Although IRI did assume liability for damages and actions made against FLM due to IRI’s negligent performance under the lease, the trial court erred in granting summary judgment in favor of Cincinnati. The court of appeal reversed the trial court’s entry of summary judgment in favor of Cincinnati and remanded the case to the trial court with instruction to enter summary judgment in favor of FLM.

ZALMA OPINION

It is essential to the understanding of an insurance policy to read the entire policy, read all of its words, and parse the sentence in the way some of us were taught by grammar teachers. In this case, the parsing of the wording of the policy, made it clear that there was coverage and that it was important to determine which subject was modified by the language of the policy. Since the property where the sand was abandoned was there for or on behalf of the insured landlord coverage necessarily applied.

The lesson: read the whole policy, determine if it can possibly be interpreted to provide coverage, and if it does, provide the coverage and avoid the expenses of a lengthy and complex litigation.

 

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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WHEN “SUDDEN” IS NOT

SUDDEN & ACCIDENTAL MAY JUST MEAN  “UNEXPECTED”

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The Supreme Court of New Mexico was required to interpret the meaning of a single word, “sudden,” within a pollution exclusion clause in a series of liability insurance policies barring coverage for certain damages unless the events causing those damages were “sudden and accidental.”  In United Nuclear Corporation v. Allstate Insurance Company, No. 32,939 (N.M. 08/23/2012), an issue of first impression in New Mexico, although already considered by numerous courts in other jurisdictions.

FACTUAL AND PROCEDURAL BACKGROUND

United Nuclear operated several uranium mines in New Mexico from the 1960s through the early 1980s, one of which was the Northeast Church Rock Mine (Church Rock Mine) in McKinley County. Although the parties do not mention this fact in their briefs, in July 1979, a breach opened in a dam at the Church Rock Mine and about 94 million gallons of radioactive liquid escaped from a tailings pond and poured into the nearby Rio Puerco. The spill was the largest accidental release of radioactive material in U.S. history.  Remediation of the area around the Church Rock Mine continues to this day.

To insure its mining operations, United Nuclear obtained commercial general liability and umbrella liability insurance policies from a number of carriers, including the polices relevant to this dispute (the Policies), which were issued by two predecessor corporations of Respondent Allstate Insurance Company (Allstate). Together, the Policies were in effect between August 1, 1977 and June 1, 1981.

United Nuclear either incurred actual costs or was exposed to potential liability for environmental contamination resulting from its mining operations through several different proceedings. Those proceedings included a 1996 lawsuit filed by the New Mexico Mining Commission ultimately requiring United Nuclear to remediate three of its mines (including the Church Rock Mine).

United Nuclear ultimately filed a third-party complaint in the 1997 lawsuit filed by the mineral lessor, seeking a declaration that Allstate and various other insurers are required to defend and indemnify United Nuclear in the underlying suit. By April 2005, United Nuclear had amended the third-party complaint to seek declaratory relief against Allstate and the other insurers for all of its actual and potential liabilities mentioned above.

Allstate moved for summary judgment on the sole ground that the Policies contain an exclusion clause removing from coverage all claims for damages caused by pollution or contamination unless the underlying discharges were “sudden and accidental.” Allstate further asserted that the term “sudden” as used in the Policies connotes an abrupt event or events, and because the discharges that lead to the contamination at United Nuclear’s mines occurred over a period of years, those events were not “sudden” and thus are excluded from coverage.

In October 2008, the district court granted Allstate’s motion. The court found the word “sudden” and the word “accidental” to be clear and unambiguous The word “sudden” means quick, abrupt or otherwise a temporarily short period of time. The word “accidental” means unintended, unexpected or by chance. United Nuclear appealed the district court’s determination to the Court of Appeals. In its opinion, a divided panel upheld the district court’s grant of summary judgment to Allstate on the meaning of “sudden” as used in the Policies’ pollution exclusion clause.

As the district court had done, the Court of Appeals relied heavily on the reasoning and holding of Mesa Oil, Inc. v. Insurance Co. of North America, 123 F.3d 1333, 1339-41 (10th Cir. 1997). United Nuclear, 2011-NMCA-039, ¶¶ 7, 12-14. In Mesa Oil, the Tenth Circuit acknowledged an absence of New Mexico case law interpreting the term “sudden,” but surmised that New Mexico courts “would likely honor the plain meaning of the word ‘sudden’ and conclude that the term encompasses a temporal component.”

DISCUSSION

As with other contracts, where an insurance policy’s terms have a common and ordinary meaning, that meaning controls in determining the intent of the parties.

Consideration of Extrinsic Evidence in Assessing Ambiguity

Because the Court of Appeals’ majority opinion held the term “sudden” to have a plain and unambiguous meaning, it did not consider extrinsic evidence necessary to resolve the appeal. New Mexico law allows the court to consider extrinsic evidence to make a preliminary finding on the question of ambiguity. This general principle of New Mexico contract law has been reaffirmed in the specific context of insurance coverage disputes. New Mexico courts generally allow a party to introduce extrinsic evidence of an insurance contract’s meaning to determine whether an ambiguity exists and how that ambiguity should be resolved. Therefore, we consider extrinsic evidence to help evaluate whether the term “sudden,” as used in the Policies’ pollution exclusion, is ambiguous.

The Policies’ pollution exclusion is a boilerplate form that once was widely used in the liability insurance industry. Although wording of the pollution exclusion may vary slightly from policy to policy, numerous courts in other jurisdictions have considered functionally identical language from policies issued by dozens of different insurers.

When a term is undefined in the policy, a reviewing court may look to that term’s usual, ordinary, and popular meaning, such as found in a dictionary. Although the mere existence of multiple dictionary definitions of a word, without more, does not create an ambiguity. Dictionaries define “sudden” as either synonymous with “unexpected,” or as the temporal descriptor of a brief occurrence, or both. The Court of Appeals did not explain its preference for one set of these definitions over the other, but simply concluded that “the word ‘sudden’ . . . ordinarily means: quick, abrupt, or a temporarily short period of time.”

Divergence of Opinion Among Courts

Perhaps more consequential than the fact that “sudden” has multiple definitions in the abstract is the split among other courts that have considered the issue in similar insurance coverage disputes. While it is true that a split in legal authority may be indicative of an ambiguity in the policy, it does not establish one. Courts from around the country have divided nearly evenly on the meaning of sudden, with nearly half concluding that the term is ambiguous.

Many courts have reasonably concluded, both inside and outside of the insurance context, that such a lack of interpretive consensus is itself an indicator of ambiguity.

More recent decisions analyzing “sudden and accidental” in the context of other types of insurance policies are also instructive.

Turning to the drafting history of the pollution exclusion, around 1970 the insurance industry tacked the pollution exclusion onto general liability policies as a way to distance insurers in the public mind from deliberate polluters. We do not conclude, as did the Court of Appeals, that sudden has only one reasonable meaning. The New Mexico Supreme Court viewed the consideration of extrinsic evidence as important to the initial determination of whether an ambiguity exists in the insurance policy.

Insurance companies may not represent to regulators that they intend a phrase to mean one thing in a policy when they seek its approval and then assert that it means something else when a claim is subsequently filed.  Although a review of the origins of the pollution exclusion does not by itself determine ambiguity, that history provides another indication that the word “sudden” in the phrase “sudden and accidental” did not then, and does not now, bear a single obvious meaning.

CONCLUSION

The absence of a definition of the term in the Policies, taken together with diverging definitions in standard dictionaries and the lack of any consensus among courts nationwide, the New Mexico Supreme Court held that the meaning of the term “sudden” as used in the Policies is ambiguous. Recognizing the inherent imbalance of the two parties to an insurance contract and that often times “language in standard policies does not involve mutual negotiations between the insurers and the insureds,” the New Mexico Supreme Court resolved the ambiguities against the insurer.

The Supreme Court held, after a detailed analysis, as a matter of law that the term “sudden,” in the Policies’ pollution exclusion, means “unexpected,” rather than indicating a temporal limitation on the occurrence. That does not necessarily mean that United Nuclear is entitled to coverage under the Policies. United Nuclear must still prove that its operations led to discharges that were in fact “sudden and accidental,” and Allstate may have other policy defenses to coverage not raised in its summary judgment motion and this appeal.

ZALMA OPINION

Before reading this case, and the others dealing with pollution exclusions, I thought I knew and understood the meaning of the word “sudden”. I was wrong. There are multiple meanings of the word and multiple interpretations when it is used in an insurance policy.

The cases dealing with pollution, including this one from New Mexico, makes clear that future modifications of insurance policies must include more definitions — especially since policies must be written in Sesame Street English understandable by fourth graders — that are imprecise. A definition in the Allstate policies of the word “sudden” would have saved a great deal of litigation.

Now that courts, like New Mexico, will look at extrinsic evidence in determining the meaning of a phrase in a policy the insurer — when seeking regulatory approval of a policy wording — must be totally honest with the regulator and make clear when excluding a coverage that may have existed before the change that the new wording is more restrictive.

© 2012 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “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,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Comparative Fault Requires Setoff-with-Contribution When One Joint Tortfeasor Settles

Common Law Release Rule Is No More

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The California Supreme Court has been very busy dealing with insurance and tort law, allowing stacking of policies on continuing third party claims, limiting plaintiffs to actual charges for medical services rather than amounts billed, and now changing the “release rule.”

In Aidan Ming-Ho Leung, A Minor, Etc v. Verdugo Hills Hospital, the Supreme Court of California http://www.courts.ca.gov/opinions/documents/S192768.PDF,  No. S192768, 2012.CA.0006278 (8/23/12) the Supreme Court was faced with the issue of whether a release signed in favor of one defendant protects other defendants of judgments for economic damages.

FACTUAL BACKGROUND

On Monday, March 24, 2003, Aidan Ming-Ho Leung (“Aidan”), of East Asian descent, was born at Verdugo Hills Hospital in Glendale, Los Angeles County.  He was born at less than 38 weeks’ gestation (37 weeks and two days).  On the day of his birth, his mother, Nancy Leung, tried to breastfeed him five or six times, but she could not tell whether he was taking in milk.  At least three times she expressed her concern to two of the attending nurses; two entries in Aidan’s hospital medical chart indicated problems with breastfeeding.

The next day, Aidan’s pediatrician, Steven Wayne Nishibayashi, examined Aidan at the hospital.  Dr. Nishibayashi told the parents that Aidan was a healthy baby, that two bruises on the side of Aidan’s head were nothing to worry about, that it was safe to take Aidan home, and that a followup appointment should be made for the next week.  Later that morning, about 24 hours after his birth, Aidan was discharged from the hospital.

An on-call physician returned the call and, after listening to a description of Aidan’s symptoms, said to immediately take Aidan to the emergency room at Huntington Memorial Hospital in Pasadena.  There Aidan was given a blood-exchange transfusion to reduce the level of bilirubin, but it was too late.  Aidan had already developed kernicterus, resulting in severe brain damage.
Before trial, plaintiff settled with defendant pediatrician for $1 million, the limit of the pediatrician’s malpractice insurance policy.  Defendant pediatrician agreed to participate as a defendant at trial, and plaintiff agreed to release him from all claims.  The pediatrician petitioned the trial court for a determination that the written settlement agreement met the statutory requirement of having been made in “good faith,” seeking to limit his liability to the amount of the settlement. The trial court denied that motion, as it found the settlement to be “grossly disproportionate to the amount a reasonable person would estimate” the pediatrician’s share of liability would be.

Six days after his birth, plaintiff Aidan suffered irreversible brain damage. Through his mother as guardian ad litem, he sued his pediatrician and the hospital in which he was born.  Before trial, plaintiff and the pediatrician agreed to a settlement of $1 million, the limit of the pediatrician’s malpractice insurance policy.  At a jury trial, plaintiff was awarded both economic and non-economic damages.  The jury found that the pediatrician was 55 percent at fault, the hospital 40 percent at fault, and the parents 5 percent at fault. The jury awarded $250,000 in non-economic damages; $78,375.55 for past medical costs; $82,782,000 (with a present value of $14 million) for future medical costs; and $13.3 million (with a present value of $1,154,000) for loss of future earnings.

THE APPEAL

The hospital appealed contending that under the common law “release rule,” Aidan’s settlement with the pediatrician also released the nonsettling hospital from liability for plaintiff’s economic damages.  The Court of Appeal reluctantly agreed.

The Court of Appeal observed that although the California Supreme Court “has criticized the common law release rule,” it “has not abandoned it.”  Considering itself bound by principles of stare decisis, the Court of Appeal then applied the common law release rule to this case, and it reversed that portion of the trial court’s judgment awarding plaintiff economic damages against the hospital.

