No Excuse For Refusing to Respond to Motion for Summary Judgment

Bad Faith Charges Don’t Eliminate The Burden of Proof

Because most people dislike insurance companies and believe just filing suit against an insurer seeking bad faith damages is enough to win major damages. Those people are wrong. Every plaintiff, even one suing an insurance company for the tort of bad faith, has the burden of proof.

When a party files a motion for summary judgment the opposing party is obligated to present evidence that is sufficient to raise an issue of fact. Failure to do so is fatal to the suit.

In Bailey v. State Farm Fire and Casualty Company, Slip Copy, 2015 WL 7069415 (S.D.W.Va., 11-12-2015) the Plaintiffs, Justin and Robyn Bailey, sued State Farm asserting that their home and property were insured under a policy purchased from State Farm when they suffered losses caused by a derecho wind storm.

FACTUAL BACKGROUND

State Farm filed a motion for summary judgment. The plaintiffs sought more time after delaying responses to discovery and failing to respond to interrogatories or appear for depositions up to an including the discovery cut offs. Plaintiffs claimed that caring for an ill parent was sufficient to avoid the need to respond.

DISCUSSION

Extension of Time

The Baileys responded to State Farm’s motion for summary judgment with a request for an extension of the deadlines contained in the Court’s scheduling order. They explain that Ms. Bailey’s father “has been extremely ill undergoing medical procedures for suspected lung mass with possible metastasis.” They assert that Ms. Bailey’s father’s medical appointments, care, and treatment have left them unavailable to their own counsel, as well as for depositions. In light of their circumstances, they seek entry of a new scheduling order that permits completion of discovery and the taking of depositions.

State Farm opposed the requested extension. It notes the history of failure to respond to discovery requests (and failure to respond to the motion to compel), as well as the repeated attempts to schedule depositions over the course of several months.

The Court found that an extension of the deadlines at this point in the litigation is not appropriate. First, while the Plaintiffs have explained that their time and attention is devoted to Ms. Bailey’s father’s medical care, they have not provided evidence that the care interfered with their ability to conform to the Court’s deadlines. It is not clear to the Court that the family medical issue prevented the Plaintiffs from answering interrogatories or scheduling at least one of the Plaintiffs for a deposition at a time and location convenient to the Plaintiffs.

Parties have an obligation to both the Court and the opposing party to either comply with the deadlines or seek extensions in a timely manner. The Plaintiffs simply ignored their obligations in this case. The Court concluded that no extension of the long-expired discovery deadlines contained in the scheduling order to be warranted.

Summary Judgment

Because the Plaintiffs have the burden of proof, and can no longer rest on their pleadings, State Farm argues that it is entitled to summary judgment as to the breach of contract claim, and consequently as to the claims for damages, bad faith, and punitive damages.

The Court agreed that State Farm has satisfied its burden of demonstrating that it is entitled to judgment as a matter of law. The burden on the moving party may be discharged by ‘showing’ there is an absence of evidence to support the nonmoving party’s case.

Plaintiffs bear the burden of proof with respect to claims for breach of contract. They, therefore, have the burden, when challenged at the summary judgment stage, of making a sufficient showing on each essential element of their case. Because the Plaintiffs have presented no evidence to support their allegations, State Farm is entitled to summary judgment.

ZALMA OPINION

Insurers are not evil. Plaintiffs, who may have a viable suit against an insurance company, cannot ignore their obligation to the court and the legal system to provide legitimate and honest response to discovery requests and fail to respond to a motion for summary judgment. This case is like the plaintiffs failing to show up for trial because it is inconvenient.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Posted in Zalma on Insurance | Comments Off on No Excuse For Refusing to Respond to Motion for Summary Judgment

Failure to Maintain Insurance a Crime In Arkansas

Homicide is Not Always Criminal – Lack of Insurance Is

Many states, like Arkansas, require that everyone who operates a motor vehicle must carry insurance and, if he or she is involved in an accident, can be criminally responsible and go to jail for failure to carry adequate insurance.

In Gill v. State, Not Reported in S.W.3d, 2015 Ark. 421, 2015 WL 7063029 (Ark., 11/12/2015) William Gill was convicted of negligent homicide and inadequate insurance and sentenced to jail for his crimes. He appealed from the sentencing order reflecting his convictions for negligent homicide and inadequate insurance during an accident and his total sentence of six months in the county jail.