The Court of Appeal agreed with defendant hospital that under the common law release rule, plaintiff’s settlement with, and release of liability claims against, defendant pediatrician also released nonsettling defendant hospital from liability for plaintiff’s economic damages.

THE COMMON LAW RELEASE RULE

Under the traditional common law rule, a plaintiff’s settlement with, and release from liability of, one joint tortfeasor also releases from liability all other joint tortfeasors.  That common law rule originated in England at a time when, under English law, a plaintiff could sue in a single action only those tortfeasors who had acted in concert against the plaintiff.  In this context, the rule developed that if a joint tortfeasor paid compensation to the plaintiff, and received in exchange a release from liability, the remaining joint tortfeasors were also released. The reason for the rule was to protect against unjust enrichment and that there should only be one compensation for a single injury.

Since there was much criticism of the traditional common law release rule the California Legislature in 1957 enacted Code of Civil Procedure section 877.  The statute modified the common law release rule by providing that a “good faith” settlement and release of one joint tortfeasor, rather than completely releasing other joint tortfeasors, merely reduces, by the settlement amount, the damages that the plaintiff may recover from the nonsettling joint tortfeasors, and that such a good faith settlement and release discharges the settling tortfeasor from all liability to others.

The statute governs only good faith settlements. The trial court determined that the settlement between the pediatrician and Aidan was not made in good faith.

Therefore, the statute does not apply to this case.

ANALYSIS

The rationale for the common law release rule was that there could be only one compensation for a joint wrong and since each joint tortfeasor was responsible for the whole damage, payment by any one of them satisfied plaintiff’s claim against all. That rationale assumed that the amount paid in settlement to a plaintiff in return for releasing one joint tortfeasor from liability always provides full compensation for all of the plaintiff’s injuries, and that therefore anything recovered by the plaintiff beyond that amount necessarily constitutes a double or excess recovery.  The California Supreme Court found the assumption unjustified.

As a result of its finding, the Supreme Court adopted a setoff-with-contribution approach.  It concluded that the approach is more consistent with California’s comparative fault principle and its rule of joint and several liability.

Now, as a result of this decision, when a settlement with a tortfeasor has judicially been determined not to have been made in good faith, just as it is when a settlement is found to be in good faith, nonsettling joint tortfeasors remain jointly and severally liable, the amount paid in settlement is credited against any damages awarded against the nonsettling tortfeasors, and the nonsettling tortfeasors are entitled to contribution from the settling tortfeasor for amounts paid in excess of their equitable shares of liability.

As a result of the finding the hospital remains jointly and severally liable for plaintiff’s economic damages and the Court of Appeal’s judgment was reversed.

The case was sent back to the Court of Appeal to the Court of Appeal to address the hospital’s contentions that the trial court erred in excluding evidence of future insurance coverage, in calculating interest on future periodic payments, and in requiring the hospital to provide security for future periodic payments. Nor, for the same reason, did the Court of Appeal address on its merits plaintiff’s cross-appeal contending the trial court erred in allowing defendant hospital to acquire an annuity payable to itself as security for the future periodic payments it had been ordered to pay under the judgment.

The judgment of the Court of Appeal was reversed, and the case is remanded to that court for further proceedings consistent with the views expressed in this opinion.

ZALMA OPINION

The Supreme Court of California, following years of precedent, and the need for fairness that resulted in the adoption of a recognition of comparative negligence, eliminated the release rule. In doing so it reached a fair and equitable judgment allowing for a fair distribution of damages among joint tortfeasors that reasonably and naturally flows from the original comparative fault to replace contributory negligence.

Whether Aidan will recover the full amount of his damages depends upon the assets of the parties. The purchase, by the hospital, of an annuity to cover Aidan’s damages should help and since the pediatrician’s insurance coverage has been expended he can simply file bankruptcy to avoid payment of any funds in excess of his policy limits. The hospital, depending on its insurance coverages and the annuity might find itself protected and paying, regardless of its liability, the lion’s share of the judgment.

© 2012 – Barry Zalma

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

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

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

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

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Insurer Must Control Defense in Good Faith

Counsel Appointed by Insurer Must Protect Insured’s Right to Coverage

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When an insurer appoints an attorney to defend its insured subject to a reservation of rights the attorney appointed owes a duty to represent the insured vigorously, must not become involved in coverage issues and also owes a duty to the insurer. However, when the insured knows there are coverage issues – because of the reservation of rights – that can be resolved in an arbitration by requesting that the arbitrator provide a detailed explanation of the arbitration award, the insured and the insurer must require that defense counsel seek such an explanation in a timely fashion. It is up to the insurer, who controls the defense, to make certain that defense counsel do what is needed to protect the insured.

The Minnesota Supreme Court was asked to determine if an insurer is vicariously liable for the failure of the attorney it appointed to represent the insured to request a written explanation of an arbitration award. Remodeling Dimensions, Inc. (RDI), a home remodeling contractor, received a demand for arbitration regarding allegedly defective work it performed on a remodeling project. RDI tendered the demand to its insurer, Integrity Mutual Insurance Company (Integrity), and Integrity accepted defense of the claim under a reservation of rights. In Court of Appeals, Dietzen, J. v. Office of Appellate Courts, No. A10-1992 (Minn. 08/22/2012) the Minnesota Supreme Court explained the duties of an insurer who appoints counsel to defend its insured under a reservation of rights.

FACTS

The arbitrator issued a general arbitration award in favor of the homeowners and refused to give a more detailed award. Integrity refused to pay the award, RDI paid the homeowners and sued Integrity for indemnification under the policy. On cross-motions for summary judgment, the district court granted RDI’s motion, concluding that Integrity was vicariously liable for the failure of the attorney it appointed to represent RDI to request a written explanation of the arbitration award. The court of appeals reversed, concluding that Integrity had the right to challenge coverage of the claim even though no detailed award was obtained, and that the claim was not covered under the insurance policy.

RDI completed the project in June 2003. In May 2004, the house sustained storm damage. In the course of repairing the storm damage, the homeowners noticed damage and the cause of the moisture intrusion and damage was a matter of considerable dispute between RDI and the homeowners.

The Coverage Question

Integrity appointed an attorney to represent RDI in the arbitration proceedings. On September 21, 2006, the AAA appointed an arbitrator to decide the case. The next day, Integrity sent RDI a reservation-of-rights letter, stating that it questioned whether the homeowners’ claims were covered under the insurance policy and reserving its right to deny coverage notwithstanding the outcome of the arbitration. Integrity later wrote to RDI, but apparently did not instruct defense counsel, that :

“The purpose of this correspondence is also to alert you of your duties in this matter. It will be up to you and your counsel to fashion an arbitration award form that addresses the coverage issues and your respective burden. If, for example, the arbitration award ultimately rendered makes it impossible to determine whether any of the damages awarded involve ‘property damage’ that occurred during the Integrity policy period, Integrity will not be responsible to indemnify an ambiguous award.” (Emphasis added)

Following the arbitration hearing, the arbitrator awarded the homeowners $45,000 for “basic house repairs,” $2,000 for “flat roof repair,” $1,000 for “final cleaning,” and $3,000 for “construction management fees.” The arbitrator awarded nothing for replacement window costs, inspection costs, and design costs. RDI’s attorney then requested further written explanation of the award. The arbitrator denied the request as untimely in accordance with AAA rules.

The Trial & Appeals

Subsequently, Integrity denied coverage of the award. RDI paid the homeowners the award amount and then commenced a declaratory judgment action against Integrity, alleging breach of contract for Integrity’s refusal to pay the arbitration award, excluding $2,000 for flat roof repair, which RDI conceded was not covered by the insurance policy. The trial court reasoned that Integrity should pay the entire award because an attorney hired by an insurer to defend an insured is an agent of the insurer, and the insurer is therefore vicariously liable for the attorney’s failure to request a written explanation of the award.

The court of appeals reversed and ordered the district court to enter summary judgment in favor of Integrity. The court of appeal determined that the attorney hired by Integrity to represent RDI did not have an attorney-client relationship with Integrity, and therefore Integrity is not responsible for the attorney’s failure to make a timely request for a written explanation of the award.

Both negligent construction claims allege moisture damage resulting from “continuous or repeated exposure” to water intrusion into the house. Pursuant to the insurance policy, both of the homeowners’ negligent-construction claims, if proven, would satisfy the meaning of “occurrence” under the policy.

It is well established that an attorney hired by an insurer to defend a claim against its insured represents the insured. Since the attorney has an attorney-client relationship with the insured, the attorney owes a duty of undivided loyalty to the insured and must faithfully represent the insured’s interest. But we have not held that an attorney cannot have an attorney-client relationship with both the insured and the insurer.

A principal (the insurer) may be legally responsible for the actionable conduct of its agent (defense counsel) committed in the course and within the scope of the agency.  When an insurer notifies its insured that it accepts the defense of an arbitration claim under a reservation of rights that includes covered and non-covered claims, the insurer not only has a duty to defend the claim, but also to disclose to its insured the insured’s interest in obtaining a written explanation of the award  and direct counsel it retained to defend the insured, that the award must identify the claims or theories of recovery actually proved and the portions of the award attributable to each.

Therefore, the Supreme Court imposed a duty to notify upon the insurer because the insurer is in a unique position to know the scope of coverage and exclusions in its insurance policies. Although it acknowledged that the insured has more information regarding the claim against the insured the obligation of the insurer to notify the insured should be limited to the claim presented to it by its insured.

The Supreme Court concluded that the homeowners’ negligent-construction (original house) claim presented in the arbitration proceeding satisfied the definition of an occurrence and was not excluded under the business-risk exclusions in the policy. Additionally, it concluded that RDI’s vicarious-liability claim fails because it has failed to establish that the attorney appointed by Integrity to defend RDI against the homeowners’ liability claims had a duty of care to obtain a written explanation of the arbitration award.

However, the Supreme Court concluded that when Integrity elected to defend the homeowners’ claims under a reservation of rights, Integrity had a duty to notify RDI of RDI’s interest in an explanation of the arbitration award. If Integrity failed to notify RDI, and RDI is able to show prejudice resulting from the conduct of Integrity in failing to do so, then the burden shifts to Integrity to show that some part of the arbitration award is not covered under the policy.

Since the Supreme Court was unable to determine whether Integrity fulfilled its duty to notify RDI, and therefore whether the burden of proof as to allocation remains with RDI.

ZALMA OPINION

Although the opinion is difficult to understand and tends to go in both directions the lesson taught by this decision is that the tri-partite relationship between an insured, defense counsel and an insurer who pays defense counsel to defend the insured requires more than just paying the lawyer’s bills.

When an insurer notifies its insured that it accepts defense of an arbitration claim under a reservation of rights that includes covered and non-covered claims, the insurer not only has a duty to defend the claim, but also to disclose to its insured the insured’s interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and the portions of the award attributable to each. That notice should not be limited to the insured but must include defense counsel. That defense counsel failed, in this case, to promptly make such a demand on the arbitrator raised a coverage issue between the insurer and the insured that should never have occurred.

© 2012 – Barry Zalma

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

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

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

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

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Workers’ Compensation Is Not Always an Exclusive Remedy

Right to Augment Workers’ Comp Benefits Limited to Worker

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In California, where an employee is injured in the course and scope of his or her employment, workers’ compensation is generally the exclusive remedy of the employee and his or her dependents against the employer. The “exclusivity rule” is based upon a presumed compensation bargain where the employer assumes liability for industrial personal injury or death without regard to fault in exchange for limitations on the amount of that liability. The employee is afforded relatively swift and certain payment of benefits to cure or relieve the effects of industrial injury without having to prove fault but, in exchange, gives up the wider range of damages potentially available in tort.

In Lefiell Manufacturing Co v. the Superior Court of Los Angeles County, No. S192759 (Cal. 08/20/2012) the California Supreme Court accepted the fact that, contrary to general knowledge, there are limited statutory exceptions to the exclusivity rule that authorize the injured worker to seek to augment the workers’ compensation benefits by bringing an action at law for damages against the employer. One such exception is found in Labor Code § 4558, called the “power press exception.”

Section 4558 authorizes an injured worker to bring a civil action for tort damages against his or her employer where the injuries were “proximately caused by the employer’s knowing removal of, or knowing failure to install, a point of operation guard on a power press,” where the “manufacturer [had] designed, installed, required or otherwise provided by specification for the attachment of the guards and conveyed knowledge of the same to the employer.” (§ 4558, subds. (b) & (c).)

A worker injured while operating a power press without a point of operation guard brought a civil suit against his employer under the power press exception that included a claim for loss of consortium on behalf of his spouse, predicated on the facts allegedly establishing the section 4558 violation.

The Supreme Court was called upon to determine the viability of the spouse’s loss of consortium claim.

Court of Appeal Decision

The Court of Appeal concluded the spouse’s loss of consortium claim as pleaded in the civil action remained viable. The court believed that because section 4558 authorized the injured worker to sue his employer in a court of law for his power press injuries, the claims of both the worker and his dependent spouse fell outside the workers’ compensation system altogether, and accordingly, the exclusivity rule did not apply or bar the spouse’s loss of consortium claim.

Factual and Procedural Background

O’Neil Watrous and Nidia Watrous, his spouse filed a civil action against LeFiell Manufacturing Company for injuries suffered by employee while operating a “FENN 5f” swaging machine while working for LeFiell.  LeFiell contended Mrs. Watrous lacked standing to pursue or join in any cause of action for tort damages arising from the power press injury, and that her loss of consortium claim for damages was likewise barred by the exclusivity rule and did not fall within any of the recognized statutory exceptions to that rule.

Discussion

Based on the statutory language, California courts have held workers’ compensation proceedings to be the exclusive remedy for certain third party claims deemed collateral to or derivative of the employee’s injury.

As a factual matter, Mrs. Waltrous’ claim for loss of consortium was unquestionably derivative of, and dependent on, Mr. Waltrous’ industrial injuries.

The Supreme Court concluded that Section 4558 is an exception to the workers’ compensation exclusivity rule only to the extent that it authorizes an employee who suffers a power press injury to seek to augment his or her recovery under the workers’ compensation system.

Decision

The Supreme Court stated that the  “remedy of tort damages in an action at law pursuant to the power press exception is intended to augment, and not replace, the remedies otherwise available to compensate for the industrial injury under the workers’ compensation system.” If the injured worker prevails in his or her suit the employer is entitled to a setoff or credit against that judgment or settlement for any workers’ compensation benefits paid to the worker.

Where the worker’s power press injuries do not prove fatal, the Legislature has expressly restricted standing to bring the action at law to the injured worker alone. The availability of a civil remedy for the injured worker, to augment his or her workers’ compensation benefits does not take the case outside of the workers’ compensation system.

Notwithstanding the availability of a civil cause of action for workers who suffer power press injuries, claims arising from the industrial accident that caused those injuries fundamentally remain compensable under the workers’ compensation system.

As a result the Supreme Court decided that under settled principles of workers’ compensation law, the exclusivity rule bars a dependent spouse’s claim for loss of consortium and limits her to recovery available only under the workers’ compensation system. It ordered, therefore, the trial court to sustain LeFiell’s demurrer to the loss of consortium cause of action.

ZALMA OPINION

The workers’ compensation system was designed to be an exclusive remedy for an injured worker and his or her dependents. The California Legislature created an exception to the exclusive remedy to augment the benefits paid to the injured worker. If it wanted to augment the spouse who lost the spousal services of the injured worker it could have so written the statute.

Of course, by enacting an exception to the exclusive remedy bargain, breaches the bargain entered by the state with its employers that had the employer assume liability for industrial personal injury or death without regard to fault in exchange for limitations on the amount of that liability.

© 2012 – Barry Zalma

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

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

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

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

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RIGHT TO JURY TRIAL IN DECLARATORY RELIEF ACTION

Failure to Fish or Cut Bait

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In Allen M. Entin v. the Superior Court of Los Angeles County, No. B239642 (Cal.App. Dist.2 08/20/2012) the insurer filed a declaratory relief action that was pending while the benefits of disability insurance policies were paid seeking a conclusion from the court that it could stop payments. In so doing it neither accepted nor denied the claim of Mr. Entin.

An insurance company faced with a claim where, after completing a thorough and fair investigation, it concludes that the evidence available to the insurer leads it to conclude that the claim is not by the terms and conditions of the policy, has available to it the following choices:

  1. Deny the claim outright.
  2. Pay the claim to avoid litigation.
  3. File a complaint for declaratory relief seeking the advice of the court whether the insurer’s decision to deny the claim is correct.

FACTS

Allen Entin owned two disability income insurance policies. In 2009, Entin filed a claim asserting that migraine headaches had rendered him totally disabled. Entin’s insurer, respondent Provident Life and Accident Insurance Company, agreed to pay Entin benefits while investigating his claim. Allen Entin acquired a disability income insurance policy that provided benefits of $20,000 per month in the event that he became totally disabled and an “overhead expense disability policy” that provided benefits up to $360,000 in the event that he became totally disabled. Both polices defined the term “totally disabled” to mean: “(1) [the insured is] not able to perform the substantial and material duties of [his] occupation; and [¶] (2) [the insured is] receiving care by a [p]hysician which is appropriate for the condition causing the disability.”

At the conclusion of its investigation, Provident filed a declaratory relief action seeking a determination that Entin was not totally disabled within the meaning of his policies. The complaint clarified that Provident would continue to pay Entin benefits during the pendency of the action and would not seek reimbursement of those payments. Entin requested a jury trial. The trial court denied the request, concluding that Provident’s claim was equitable in nature because Provident was continuing to pay Entin disability benefits during the pendency of the action.

Entin filed a petition for writ of mandate seeking an order directing the superior court to grant his request for a jury trial.

Entin argued that he had a right to a jury because the case raised factual issues concerning his entitlement to contractual insurance benefits. Provident, however, argued that there was no right to a jury because “the underlying claim and relief sought – identification of prospective right under the insurance policies – is [sic] purely equitable in nature.” On February 22, 2012, the trial court ordered that Entin did not have a right to a jury “in light of the fact that payments [under the policies] are ongoing.”

DISCUSSION

The issue of whether Entin was constitutionally entitled to a jury trial is a pure question of law. The right to a jury trial is guaranteed by the California Constitution. (Cal. Const., art. I, § 16.)  As a general proposition, the jury trial is a matter of right in a civil action at law, but not in equity.  If the action is essentially one in equity and the relief sought depends upon the application of equitable doctrines, the parties are not entitled to a jury trial. California courts characterize declaratory relief actions as being “equitable” in nature.

Several California decisions have addressed whether the right to a jury attaches in declaratory relief actions seeking a determination of insurance coverage. The general rule is that if the issues of fact arising would have been triable by a jury as of right in an action which might have been substituted for the declaratory judgment action by either party, then there is a right to jury trial on such issues. California courts will not permit a declaratory action to be used as a device to circumvent the right to a jury trial in cases where such right would be guaranteed if the proceeding were coercive rather than declaratory in nature. Notwithstanding that an action for declaratory relief is characterized as an action in equity, there is a right to a jury trial of material triable issues of fact concerning a breach of contract claim. For example, if an insurance policy is ambiguous, and the resolution of the ambiguity turns on disputed extrinsic evidence, the dispute must be resolved by a jury upon demand.

Provident’s complaint does not raise any dispute regarding the proper construction of the parties’ insurance policies. Instead, it seeks a determination as to whether Entin is “totally disabled” within the meaning of those policies. To resolve this issue, the finder of fact will have to decide two matters that are currently in dispute: (1) whether Entin’s migraine headaches have rendered him “unable to perform the substantial and material duties of his occupation,” and (2) whether Entin is receiving “appropriate care for the condition.” The legal nature of Provident’s claim is also demonstrated by the fact that, without the declaratory relief mechanism, this matter would have proceeded as an action at law.

The predominant issue in this case does not involve the proper construction of Entin’s disability policy. Provident’s complaint does not allege that the parties dispute the meaning of any term in the policy. It asserts only that they disagree as to whether Entin’s migraine headaches have rendered him incapable of performing the substantial and material duties of his profession and whether he is seeking appropriate treatment for his condition. These are pure issues of fact and Entin was entitled to have a jury decide them.

The petition for writ of mandate was granted and the trial court was directed to vacate its order denying Entin’s request for a jury trial and enter a new order granting the request.

ZALMA OPINION

This is a case where form overcame substance. Provident believed that Mr. Entin was not disabled as he claimed and that, therefore, his claim was fraudulent. Rather than apply its position directly the insurer filed a suit it called a complaint for declaratory relief hoping to avoid a jury trial. It failed because the issue was not an interpretation of the contract but was, rather, a question of whether Mr. Entin was really disabled.

If Provident had evidence that Entin was not disabled it should have denied his claim in its entirety. Entin would have sued for the benefits and, if demanded by either party, a jury would have determined whether the denial was appropriate or not.

Insurers should stand by their principles. If they believe they are being defrauded and have evidence to support that position, they should act on their belief. If they have no evidence to support the decision then they should simply pay the claim. Provident promised to pay disability payments to Mr. Entin if he was totally disabled. He claimed he was disabled and Provident believed he was not. Paying him and filing a declaratory relief action did not help. By their pleadings they admitted they were not sure he was disabled and wanted the court to resolve the lack of certainty without giving Entin the right to a jury trial.

Insurers should never deny a claim unless they have conducted a thorough and fair investigation and conclude, from that investigation, that a preponderance of the evidence will prove there is no coverage under the policy. There is really no middle ground — the coverage either applies or it does not. Insurers must decide.

© 2012 – Barry Zalma

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

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

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

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

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Waiver of Stacking Upheld

The Right to Stack UM Coverage Can Be Waived

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People who insure their cars in Pennsyvania have the right to stack coverages for uninsured motorist (“UM”) or Underinsured Mortorist (“UIM”) coverages if they insure more than one vehicle with their insurer. The Pennsylvania statutes allow an insured to waive the right to stack coverages and thereby generate a lower premium. In Glenn B. Shipp and Denise A. Shipp v. the Phoenix Insurance Company, 2012 Pa.Super. 167 (Pa.Super. 08/14/2012) a Pennsylvania appellate court was asked to resolve a dispute over the effectiveness of a waiver of stacking after the trial court allowed stacking even though there had been a waiver.

The Phoenix Insurance Company (“Phoenix”) appealed the entry of an order granting summary judgment in a declaratory judgment action filed by the administrators of the Estate of Shipp (“the Shipps”).

FACTS

Plaintiff Glenn B. Shipp applied for personal automobile insurance and signed a rejection of stacked underinsured coverage form on September 12, 2002. The form was signed in the presence of his insurance agent. The policy was issued by the Phoenix Insurance Company. Plaintiffs paid less for non-stacked coverage than they would have paid for stacked coverage. The amount of underinsured motorist benefits available under the policy was $100,000.

This insurance policy was renewed every six months and the declaration sheets issued to Plaintiffs showed underinsured motorist benefits in the amount of $100,000 non-stacked. On February 3, 2006, Plaintiffs’ minor son, Michael R. Shipp, was severely injured in a motor vehicle accident. He was a passenger of a motor vehicle driven by William R. Flemming, who admitted liability for the accident. Michael died on February 11, 2006 as result of the injuries sustained in the accident.

On the date of the accident, Plaintiffs and their son were insured 2005 Toyota Corolla and the 2004 Toyota Highlander. Both vehicles had collision and comprehensive coverage.

Following the accident and Michael’s death, Plaintiffs made a claim to Defendant for the limits of underinsured motorist benefits in the amount of $200,000. This amount is the $100,000 underinsured motorist benefit stacked for two vehicles. Defendant responded by tendering $100,000 for the undisputed underinsured motorist benefit limit, but denied that Plaintiffs were entitled to stacked coverage.

On appeal, Phoenix contends that the entry of summary judgment was in error because Phoenix was not compelled to obtain a second waiver of stacked uninsured/underinsured (“UM/UIM”) coverage limits when the Shipps replaced an existing vehicle with a new vehicle under the insurance policy between Phoenix and the Shipps.

ANALYSIS

This case involves the interpretation of the a statute that allows for stacking of uninsured and underinsured benefits and option to waive the limit for each vehicle. When more than one vehicle is insured under one or more policies providing uninsured or underinsured motorist coverage, the stated limit for uninsured or underinsured coverage shall apply separately to each vehicle so insured. Notwithstanding the provisions of the statute a named insured may waive coverage providing stacking of uninsured or underinsured coverages in which case the limits of coverage available under the policy for an insured shall be the stated limits for the motor vehicle as to which the injured person is an insured.

The wrinkle in the case before the court is the fact that there was no additional vehicle being added to the policy; rather, the new vehicle was a replacement for an existing vehicle. Thus, where the policy went from covering two vehicles to three, the policy continuously covered two vehicles only. The coverage on the replacement vehicle will continue uninterrupted as long as the Shipps give notice to Phoenix. The initial waiver signed by the Shipps, because only two cars were covered, was found to be still valid and bar the stacking of coverage.

The fact that the Shipps’ added collision coverage when they bought the Toyota in 2005 does not constitute a purchase of a new policy for the purpose of triggering the need to obtain another waiver as to stacking. The matter of importance in all of these cases and whether a new waiver of stacked coverage is required. Indeed, both before and after the purchase of the 2005 Toyota, the UM/UIM coverage available to the Shipps’ remained at all times $200,000 stacked, $100,000 unstacked.

Since no new insurance coverage was purchased under such circumstances, Phoenix would not need to re-obtain waiver of stacked coverage from the Shipps. Of course, it is possible that under the terms of some hypothetical insurance policy, a replacement vehicle could somehow be interpreted as the acquiring of new coverage, however, under the terms of the policy, it is not. For all these reasons the appellate court found that it was error to permit the recovery of stacked limits.

ZALMA OPINION

When auto insurance is purchased every state requires that the insured be provided an option to buy UM or UIM coverage and, in states like Pennsylvania, they also have the right to stack the limits for each vehicle. Such provisions always authorize the insured to save premium by waiving UM/UIM or stacking provisions. The insured in this case waived it and tried imaginative arguments to try to get the insured an additional $100,000.

All insureds should consider the potential effect of a waiver. Good practice would be to carry at least as much UM/UIM coverage to protect yourself that is equal to that bought to protect others you may injure negligently.

© 2012 – Barry Zalma

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

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

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

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

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“However Caused” Exclusion Applies

Exclude Result Rather Than Cause

Zalma on Insurance in top 50

When insurers first began to insure people against the risk of loss of property they specified the risks of loss they would insure, such as “fire” or “windstorm”. To sell more policies insurers offered “all risk” insurance policies that covered all possible risks of physical loss except those specifically excluded. Since more than one cause can join with others to cause a loss courts created the “efficient proximate cause” method of analysis to find the moving cause of loss which, if not excluded, would provide coverage and if excluded would prevent coverage from attaching. In Steven L. Grossberg and Donna Grossberg v. Chubb Insurance Company of New Jersey, No. A-3724-10T4 (N.J.Super.App.Div. 08/20/2012) the Appellate Division of the New Jersey Superior Court was called upon to determine whether an exclusion applied.

FACTS

Steven and Donna Grossberg appealed from an order of the trial court granting summary judgment to Chubb Insurance Company of New Jersey (Chubb) and dismissing with prejudice their complaint for insurance coverage.

Plaintiffs own a single family home situated on the bay in Beach Haven. They purchased the property in 1987, and demolished ninety percent of the existing structure which they then re-built to their own specifications. They use the property as a seasonal vacation home. The structure is a single story wood-framed house sheathed in plywood and finished with horizontal cedar siding.

In late August or early September 2009, Steven Grossberg noticed some loose cedar siding on the exterior of the house and asked a local contractor to examine and repair the siding. The contractor removed some of the siding “and discovered that the framing beneath the siding, hidden from view, was either severely compromised or not visible at all.” The contractor then asked an architect to inspect the house. The architect reported seeing “damages” to exterior framing, sill plates, rim joists and the “tails” of the floor joists and stated “[m]uch of the framing which is still present has been compromised by the elements.” He explained that because the house was situated on the bay and is “constantly subjected to high wind”, it was in “imminent danger of collapse” due to the damages, and required support.

Chubb, as part of its initial claims investigation hired an engineer to inspect the property and who found “varying degrees of wood decay” within the structure and that the decay was the result of water intrusion behind the siding that could not drain, and which managed to bypass the weather resistant barrier and attacked the underlying wood framing.

The Chubb Masterpiece policy provided, among other things, “Deluxe House Coverage” for the dwelling with limits of $1,447,000. Under this coverage, a “covered loss” included all risk of physical loss to the property unless stated otherwise or an exclusion applies. One exclusion was “Gradual or sudden loss. We do not provide coverage for the presence of wear and tear, gradual deterioration, rust, bacteria, corrosion, dry or wet rot, or warping, however caused, or any loss caused by wear and tear, gradual deterioration, rust, bacteria, corrosion, dry or wet rot, or warping. …” (emphasis added)

Chubb notified plaintiffs it was denying coverage under its Masterpiece policy. In its letter of denial, Chubb cited the “Gradual or sudden loss” exclusion.

ANALYSIS

The question presented to the appellate court was whether or not the exclusion which the Court has read into the record would exclude coverage in this matter notwithstanding the fact that the cause of the damage to the structure in question may have been the result of an external agency, that is, the wind driven rain.

The appellate court had little trouble concluding that a loss occasioned by wind-driven rain would be a “covered loss” under the “all-risk” Masterpiece Chubb policy, unless specifically excluded from coverage.

Both parties’ experts found that the deterioration and decay within the property occurred as a consequence of the structure’s repeated exposure to wind-driven rain being forced behind the cedar siding. It is clear that plaintiffs’ premises was compromised by wood rot occasioned by wind-driven rain that could not otherwise escape from behind the cedar siding. By its plain and unambiguous terms, the Chubb Masterpiece policy excludes coverage for losses occasioned by rot. The Chubb Masterpiece policy excludes losses occasioned by gradual deterioration, or dry or wet rot, “however caused.”

The appellate court conclude that it makes no difference what the cause of the excluded loss may have been, and the sequence of causes is likewise irrelevant. The phrase “however caused” avoids application of the efficient proximate cause doctrine and, because it is clear and unambiguous, it is enforceable.

Because the unambiguous language of the “Gradual or sudden loss” exclusion applies and negates application of the efficient proximate cause doctrine the judgment of the trial court was affirmed.

ZALMA OPINION

Ever since state regulators required insurance companies to write their policies in “easy to read” language the precision of earlier (more difficult to read) policies was often lost. In this case Chubb designed an exclusion in easy to read, yet precise language, that excluded wet or dry rot “however caused.” The two words removed the analysis of the cover from the court the ability to interpret the policy by saying the efficient proximate cause of the wet rot was the wind driven rain and since that was not excluded there should be covered. Since the result, rather than the cause was excluded, the court had no option but to enforce the exclusion.

Insurers should emulate Chubb when writing exclusions to eliminate “cause” when writing exclusions and exclude the result if they truly wish to limit coverage.

© 2012 – Barry Zalma

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

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

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

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

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CONVICTION FOR INSURANCE FRAUD AND ARSON AFFIRMED

PUNISHMENT FOR ARSON MUST BE SEVERE

Zalma on Insurance in top 50

Arson is the most serious form of insurance fraud because innocent people and firefighters die or are injured as a result of the crime. The punishment for this crime cannot, in my opinion, be a severe enough. Some courts treat it as a “white collar” crime. Others recognize it as a serious and violent crime and sentence accordingly.

The United States is a melting pot where people come to find their fortune because of the opportunities not available elsewhere in the world. Most, like my immigrant parents, do so by honestly working hard. Some do so by taking advantage of our legal system. In United States of America v. Majeed Bazazpour, No. 10-4529 (6th Cir. 08/15/2012) the Sixth Circuit Court of Appeal was called upon to resolve the appeal of Majeed Bazazpour to a 240-month prison sentence after he was found guilty by a federal trial jury to multiple criminal acts.

FACTUAL BACKGROUND

Bazazpour, a Canadian citizen born in Iran, immigrated to Ohio in late 1996. Upon arriving in the Youngstown area, the defendant stayed for a short time with his second cousin, Cyrus Ghassab, and Ghassab’s wife, Farideh Jamali, before finding his own place to live. Between that time and November 2005, Bazazpour, Ghassab, Jamali, and others were involved in various illegal acts in and around Youngstown, including conspiracy to commit mail fraud, money laundering, and arson, as well as aiding and abetting the actual commission of mail fraud, money laundering, and arson. After a lengthy trial, the jury found Bazazpour guilty of:

  1. Conspiracy to Commit Mail Fraud because Bazazpour and others conspired to use the United States mail to submit fraudulent insurance claims and receive insurance proceeds for fire damage that the co-conspirators either caused themselves or hired other individuals to cause. As part of the conspiracy, the defendant made material misrepresentations to the insurance companies by failing to disclose prior property losses as requested on the insurance applications.
  2. Conspiracy to Commit Arson of an Interstate Building.
  3. Conspiracy to Commit Money Laundering.
  4. Aiding and Abetting Arson in the Commission of a Felony because Bazazpour and Ghassab set fire to the JB’s Foods building in Youngstown, Ohio, in order to obtain the insurance proceeds for the damage caused by the arson.
  5. Aiding and Abetting Mail Fraud.
  6. Aiding and Abetting Money Laundering.

The district court sentenced the Bazazpour to 60 months in prison for conspiring to commit mail fraud, 60 months for conspiring to commit arson, 120 months for conspiring to commit money laundering, 120 months for aiding and abetting mail fraud, and 120 months for aiding and abetting money laundering. Each of those sentences was ordered to run concurrently with the others. The district judge also sentenced Bazazpour to a consecutive 120-month sentence for aiding and abetting arson, resulting in an effective prison sentence of 240 months, or 20 years. Additionally, the district judge ordered the defendant to serve three years of supervised release, to pay a $600 special assessment, and to make restitution to three insurance companies in a total amount of $778,648.64.

DISCUSSION

The defendant contended that the prosecution failed to adduce sufficient evidence to establish his guilt of conspiracy to commit money-laundering, conspiracy to commit arson, and aiding and abetting arson. Faced with clear evidence the appellate court concluded that a rational trier-of-fact would be justified in concluding that Bazazpour, Ghassab, and Jamali conspired to launder fraudulently- received money through the bank accounts of Ghassab and Bazazpour.

Conspiracy to commit arson

Similarly, sufficient evidence was adduced to support the defendant’s conviction of conspiring to commit arson. The overt acts in which Bazazpour allegedly participated included:

    (1)     setting fire to a building located at 2606 Glenwood Avenue in Youngstown, Ohio, on April 20, 1998;
(2)     setting fire to a building located at 608 North Garland in Youngstown, Ohio, on December 11, 1999;
(3)     setting fire to a building located at 2604-2606 Glenwood Avenue in Youngstown, Ohio, on April 22, 2004; and
(4)     setting fire to a building located at 2732 Glenwood Avenue in Youngstown, Ohio, on June 24, 2005.

The defendant argued that those overt acts cannot support his conspiracy conviction because the jury actually acquitted Bazazpour of setting the fires on April 20, 1998, December 11, 1999, and June 24, 2005. Nevertheless, the jury did find beyond a reasonable doubt that the defendant was guilty of aiding and abetting the setting of the April 22, 2004, fire at 2604-2606 Glenwood Avenue. That single overt act is thus legally sufficient to support the conspiracy charge. Coupled with testimony that Bazazpour misled insurance agents in obtaining insurance for the 2604-2606 Glenwood property and that Earl Adams overheard Bazazpour threatening to reveal that he and Ghassab set the fire at JB’s Foods unless Ghassab paid him $100,000 that Bazazpour felt he was owed from insurance proceeds from a previous fire, a rational trier-of-fact would have more than enough evidence to convict Bazazpour on the charge of conspiracy to commit arson.

That same evidence refutes the defendant’s claim that the jury had before it insufficient proof to support his conviction of aiding and abetting the setting of the fire at 2604-2606 Glenwood Avenue on April 22, 2004.

In his final appellate issue, Bazazpour wages a multi-pronged attack on the effective 240-month prison sentence that the district judge imposed upon him. He contends that the district court erred in calculating his base offense level; that the court should have reduced his sentence due to the duress under which Bazazpour was operating; that the court improperly considered him to be a manager or supervisor of the offenses; and that the court erred in enhancing his sentence for obstruction of justice.

Defendant was properly classified as a manager or supervisor due to the nature of his participation, in owning the businesses, submitting fraudulent insurance documents, and soliciting other co-conspirators to participate. He claimed rights to a larger share of the proceeds when he sued Cyrus Ghassab for additional insurance proceeds.  Imposing the two-level increase for serving as a manager or supervisor, the district judge noted, “I have a very different view of his role and his own autonomy in the role. So I don’t take issue with this as you would.” In light of the information before the district court in the government’s sentencing memorandum and the testimony recounted in the trial transcript, the appellate court concluded that the district judge did not err in applying the enhancement in this case.

In his final challenge to his sentence, Bazazpour submited that the district court erred in enhancing his base offense level for obstructing the administration of justice. Although we apply a clearly-erroneous standard of review to the district court’s findings of fact, the determination of whether specific facts actually constitute an obstruction of justice is a mixed question of fact and law that the court can review as if it were the trial court.

In deciding to impose the obstruction-of-justice enhancement, the district court also referred to the testimony of two individuals, Frank Tenney and Earl Adams, indicating that those individuals testified under oath that the defendant “told them not to talk to the ATF.” The district court obviously viewed such testimony as evidence of an effort on Bazazpour’s part to interfere with or obstruct an investigation. A trial court, to impose an obstruction enhancement must fulfill two steps: first, it must identify those particular portions of the defendant’s testimony that it considers to be perjurious, and second, it must either make specific findings for each element of perjury or at least make a finding that encompasses all of the factual predicates for a finding of perjury. When the defendant’s testimony appears to be pervasively perjurious, the district court is not obligated to recite the perjury line by line, so long as its findings encompass the factual predicates necessary for a finding of perjury; in such cases, there is no danger that an enhancement will be imposed solely because the defendant exercised his right to testify.

CONCLUSION

For the reasons set out above, the convictions were affirmed but the sentence imposed was vacated and remanded to the district court for findings necessary to determine whether an obstruction-of-justice enhancement is proper in this case.

ZALMA OPINION

When the trial court reviews the case again she will determine that Bazazpour serves either 10 years, 20 years or something in between. Bazazpour came to this country as an immigrant from the tyrannical regime in Iran. Instead of working hard to earn a living in his new country Bazazpour decided to enter into a life of crime including insurance fraud and the most dangerous form of insurance fraud, arson-for-profit. If there is evidence sufficient to enhance his sentence the court should reinstate the 20 year sentence. If not, she should order he serve the most time possible.

The insurers have, while he is in jail, little chance of obtaining the ordered restitution unless they can attach his assets. If there are assets worth attaching the insurers should sue to collect.

© 2012 – Barry Zalma

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

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

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

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

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ARBITRATION DECISION CAN MAKE CONDOMINIUM DEVELOPERS MORE INSURABLE

Effective Underwriting Requires Review of CC&R’s

Zalma on Insurance in top 50

Every insurer that insures developers of condominium projects in California for their liability for claims of construction defects should carefully review the decision of the California Supreme Court in Pinnacle Museum Tower v. Pinnacle Market Development, No. S186149 (Cal. 08/16/2012). The holding of the California Supreme Court should be kept it in mind during the underwriting process before agreeing to insure the developer against the risk of loss by claims of construction defects. The prudent insurer might insist on an effective arbitration agreement be included in the covenants, conditions and restrictions (“CC&R’s”) CC&R’s before selling any units to a buyer.

The Supreme Court resolved a dispute between an owners association and the original developer over an arbitration agreement made part of the CC&R’s  before the owners association came into existence. The association filed a construction defect action against a condominium developer, seeking recovery for damage to its property and damage to the separate interests of the condominium owners who compose its membership. In response, the developer filed a motion to compel arbitration, based on a clause in the recorded declaration of CC&R’s that provided that the association and the individual owners agreed to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (“FAA”).

FACTUAL AND PROCEDURAL BACKGROUND

Pinnacle Market Development (US), LLC, and others (collectively Pinnacle) developed a mixed use residential and commercial common interest community in San Diego known as the Pinnacle Museum Tower Condominium (the Project). Pinnacle, as the owner and developer of the Project property, drafted and recorded a “Declaration of Restrictions” to govern its use and operation (the Project CC&R’s). The Project CC&R’s contain a number of easements, restrictions and covenants.

The individual owners bought condominium units in the Project pursuant to a standard purchase agreement. The Association filed the instant action against Pinnacle, alleging that construction defects caused damage to the Project. As the sole plaintiff, the Association seeks recovery not only for damage to its own property, but also for damage to the interests held by its individual members.

Pinnacle filed a motion to compel arbitration, contending the FAA mandates enforcement of article XVIII’s arbitration provisions. The trial court determined that the FAA is applicable and that article XVIII embodies an agreement to arbitrate between Pinnacle and the Association. Nonetheless, the court invalidated the agreement upon finding it marked by slight substantive unconscionability and a high degree of procedural unconscionability.

DISCUSSION

To ensure that arbitration agreements are enforced according to their terms, the FAA preempts state laws which require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. The FAA also precludes a court from construing an arbitration agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what the state legislature cannot.

The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.

Settled principles of condominium law establish that an owners association, like its constituent members, must act in conformity with the terms of a recorded declaration.

That a developer and condominium owners may bind an association to an arbitration covenant via a recorded declaration is not unreasonable; indeed, such a result appears particularly important because (1) the Davis-Stirling Act confers standing upon an association to prosecute claims for construction damage in its own name without joining the individual condominium owners and (2) as between an association and its members, it is the members who pay the assessments that cover the expenses of resolving construction disputes. Given these circumstances, an association should not be allowed to frustrate the expectations of the owners (and the developer) by shunning their choice of a speedy and relatively inexpensive means of dispute resolution. Likewise, condominium owners should not be permitted to thwart the expectations of a developer by using an owners association as a shell to avoid an arbitration covenant in a duly recorded declaration.

In sum, even though the Association did not bargain with Pinnacle over the terms of the Project CC&R’s or participate in their drafting, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration, including those in article XVIII, reflect written promises and agreements that are subject to enforcement against the Association.

The Doctrine of Unconscionability

As indicated, procedural unconscionability requires oppression or surprise. Here, the trial court found no evidence of surprise. Nonetheless, the court perceived a high degree of procedural unconscionability, because the Project CC&R’s were drafted and recorded by Pinnacle before any unit was purchased and before the Association was formed. Noting the Association had no opportunity to participate in the drafting of the recorded declaration, the court determined it was oppressive.  By providing for Pinnacle’s capacity to record a declaration that, when accepted by the first purchaser binds all others who accept deeds to its condominium properties, the Act ensures that the terms reflected in the declaration — i.e., the covenants, conditions, and restrictions governing the development’s character and operation — will be respected in accordance with the expectations of all property owners and enforced unless proven unreasonable. Far from evidencing substantive unconscionability, the consent provision reflects a restrictive term that the Legislature, for policy reasons, has determined is reasonably and properly included in a recorded declaration.

CONCLUSION

Article XVIII of the Project CC&R’s is consistent with the provisions of the Davis-Stirling Act and is not procedurally or substantively unconscionable. Its terms requiring binding arbitration of construction disputes are therefore enforceable. Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration — which manifest the intent and expectations of the developer and those who take title to property in a community interest development — will be honored and enforced unless proven unreasonable.

Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration. Therefore, article XVIII’s covenant to arbitrate is not unconscionable and is properly enforced against the Association. Accordingly, we reverse the judgment of the Court of Appeal and remand the matter for further proceedings consistent with the views herein.

Justice Kennard, in dissent, stated that the evidence lacked a showing that the owners association’s consented to an arbitration provision in the CC&R’s drafted and recorded by the developer before the association’s independent existence. In compelling arbitration, which offers no right to a jury, the majority deprives the owners association of its constitutional right to have its construction defect dispute decided by a jury. In the words of our state Constitution: “Trial by jury is an inviolate right and shall be secured to all . . . .” (Cal. Const., art. I, § 16.)

ZALMA OPINION

Although this case never mentioned the word insurance it is an important decision for insurers and may, if properly underwritten, make it possible to insure condominium developers for lower premium because they can effectively avoid litigation and trial and compel the resolution of construction defects by binding arbitration. Since arbitration is usually less expensive and much quicker than litigation; since arbitration does not put the parties at the risk of confusing a jury of 12 who know nothing about construction or construction defects, an actuary can more accurately calculate the potential losses and charge a competitive and fair premium to the developer.

© 2012 – Barry Zalma

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

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

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

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

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Rejection of UM/UIM Coverage Upheld

NEED DOES NOT CREATE COVERAGE

Zalma on Insurance in top 50

Herman Duke and Gayle Duke (the “Dukes”) appealed a summary judgment granted in favor of , Sentry Select Insurance Company (“Sentry”). The trial court found that uninsured motorist coverage had been validly rejected by the owner of the vehicle driven by Herman Duke at the time of the accident. In Herman Duke and Gayle H. Duke v. Morgan Storm Evans, et al, No. 47,383-CA (La.App. Cir.2 08/08/2012) the Louisiana Court of Appeal resolved the dispute.

FACTS

On February 24, 2008, Herman Duke was driving a vehicle on Airline Drive in Bossier City, Louisiana and was injured as the result of a collision with a vehicle driven by Morgan Evans. The vehicle driven by Duke was owned by his employer, Orr Motors of Louisiana, Inc. (“Orr Motors”), which was a named insured in an automobile liability policy issued by Sentry.

Subsequently, the Dukes filed a petition for damages against the defendants, Morgan Evans and United Services Automobile Association (“USAA”), her liability insurer. The Dukes sued Sentry alleging uninsured/underinsured motorist (“UM”) coverage through the Sentry policy. Sentry filed an answer denying UM coverage. A UM rejection form had been signed on January 31, 2005, by William Gregg Orr, who was the owner and authorized representative of Orr Motors and the other auto dealerships listed as named insureds in the Sentry policy. The form contains the handwritten names of two named insureds, “Class Motors of Texarkana, Inc.” and “Gregg Orr Auto Collection,” above Orr’s signature.

Pursuant to a settlement agreement, the Dukes collected the full $10,000 liability limits provided by the USAA insurance policy and dismissed their claims against Evans and USAA. The Dukes and Sentry filed motions for summary judgment based on the Sentry insurance policy. After a hearing, the district court found that UM coverage had been validly waived because Gregg Orr possessed the authority and the intent to reject UM coverage for all of the dealerships listed as named insureds in the policy and had signed the rejection form. The court rendered judgment granting Sentry’s motion for summary judgment, denying the plaintiffs’ motion and dismissing their claims.

DISCUSSION

The plaintiffs contend the district court erred in granting Sentry’s motion for summary judgment. In four assignments of error, the plaintiffs argue that the UM rejection was invalid because Orr Motors, a named insured, was not specifically listed on the waiver form.

Louisiana statutes govern the issuance of UM coverage and provides that no automobile liability insurance policy shall be issued in this state unless coverage is provided therein for the protection of persons insured under the policy who are legally entitled to recover damages from owners or operators of uninsured or underinsured motor vehicles because of bodily injury. However, the coverage required under this Section is not applicable when any insured named in the policy either rejects coverage, selects lower limits, or selects economic-only coverage, in the manner provided in the statute. Such rejection of UM coverage must be made only on a form prescribed by the commissioner of insurance. The prescribed form provided by the insurer and signed by the named insured or his legal representative.  A properly completed and signed form creates a rebuttable presumption that the insured knowingly rejected coverage.

Completion of the prescribed form involves six tasks: (1) initialing the selection or rejection of coverage; (2) if limits lower than the policy limits are chosen, then selecting the amount of coverage; (3) printing the name of the named insured or legal representative; (4) signing the name of the named insured or legal representative; (5) filling in the policy number; and (6) the date. The statutory requirement of UM coverage will be read into any automobile liability policy unless validly rejected. Any exclusion from coverage in an insurance policy must be clear and unmistakable.

CONCLUSION

In the present case, the parties do not dispute that Sentry provided the prescribed UM form, that the form is initialed to reject UM coverage, includes the policy number and is dated. Nor do plaintiffs dispute that Gregg Orr was the person authorized to obtain liability insurance and to reject UM coverage for the dealerships he owned, including Orr Motors, which was listed as a named insured in the Sentry policy. This court has previously found that pursuant to this statutory language, any named insured in the policy may reject UM coverage for all other insureds.

Gregg Orr signed the form below the following statement: “The choice I made by my initials on this form will apply to all persons insured under my policy.” Thus, the express language of the prescribed form demonstrates that the rejection of UM coverage is binding on all named insureds, including Orr Motors.

The evidence presented supports the district court’s finding that UM coverage was validly rejected. Consequently, the district court did not err in granting Sentry’s motion for summary judgment.

ZALMA OPINION

Insurance, contrary to the desire of some, is a contract just like any other. It makes certain promises to the person insured. After an accident with an uninsured motorist or underinsured motorist the person injured really wants to receive benefits for all injuries incurred. The coverage is designed to provide to replace the coverage the tortfeasor — the person who caused the accident — did not buy himself.

States, like Louisiana, require insurers to offer the coverage and automatically provide it unless specifically rejected. That is what happened in this case and although we can empathize with the Dukes, the person who bought the insurance specifically rejected UM/UIM coverage. No promise was made by Sentry and the Dukes — no matter how badly injured — could not create a coverage that never existed.

© 2012 – Barry Zalma

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

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

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

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

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Private Limitations of Action Enforced

PRUDENT INSURER WARNS INSURED OF TIME TO SUE

Zalma on Insurance in top 50

Joseph D. Elias (Elias) sued his insurer, for breach of an insurance contract. The trial court granted summary judgment to defendant Farmers Insurance Exchange (Farmers) on the ground that the action was barred by the one-year limitation period contained in the policy because Elias did not commence the action until more than a year after Farmers “clearly and unequivocally” denied his claim. On appeal, Elias contends the trial court erred because “the date of denial was an issue of fact which was not subject to determination and resolution in a summary judgment motion.” In Joseph D. Elias v. Famers Insurance Exchange, No. C069262 (Cal.App. Dist.3 08/14/2012) the Court of Appeal was resolved the dispute.

FACTUAL BACKGROUND

Elias was allegedly the victim of a home burglary in January 2008. Shortly thereafter, he submitted a claim against his homeowners’ insurance to Farmers. The policy contained a provision stating that “[s]uit on or arising out of this policy must be brought within one year after the loss occurs.” Under California law, however, the one-year period is tolled from the time the insured gives notice of the claim to the insurance company until ‘the time the insurer formally denies the claim in writing. This has been construed to mean an “unequivocal” denial in writing.

On May 23, 2008, Farmers sent a letter to Elias explaining that Farmers had “finalized its investigation and evaluation of the . . . claim.” The letter expressly stated that it “represent[ed] the final decision of [Farmers] for the . . . loss” and stated that Farmers “denies the claim in its entirety” “due to material misrepresentations and conflicting statements made by the insured.” The “Conclusion” section of the letter included the following:

The “Conclusion” section of the letter further specified that “[p]ursuant to the terms of the policy and California law, the insured has one year from the date of this letter to commence suit against [Farmers] should the insured wish to pursue this matter in litigation.” (emphasis added)

In a letter to Farmers’s attorney dated June 6, 2008, Elias’s attorney noted that he had “received the final decision of [Farmers] for the . . . loss.” Farmers’s attorney responded to Elias’s attorney, explaining that Farmers had “reviewed[,] evaluated” and “considered” the information provided following the May 25 “Decision Letter,” but that information did “not change the basis for the Decision. Accordingly, the claim is denied due to material misrepresentation and conflicting statements.” Thereafter, the August 12 letter stated that Farmers’s “decision as set forth in their May 23, 2008 letter will not be changed and the claim remains denied.”

Elias filed this breach of contract action against Farmers on June 2, 2009. In November 2010, Farmers moved for summary judgment on the ground that Elias “failed to comply with the one year limitation.” In opposition, Elias argued the May 23, 2008, letter did not constitute an unequivocal denial of his claim and instead his claim was not finally denied until the August 12, 2008 letter from the Farmers lawyer.

DISCUSSION

On appeal, Elias contends there was an issue of fact as to whether, following the May 23 letter, Farmers’s investigation of his claim was still open, precluding summary judgment on limitations issue. Although it is true that, in its conclusion, the letter stated that Farmers was “not aware of any party legally responsible for causing or contributing to this loss,” and further stated, “If you believe there is additional information that would identify a responsible party, please contact [Farmers].”  This statement cannot reasonably be construed as a demand for additional information.  First, on its face, the sentence on which Elias relies did not require or demand that he provide additional information, notwithstanding Elias’s repeated assertions to the contrary. It merely directed Elias to contact Famers if he believed there was additional information that would identify a responsible party.

Not only did this statement reiterate that the letter represented Farmers’s final decision, it also made clear that Farmers was not demanding or requiring that Elias provide any additional documents or information – it was just giving him an opportunity to present additional information. he sentence on which Elias relied was also followed by the express advisement that he had one year from the date of this letter to commence suit against Farmers.

The fact that Farmers gave Elias the courtesy of two additional weeks to supply Farmers with additional information if he had any did not undercut the finality of Farmers’s denial of his claim. The May 23 letter here could hardly be a more unequivocal denial. There was nothing tentative or conditional about it.

The judgment was affirmed and  Farmers  recovered its costs on appeal.

ZALMA OPINION

When an insurer denies a first party claim it must do so clearly and definitively. If the insurer wishes to obtain the benefit of the shortened, contractual limitation of action provision of the policy it should emulate Farmers in this case by:

  1. Deny the claim clearly and unambiguously.
  2. Advise the insured in writing why the claim is being denied.
  3. Advise the insured of the limitation contained in the policy.

Private limitation of action provisions have been enforceable in the U.S. since Riddlesbarger v. Hartford Insurance Company, 74 U.S. 386, 19 L. Ed. 257 (1868) enforced one saying In California a decision of the California Supreme Court, that held “it is not an unreasonable term that in case of a controversy upon a loss resort shall be had by the assured to the proper tribunal, whilst the transaction is recent, and the proofs respecting it are accessible…” It was also supported in California in Garido v. American Cent. Ins. Co. of St. Louis, 2 Cal Unrep. 560, 8 P. 512 (1885).

That limitation was “tolled” or held in abeyance by a California Supreme Court decision, Prudential-LMI, v. Superior Court, 51 Cal. 3d at p. 695, & fn. 7, 274 Cal. Rptr. 387, 798 P.2d 1230 that stopped the running of the limitation provision from the date the insured reported the loss to the date the claim was denied. That is why Farmers warned the insured that he only had a year from the date of the denial to file suit.

In addition California Code of Regulations Section 2695.7 (f) requires that “every insurer shall provide written notice of any statute of limitation or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant not less than sixty (60) days prior to the expiration date…”

© 2012 – Barry Zalma

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

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

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

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

 

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INSURANCE FRAUD CONTINUES UNABATED

Zalma’s Insurance Fraud Letter

August 15, 2012

Continuing with the sixteenth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) reports in its August 15, 2012 issue that Alabama adds statutes to aid in its fight against insurance fraud; facts about insurance fraud from the states of Washington and Texas; on why the California Court of Appeal made a person spend time in jail for faking an injury; how an insurance fraud conviction caused a naturalized citizen to lose his citizenship; and why failure to produce documents was fatal to a first party insurance claim.

The issue also reports on a new E-book from Barry Zalma, Random Thoughts on Insurance, adapted from Barry Zalma’s Blog Zalma On Insurance, © 2012 that contains a collection of 268 of the posts that reveal his 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.  The e-book covers articles that summarize recent decisions of the courts of appeal and Supreme Courts across the United States on topics from rescission to bad faith, from what is an “occurrence” to subrogation, from uninsured motorist coverage to the CGL, from Medicaid’s right of reimbursement to insurance fraud, and almost every other issue that involves insurance. For details and a list of all the posts go to  http://www.zalma.com/RANDOMTHOUGHTS.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.

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 and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/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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Excess Owes No Duty to Defend

Insurer v. Insurer — Both Lose, One Loses More Than Another

Zalma on Insurance in top 50

When one insurer sues another trying to transfer the risk taken to the other both will probably lose because of the costs of defending or prosecuting the suit. In Admiral Indemnity Company v. Travelers Casualty and Surety Company of America, No. 11 Civ. 1158 (S.D.N.Y. 08/09/2012) Admiral Indemnity Company (“Admiral”) sued Travelers Casualty and Surety Company of America (“Travelers”), for declaratory judgment that Travelers is obligated to pay all or part of the costs Admiral incurred in defending 315 East 69th Street Owners Corporation (“Owners Corp.”) in a state court action. Owners Corp. was insured by both Admiral and Travelers. After the case was at issue Admiral and Travelers moved for summary judgment.

UNDISPUTED FACTS

In 2005, Owners Corp., a condominium association, purchased insurance from both Admiral and Travelers. Admiral issued Owners Corp. a commercial general liability insurance policy (“Admiral Policy”). The Admiral Policy covered “bodily injury,” “property damage,” and “personal and advertising injury” among other things. The Admiral Policy was an occurrence policy that applied to any occurrence “during the policy period.” “Occurrence” is defined by the policy as “an accident, including continuous or repeated exposures to substantially the same general harmful conditions.”

Travelers issued Owners Corp. Non-Profit Management and Organization Liability Insurance (“Travelers Policy”). The Travelers Policy provided Owners Corp. with directors and officers liability coverage. The Travelers Policy provided coverage on a “claims made” basis, for claims first made against the insured and reported to Travelers during the policy period or during a further three-year discovery period.

The policy periods for both the Admiral Policy and the Travelers Policy initially ran from February 1, 2005, until February 1, 2006. Both Travelers and Admiral issued identical successor policies for the period from February 1, 2006 until February 1, 2007.

Both the Admiral Policy and the Travelers Policy contain “Other Insurance” clauses.

Admiral seeks to hold Travelers liable for a share of the costs that Admiral has expended in the defense of a lawsuit that was brought in the New York State Supreme Court, entitled Gallup v. 315 East 69th Street Owners’ Corp., et al. (the “Gallup Action”). The occurrence that formed the basis for the Gallup Action occurred in March 2005. Stephen Gallup owned the penthouse apartment at 315 East 69th Street (“the Building”) including a greenhouse attached to the apartment.  Gallup had an agreement (the “Greenhouse Agreement”) with Owners Corp. that allegedly gave Gallup primary responsibility over the greenhouse, including maintenance and repair.

In or about March 2005, as the alleged result of ongoing repair work to the exterior of the Building undertaken by Owners Corp., Gallup’s greenhouse was damaged. Gallup and Owners Corp. spent months negotiating to resolve the damages issues.  The negotiations included an alleged Alteration Agreement between the parties. However, as a result of an impasse in negotiations, Gallup brought suit in state court in April, 2006 against Owners Corp. and others.

In May 2006 Travelers disclaimed coverage for the Gallup Action, explaining in a letter dated May 11, 2006, that all claims in the action fell within its Property Damage Exclusion. In a letter dated May 15, 2006, Admiral partially disclaimed coverage, citing exclusions in the Admiral Policy. Admiral disclaimed coverage as to all causes of action except the fifth (property damage), the ninth (faulty repairs by Steven Seplow), and the tenth (defamation against Steven Seplow). Recognizing that “the duty to defend is broader than the duty to indemnify,” Admiral agreed to defend Owners Corp. under the Admiral Policy for all claims in the Gallup Action.

Robert Buchert, Admiral’s Vice President-Liability Claims, submitted an affidavit swearing that while Admiral provided a defense for the entire action, “coverage only attached to the Gallup Fifth and Ninth cause of action, for recovery for water damage, and the Tenth cause of action, for defamation….”

ANALYSIS

Admiral conceded that, of the eleven alleged causes of action, its policy covered at least the fifth, ninth, and tenth causes of action. Based upon this admission, Admiral had a duty to defend the entire Gallup Action. Furthermore, Admiral is not entitled to any contribution from Travelers “notwithstanding the fact that [Travelers] would appear to have an obligation to indemnify [Owners Corp.] for a greater proportion of the causes of action, if successfully prosecuted.” Therefore, even if Travelers had been required to contribute if liability were found on any of the claims against Owners Corp. in the Gallup Action, that duty alone did not require it to share in the costs of defending against the claims during the litigation.

Admiral points to no case where a primary insurer was able to turn its responsibility for defense costs into excess coverage on a par with an excess insurer, after it had already incurred the obligation to pay for the defense costs of an ongoing litigation.

For the reasons explained above, Travelers’ motion for summary judgment was granted and Admiral’s cross-motion for summary judgment was denied.

ZALMA OPINION

“Other Insurance” clauses are less than reliable because of the actions of the courts over the years when competing other insurance clauses seem to contradict each other. In this case, as the trial court found, it mattered not because Admiral admitted it owed a duty to defend and could not pass its obligation to another insurer that had a reasonable defense to coverage — an exclusion — and was found to be excess.

Every third party liability policy contains an “other insurance” clause that attempts to control disputes when there are two or more policies insuring the same risk. The term “other insurance” is used in a special sense in insurance contracts. It describes the situation in which two or more policies of insurance cover the same risk in the name of, or for the benefit of, the same person. Difficulties arise when the two or more policies have other insurance clauses that conflict with each other.

Since other insurance clauses usually do not prescribe how defense costs should
be apportioned among insurers, courts have developed general allocation rules.
When only one of two insurers is held to provide coverage that insurer must bear
the entire burden of defense. Equity is the apparent intent of those courts who deal with the need to allocate defense costs when other insurance clauses fail to cover the issue.

Claims handlers should read their policies with an intention to find coverage not
an intention to avoid coverage. Whenever a claims handler finds he or she must
twist the language of a policy or use a creative interpretation of the language of
the policy, which should act as a warning to the claims handler or lawyer advising
the insurer that the conclusion is wrong. If there are two insurers and they cannot agree, it is prudent for the two insurers to reserve their rights, work together to protect the insured on an equal basis, and then submit the coverage issue to a court or arbitrator for resolution of who owes what part, if any, of the obligation to defend and indemnify the insured. If the two insurers worked together in this case — rather than taking a stand and suing in federal court, they could have avoided considerable expense and offending the insured.

For a detailed analysis of other insurance clauses see Zalma, Barry, “Insurance Claims: A Comprehensive Guide” published by Specialty Technical Publishers, http://www.stpub.com, Part I, Chapter 2.

© 2012 – Barry Zalma

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

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

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

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

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KISS A FROG AND ALL YOU GET IS AN ANGRY FROG

Clear Policy Language Must be Enforced

Zalma on Insurance in top 50

When serious injuries and death result from an accident parties and their lawyers often grasp at any possibility to obtain insurance coverage from insurers that neither intended to nor agreed to provide protection for the type of injury. Homeowners insurance provides general liability insurance coverage to insureds for almost any injuries caused to third parties. However, a homeowners policy does not provide coverage for all accidents and injuries. It specifically and clearly excluded coverage for accidents resulting from operation or use of a motor vehicle since automobile insurance is better designed to provide that type of protection.

Edward Dzikiewicz, administrator of the estate of TyCody Dzikiewicz (decedent), appealed from the summary judgment rendered by the trial court in favor of the plaintiff, New London County Mutual Insurance Company (New London).  On appeal, the defendant claims that the court erred in ruling that the motor vehicle exclusion provision and the negligent entrustment of a motor vehicle exclusion provision, both contained in a home-owner’s insurance policy issued by the plaintiff, exclude coverage for the defendant’s negligent supervision cause of action. In New London County Mutual Insurance v. Andrzej Bialobrodec, No. AC 33433 (Conn.App. 08/14/2012) the Connecticut Court of Appeal was called upon to resolve the dispute.

FACTS

The following facts are relevant to the present appeal. In count one of the complaint dated November 5, 2009, the defendant sued Andrzej Bialobrodec and Grazyna Bialobrodec (parents) for the allegedly negligent supervision of their son, Adrian Bialobrodec, that allowed him to purchase and, thereafter, to give the decedent access to and use of a motorcycle, a motor vehicle, which the decedent operated and crashed, resulting in his death. In count two of his complaint, the defendant sued Adrian Bialobrodec for his allegedly negligent supervision of the decedent and for the decedent’s use of his motorcycle, which resulted in the decedent’s death.

On February 6, 2010, the New London commenced a declaratory judgment action against the parents and Adrian Bialobrodec. On November 18, 2010, the trial court granted the plaintiff’s motion to cite in the defendant as an additional party defendant. In its amended complaint, the plaintiff alleged the parents had a homeowner’s insurance policy (policy) issued by the plaintiff that was in effect at all times relevant to the defendant’s claims. Adrian Bialobrodec resided with his parents at all times relevant to the defendant’s claims. Adrian Bialobrodec was an insured under the policy at all relevant times.

The defendant sued the parents and Adrian Bialborodec for alleged bodily injuries and damages sustained by the decedent in the motorcycle accident.

TRIAL COURT DECISION

The plaintiff filed a motion for summary judgment on the ground that it had no duty to defend the insured parties in the defendant’s action because the defendant’s causes of action arose out of the decedent’s use of a motor vehicle, or the negligent entrustment of a motor vehicle to the decedent, and the conduct and damages alleged against the parents were excluded from the policy coverage. The trial court rendered summary judgment in favor of the plaintiff, holding that the policy excluded coverage for causes of action arising out of the use of a motor vehicle and that the policy excluded coverage for the defendant’s negligent supervision cause of action because it arose out of the decedent’s use of a motor vehicle owned by an insured.

ANALYSIS

An insurance policy is to be interpreted by the same general rules that govern the construction of any written contract. In accordance with those principles, the determinative question is the intent of the parties, that is, what coverage the insured expected to receive and what the insurer was to provide, as disclosed by the provision of the policy.  If the terms of the policy are clear and unambiguous, then the language, from which the intention of the parties is to be deduced, must be accorded its natural and ordinary meaning.

Since the question of whether an insurer has a duty to defend its insured is purely a question of law the appellate court reviews the decision anew.

Section II of the policy, entitled “EXCLUSIONS,” provides in relevant part: “1. Coverage E-Personal Liability and Coverage F-Medical Payments to Others do not apply to ‘bodily injury’ or ‘property damage’ . . .

[f] [a]rising out of: (1) The ownership, maintenance, use, loading or unloading of motor vehicles . . . owned or operated by or rented or loaned to an ‘insured’ . . . .”

The defendant specifically alleges in his complaint against the parents that on September 1, 2008, at approximately 12:35 a.m., Adrian Bialobrodec took his motorcycle from his parents’ home and met with friends; he allowed the decedent to operate the motorcycle; the decedent lost control of the motorcycle and crashed into a tree; as a result of the accident, the decedent suffered fatal injuries; and the parents knew or should have known that Adrian Bialobrodec would allow others to use and operate the motorcycle.

The defendant attempts to separate his negligent supervision legal theory from the factual allegations of his complaint against the parents pertaining to the decedent’s accident and injuries arising from his use of the motorcycle. The facts alleged by the defendant in his complaint against the parents, however, underlie and undercut his claim that his negligent supervision cause of action stands alone and is separate from any claims arising from the motorcycle accident because they leave no doubt that the injuries for which he seeks to recover arose out of the decedent’s use of the motorcycle owned by an insured under the policy issued by the plaintiff.

The policy explicitly and unambiguously provides that bodily injury arising out of the use of motor vehicles owned by an insured shall be excluded from policy coverage. Although the alleged facts may support a negligent supervision cause of action against the parents, that does not change the parameters of the review of the appeal.

Finding that the trial court correctly determined that the motor vehicle exclusion provision of the policy excludes coverage for the defendant’s negligent supervision cause of action.

ZALMA OPINION

This is a case of attempting to turn a frog into a prince. Since the parties and lawyers had no magic available to them the frog stayed a frog, albeit angry, and the plaintiffs got slime on their lips. The clear language of the policy was applied because all of the injuries claimed against the insureds and their insurer arose out of the use of a motor vehicle the insurer owed no duty to defend or indemnify the insureds.

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

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

 

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California Allows Stacking of CGL

A CASE OF FIRST IMPRESSION AND IMPORTANCE

The state of California is a financial basket case. It has been ordered by a federal court to clean up the pollution caused by the construction and use of the Stringfellow Acid Pits in Riverside County, California that is anticipated to cost the state as much as $700 million. The state that may not be able to fulfill the order because of a lack of assets and because of growing budget deficits turned to the California Supreme Court to obtain funds from the insurers who insured the state while the pits were constructed and the period when the pits polluted the land and water of Riverside County. To fulfill its obligation to clean up the pollution the state needed as much money as it could squeeze from its insurers.

The California Supreme Court considered the complex questions of insurance policy coverage interpretation that arose in connection with a federal court-ordered cleanup of the state’s Stringfellow Acid Pits waste site. The Supreme Court initially addressed the “‘continuous injury’ trigger of coverage,” as that principle was explained in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655 (Montrose) and the “all sums” rule adopted in Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 55-57 (Aerojet). The California Supreme Court brought to an end the dispute that started in the 1960′s when the Stringfellow Acid Pits began to leak in The State of California v. Continental Insurance, No. S170560, http://www.metnews.com/sos.cgi?0812//S170560 (Cal. 08/09/2012).

FACTUAL AND PROCEDURAL BACKGROUND

The State of California (State) sought indemnity from several of its insurers. The Stringfellow site was an industrial waste disposal facility that the State designed and operated from 1956 to 1972. Each insurer that is party to this appeal issued one or more excess commercial (also known as comprehensive) general liability (CGL) insurance policies to the State between 1964 and 1976. The site was uninsured before 1963, and after 1978.

In 1955, a state geologist determined that a Riverside County quarry was a suitable location for the disposal of industrial waste. According to the geologist’s report, the site was a canyon lined on its bottom with impermeable rock. The geologist advised the State to build a concrete barrier dam to close a 250-foot gap in the canyon’s natural walls. He claimed that, once the dam was in place, “the operation of the site for industrial wastes [would] not constitute a threat of pollution.” The State subsequently developed the facility, which went into operation in 1956, and eventually received more than 30 million gallons of industrial waste.

In reality, the site suffered from three major flaws that made it ill-suited to serve as an industrial waste facility. First, the state geologist had failed to identify an underground aquifer located 70 feet below the canyon floor that facilitated the movement of groundwater into and out of the site. Second, the rock underlying the canyon floor was fractured, so it allowed waste to leak into the groundwater system and escape the facility. Third, the barrier dam proved ineffective. It permitted contaminants to escape the facility during heavy rains in 1969 and again in 1978. The severity of the latter event forced the State to conduct a “controlled discharge” of contaminants into Pyrite Channel. The ensuing plume of waste extended for miles. The State closed the facility in 1972 after discovering the groundwater contamination.

In 1998, a federal court found the State liable for, inter alia, negligence in investigating, choosing, and designing the site, overseeing its construction, failing to correct conditions at it, and delaying its remediation. The State was held liable for all past and future cleanup costs. The State claims costs associated with the Stringfellow site remediation could reach $700 million. The State filed an action against several of its insurers in September 1993, seeking indemnification for its liability in the federal action. That case was finally resolved by the August 9, 2012 decision of the Supreme Court.

THE STATE SUES ITS INSURERS

The state’s suit was tried in multiple phases. At the conclusion of a June 1999 bench trial, the court ruled that the policy limits under policies with multiple-year periods applied “per occurrence” and not annually. Following this, in April 2002, the trial court held that the State’s failure to remediate and its delay in remediating the site was not a breach of any duty to mitigate the insurers’ damages. In September 2002, the State brought a second suit, asserting related claims against additional insurers, including those which are parties to this appeal. This case was consolidated with the first action, and defendant insurers in the second suit agreed to be bound by all prior rulings in the original action. All parties stipulated that the property damage that the Stringfellow site’s selection, design, and construction caused took place continuously throughout the defendant insurers’ multiple consecutive policy periods from 1964 to 1976.

In May 2005, a jury in phase three of the trial rendered special verdicts finding the insurers had breached their policies. By that time, the State had already entered into settlement agreements totaling approximately $120 million with several other insurers. The State filed an appeal and, with the exception of Wausau, all of the insurers filed cross-appeals. The Court of Appeal, like the trial court, rejected the insurers’ contention that they could not be liable for property damage occurring outside their respective policy periods. It held that once coverage was triggered, all of the insurers had to indemnify the insured for the loss. The Court of Appeal allowed the State to stack the total policy limits in effect for any one policy period.

DISCUSSION

“Long-tail” Claims

The kind of property damage associated with the Stringfellow site, often termed a “long-tail” injury, is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous “cause.” Long-tail injuries produce progressive damage that takes place slowly over years or even decades. It is often “virtually impossible” for an insured to prove what specific damage occurred during each of the multiple consecutive policy periods in a progressive property damage case. CGL policies leave unanswered the crucial question for long-tail injuries: when does a continuous condition become an ‘occurrence’ for the purposes of triggering insurance coverage?

While the term “trigger of coverage” does not appear in the language of the CGL insurance policies here, it is a term of convenience used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise. The issue is largely one of timing – what must take place within the policy’s effective dates for the potential of coverage to be triggered?

In the context of a third party liability policy property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.  As long as the property is insured at some point during the continuing damage period, the insurers’ indemnity obligations persist until the loss is complete, or terminates. Neither the State nor the insurers dispute that progressive damage to property at the Stringfellow site “occurred” during numerous policy periods. In addition, the insurers concede that in cases such as this it is impossible to prove precisely what property damage occurred during any specific policy period. The Supreme Court concluded that the fact that all policies were covering the risk at some point during the property loss is enough to trigger the insurers’ indemnity obligation.

Rather than a pro-rata share of the damage the Supreme Court decided that the policies obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was “on the loss.” The coverage extends to the entirety of the ensuing damage or injury and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.

The all sums indemnity coverage envisions that each successive insurer is potentially liable for the entire loss up to its policy limits. When the entire loss is within the limits of one policy, the insured can recover from that insurer, which may then seek contribution from the other insurers on the risk during the same loss. Recognizing, however, that this method stops short of satisfying the coverage responsibilities of the policies covering a continuous long-tail loss, and potentially leaves the insured vastly uncovered for a significant portion of the loss, the present Court of Appeal allowed the insured to stack the consecutive policies and recover up to the policy limits of the multiple plans.

“Stacking” generally refers to the stacking of policy limits across multiple policy periods that were on a particular risk. In other words, “Stacking policy limits means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy.” The Supreme Court found that an all-sums-with-stacking rule has numerous advantages. “It resolves the question of insurance coverage as equitably as possible, given the immeasurable aspects of a long-tail injury. It also comports with the parties’ reasonable expectations, in that the insurer reasonably expects to pay for property damage occurring during a long-tail loss it covered, but only up to its policy limits, while the insured reasonably expects indemnification for the time periods in which it purchased insurance coverage.”

The most significant caveat to all-sums-with-stacking indemnity allocation is that it contemplates that an insurer may avoid stacking by specifically including an “antistacking” provision in its policy. Of course, in the future, contracting parties can write into their policies whatever language they agree upon, including limitations on indemnity, equitable pro rata coverage allocation rules, and prohibitions on stacking.

CONCLUSION

The decision means, simply, that each insurer on the risk must pay its limits for each policy year it had a policy in effect.

ZALMA OPINION

This decision puts to rest the most important part of the Stringfellow story. It teaches insurers that the wording of the Commercial General Liability policy needs rewording to protect against “stacking” and to protect against long tail losses or find, when an insured pollutes, it will be probably be paying its policy limits for every year the policy is in effect.

The case also teaches something the Supreme Court did not discuss: effective underwriting. If each insurer required a complete application from the state before agreeing to insure it, it should have learned of the existence of problems at the Stringfellow Acid pits. An intelligent underwriter with that knowledge would have refused to insure the risk or would have specifically excluded losses resulting from the Stringfellow Acid Pits.

The state of California knew or should have known, sometime between 1959 and 1972 that the Stringfellow pits were leaking and polluting the land and water of Riverside County. If it did not disclose that knowledge to its insurers, it concealed a material fact that might have been sufficient grounds to rescind the policies. Any policy issued to the state after it knew of the pollution should have been void from inception.

 

Barry Zalma

© 2012 – Barry Zalma

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

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

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

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

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No Coverage If Not an Insured

AMBIGUITY CAN’T BE CREATED FROM WHOLE CLOTH

Zalma on Insurance in top 50

The Illinois Court of Appeal was asked to resolve a dispute between an insurer and its insured over the meaning of an exclusion in Sandra Knezovich, Personal Representative of the v. Hallmark Insurance Company, 2012 IL App 111677 (Ill.App. Dist.1 08/03/2012). Before the trial court was a declaratory judgment action where the parties filed cross-motions for summary judgment concerning whether Hallmark Insurance Company (Hallmark) owed a duty to defend the estate of a deceased student pilot who had rented an aircraft from Hallmark’s insured. The trial court found that Hallmark’s policy provisions concerning the exclusion of coverage for student and renter pilots were ambiguous and Hallmark, therefore, had a duty to defend and/or indemnify the estate of the student pilot in the underlying wrongful death lawsuits.

Hallmark appealed the trial court’s ruling.

BACKGROUND

This insurance coverage dispute arises out of a midair collision between two aircraft, a Cessna and a Cirrus, in Wyoming. Both pilots and the sole passenger were killed, and both planes were destroyed. Hallmark insured the Cessna, which was owned by Franklin Aviation, Inc., a fixed base operator, and, at the time of the collision, was being operated by Anthony Knezovich, a student pilot. Ralph Otto was operating the Cirrus, and C. Michael Downey was his passenger. A number of wrongful death lawsuits were filed as a result of the collision.

Plaintiff Sandra Knezovich, as the personal representative of the estate of Anthony Knezovich, filed a complaint for declaratory judgment seeking a finding that Hallmark had a duty to defend and indemnify the Knezovich estate in the underlying wrongful death lawsuits.

Hallmark moved for summary judgment, arguing there was no coverage available to Anthony Knezovich under the policy Hallmark had issued to Franklin Aviation because a provision of the policy excluded renter pilots from coverage. The affidavit of Raymond Verheydt, the owner of Franklin Aviation, was attached to the motion. Verheydt averred that Franklin Aviation operated a flight school and rented aircraft to its customers. It charged its customers for both the rental of aircraft and instruction services. Verheydt was a certified flight instructor and provided instruction to customers as requested. Anthony Knezovich held a student pilot certificate and was a customer of Franklin Aviation, renting aircraft and receiving flight training.

Verheydt informed Mr. Knezovich that he would be charged for the rental of the airplane on each flight based on an hourly rate. For those flights during which he flew with a flight instructor, he would be charged both an hourly rental fee for the use of the aircraft and the hourly rate for the instructor. When he was receiving ground instruction, he would only be charged for the instructional time. Furthermore, when he was flying without a flight instructor, he would be charged a rental fee for the use of the aircraft. Mr. Knezovich acknowledged that he understood and agreed with that arrangement.

Verheydt averred that after he authorized Mr. Knezovich to make his first solo flight on April 10, 2008, Mr. Knezovich was authorized to rent the aircraft to fly solo as long as Verheydt preapproved each solo flight.  On August 10, 2008, Mr. Knezovich rented the aircraft to fly solo. During that flight, the aircraft was involved in a midair collision, resulting in fatal injuries to Mr. Knezovich and destruction of the aircraft.

Also attached to Hallmark’s motion for summary judgment was its aircraft insurance policy issued to Franklin Aviation. The named insured specified on the coverage identification page of the policy was “Franklin Aviation, Inc. and its individual shareholders and executive officers.” The definitions section of the policy, provided in pertinent part:

        Student Pilot means any pilot holding a valid student pilot certificate issued by the FAA who is receiving flight instruction or operating the aircraft solo under the direct supervision and flight endorsement of a FAA Certified Flight Instructor.

        Renter Pilot means any person or organization who is renting the aircraft from you.
    * * *
        Who Is Not Protected

    * * *
        Your bodily injury and property damage coverage does not protect:
        
        b. Renter Pilots A renter pilot with respect to any occurrence arising out of the operation of the aircraft by a renter pilot.

    * * *
        What Is Not Covered We do not cover any:

        f. Student Pilots Property damage or bodily injury if the aircraft is being operated in flight by a Student Pilot with passengers unless a passenger is a pilot acting as pilot in command [and has a current and proper medical certificate, flight review, and pilot certificate with necessary ratings, each as required by the FAA].

ANALYSIS

Under Illinois law, if an insurer contends that a complaint does not allege a covered claim and the insurer neither defends the lawsuit under a reservation of rights nor seeks a declaratory judgment that there is no coverage, then the insurer may be estopped from raising policy defenses to coverage if the insurer is later found to have wrongfully denied coverage.

First, the record establishes that Hallmark sought a declaration of noncoverage by filing a declaratory judgment action in Wyoming, but that case was ultimately dismissed after the Knezovich estate filed the instant coverage action in Illinois. Furthermore, Hallmark is not raising a policy defense to coverage but, rather, is asserting that Mr. Knezovich is not even an insured under the policy.

When construing the language of an insurance policy, a court’s primary objective is to ascertain and give effect to the intentions of the parties as expressed by the words of the policy. Because the court must assume that every provision was intended to serve a purpose, an insurance policy is to be construed as a whole, giving effect to every provision and taking into account the type of insurance provided, the nature of the risks involved, and the overall purpose of the contract. If the words used in the policy are clear and unambiguous, they must be given their plain, ordinary, and popular meaning, and the policy will be applied as written, unless it contravenes public policy. Although policy terms that limit an insurer’s liability will be liberally construed in favor of coverage, this rule of construction only comes into play when the policy is ambiguous.

With respect to the nature of the risk insured against, Hallmark’s policy makes a critical distinction between who is protected under Franklin Aviation’s liability coverage and what types of uses and risks are covered under the policy. In addition to covering Franklin Aviation as the named insured, the policy also provides coverage to “someone we [i.e., Hallmark] protect.” Persons included within that someone we protect category are determined by looking under the provisions entitled “Who Is Protected” and “Who Is Not Protected.” The clear language of the policy protects any person riding in the aircraft with Franklin Aviation’s express permission and any employee of Franklin Aviation acting within the scope of his employment, but renter pilots are specifically excluded from protection under the policy. A renter pilot is simply any person or organization who rents the aircraft from Franklin Aviation. Furthermore, the policy defines instruction and rental as Franklin Aviation’s use of the aircraft for the instruction of, or rental to, others for their pleasure and business purposes.

Here, the affidavit of Mr. Verheydt established that Mr. Knezovich paid money to Franklin Aviation to rent its aircraft for a solo flight. The fact that Mr. Knezovich was operating the aircraft as a student pilot in no way negated the fact that he was renting the aircraft from Franklin Aviation while he was furthering his training as a pilot. Renter pilot and student pilot are not mutually exclusive designations. We conclude that Mr. Knezovich is specifically excluded from being an insured because he was a person who was renting the aircraft from Franklin Aviation.

A court must not strain to find an ambiguity where none exists and the trial court’s attempt to read some ambiguity into the provisions concerning policy coverage and the renter pilot exclusion is unavailing. The interpretation ignored the very clear provisions in part 3, paragraphs 2 and 3(b), of the policy, which establish that renter pilots are excluded from the persons insured and have no coverage under the policy. Because Mr. Knezovich, as a renter pilot, is not an insured under the terms of the policy, other provisions concerning the scope of Franklin Aviation’s coverage are not implicated and are not taken into consideration to determine the identity of who is insured under the terms of the policy. Finally, there was no need for Hallmark to expressly exclude coverage for student pilots because any student pilot renting a covered aircraft falls within the definition of renter pilots and does not constitute a protected person under the policy.

Because Mr. Knezovich was not a protected person under the policy, Hallmark does not owe a duty to defend the Knezovich estate.

ZALMA OPINION

Three dead people pull at the heart strings when there are no deep pockets in which the heirs may dip their hands to recover for their loss. The trial court, faced with such a massive loss of life, attempted to do “justice” rather than the law and found an ambiguity in the policy so that the heirs could draw from the insurer’s deep pockets rather than the estate of the pilots. The Court of Appeal had empathy for those who died and their heirs but applied the law and contract of insurance as written. The insurer did not want to insure the risks of loss caused by rental pilots, probably because there was no way to underwrite the risks of each rental pilot, so they excluded any losses caused by rental pilots and clearly stated that the insurer would not insure rental pilots.

The appellate court read the entire policy and found, therefore, that there was no coverage.

When faced with a no coverage case, unless absolutely sure, the insurer must either defend under a reservation of rights or file a declaratory judgment action to avoid finding it has no policy defenses if found to be wrong on the decision to defend.

© 2012 – Barry Zalma

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

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

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

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

 

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The Danger Of Withdrawing Defense

Breach Duty to Defend and Lose Right to Attack the Settlement

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Two insurance carriers that provided consecutive coverage to a mutual insured asked the Texas Court of Appeal whether Audubon Insurance Company (Audubon) should receive contribution and reimbursement from Great American Lloyds Insurance Company (GALIC) for defense and settlement costs Audubon incurred as the result of GALIC’s breach of its duty to defend and indemnify their mutual insured. In Great American Lloyds Insurance Company v. Audubon Insurance Company, No. 05-11-00021-CV (Tex.App. Dist.5 08/06/2012) the Texas Court of Appeal resolved the dispute.

Background

Holigan Family Investment, Inc., a homebuilder, purchased two policies of commercial general liability insurance from GALIC providing coverage from July 1, 1995, through July 1, 1996, and from July 1, 1996, through July 1, 1997. Audubon and other insurance companies provided consecutive commercial general liability coverage to the homebuilder from July 1, 1997, through April 1, 2002.

In December 2001, David and Marilyn DeShields (the homeowners) sued the homebuilder in Harris County alleging that the homebuilder negligently constructed their home. They also sued their own homeowners insurance carrier, Prudential Property and Casualty, alleging negligent claims handling. The homeowners alleged that the exterior balcony of their home was constructed in a defective manner and allowed water to enter the home. They also alleged that although the homebuilder attempted to make repairs, it did so in a negligent manner. Additionally, the homeowners alleged that the HVAC system was negligently installed and resulted in intermittent condensation that dripped outside the pan onto the attic floor. And they alleged that as a result of the negligence of the homebuilder, its employees, and its contractors, toxic mold grew in the walls of the home, potentially exposing the homeowners and their child to biohazardous organisms.

GALIC, Audubon, and the other insurers agreed to defend the homebuilder against the homeowners’ claims. GALIC agreed to pay one-third of the defense costs. About a year later, however, GALIC withdrew its agreement to contribute to the homebuilder’s defense costs. It concluded that, based on discovery in the lawsuit, the earliest date any damage occurred was around March 30, 1998, which was outside its policy period, and that it did not have a duty to defend or indemnify the homebuilder. Audubon and the other insurers continued to defend the homebuilder. Prudential settled the homeowners’ claims against it, and the homeowners nonsuited the Harris County lawsuit.

The homeowners re-filed their lawsuit against the homebuilder in Dallas County; Prudential intervened. Audubon and the other insurers continued to represent the homebuilder and ultimately settled the case with the homeowners and Prudential. Audubon then sued GALIC for contribution and reimbursement of defense and settlement costs. Audubon contended that GALIC breached its contract with the homebuilder by withdrawing its defense and refusing to indemnify the homebuilder.

GALIC’s Motion for Summary Judgment

GALIC contends it did not have a duty to defend the homebuilder. An insurer’s duty to defend arises when a third party sues the insured on allegations that potentially state a cause of action within the terms of the policy, without regard to the truth or falsity of the allegations. The duty to defend in Texas is determined under the “eight corners rule” – that is, by examining the allegations in the underlying pleadings and the language of the insurance policy.</