FACTS

On March 19, 2012, Gill was driving on North Apple Street in Beebe, Arkansas. The victim, Emmaly Holt, was driving on Highway 367 with no requirement to stop at the intersection of those two roads. In a statement given at the scene, Gill said that he “stopped at the stop sign on Apple,” and “looked both ways,” but “did not see any car coming.” Gill proceeded through the stop sign, and a collision occurred between his vehicle and Holt’s vehicle. Holt was pronounced dead at the scene of the collision. Blood testing determined that Gill had neither drugs nor alcohol in his system at the time of the collision; he was seventy-one years old at the time.

On October 28, 2013, the State filed a misdemeanor information, alleging that Gill had committed the offenses of negligent homicide and failure to maintain adequate liability insurance. The circuit court found Gill guilty of both offenses and sentenced him to six months in the county jail and $2500 in fines and court costs.

Trooper Andy Simpson of the Arkansas State Police testified that  he saw a pickup truck and a car off the east shoulder of the road and that  that the vehicles were “impacted together” and that the pickup truck “was still up against the driver’s side door” of the car. According to Simpson, Holt, the driver of the car, was still in her vehicle, and she was obviously deceased.

Gill was not given a traffic citation by Simpson or any other police officer.

Trooper Ronald Laslo, qualified as an expert in accident reconstruction, testified that at the point of impact, Gill’s truck was traveling at a minimum of ten miles per hour, and Holt’s vehicle was traveling at a minimum of thirty eight miles per hour. The vehicles collided in Holt’s lane, and there were no skid marks visible from either direction made by either vehicle.

ANALYSIS

A person commits negligent homicide if he or she negligently causes the death of another person. The criminal code states that a person is criminally negligent when the person should have been aware of a substantial and unjustifiable risk that the attendant circumstances exist or the result will occur. The criminal code further states that the risk must be of such a nature and degree that the actor’s failure to perceive the risk involves a gross deviation from the standard of care that a reasonable person would observe in the actor’s situation considering the nature and purpose of the actor’s conduct and the circumstances known to the actor.

In cases of criminally negligent conduct the negligence must be a gross deviation from the standard of care that a reasonable person would observe in the actor’s situation.

In the present case, there is no question that Gill’s failure to see Holt’s vehicle traveling on Highway 367 resulted in the fatal accident. That failure may well constitute civil negligence. The State presented no evidence that Gill was engaged in any criminally culpable risk-creating conduct; rather, the evidence established only that Gill inexplicably failed to see Holt’s vehicle when he pulled onto Highway 367.

The evidence did not show that Gill was speeding, that he was driving erratically, that he was under the influence of alcohol, that he was using a phone, or that he was engaged in some similar conduct.

Gill’s failure to see Holt’s vehicle resulted in a tragic death, but that unexplained failure, without more, does not constitute criminally negligent homicide. Accordingly, we reverse and dismiss Gill’s conviction for negligent homicide.

INADEQUATE INSURANCE DURING AN ACCIDENT

When the operator of any motor vehicle is involved in a motor-vehicle accident in Arkansas and the vehicle, or the operator while driving the vehicle, is found not to be adequately insured, as required by the operator shall be deemed guilty of a Class A misdemeanor.

Trooper Simpson testified that Gill provided him with an insurance document at the scene. That document did not reflect coverage on the day the collision occurred. Gill claims that, at trial, he provided proof of insurance on the pickup truck that he was driving at the time of the collision.  Stephanie May, a State Farm Insurance agent who handled Gill’s insurance account, testified that the document presented was not proof of insurance; rather, it was a renewal certificate that was merely an offer of insurance for the stated period of time. According to May, Gill accepted the renewal offer, to be paid on a monthly basis. May testified that Gill’s automobile insurance ceased to exist after February 16, 2012, for nonpayment of the premium. May testified that the policy had not been renewed by the date of the collision. Therefore, no other proof of insurance was offered by Gill and Gill failed to rebut the presumption that his vehicle was uninsured at the time of the accident.

ZALMA OPINION

No one is perfect. No driver of an automobile always acts prudently and carefully when driving an automobile. Gill’s failure to see Holt’s vehicle resulted in a tragic death, but that unexplained failure, without more, does not constitute criminally negligent homicide. For that reason it is clearly prudent to carry insurance to protect oneself against the risks of loss as a result of negligent conduct. Mr. Gill failed to pay his premium, his policy was cancelled as a result and he was uninsured at the time of the fatal accident. In Arkansas he was found to be in violation of a criminal statute and was properly sentenced for that crime. He will also be sued in civil court and will, after he leaves jail, be forced to pay a judgment from his own assets.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Failure to Maintain Insurance a Crime In Arkansas

CGL Provides No Cover For Building House on Someone Else’s Land

Insured’s Work On Property Was Clearly Excluded

No insurance policy provides coverage for every possible risk of loss. When an insured builder built a house that encroached on the property of another, it sought coverage for the damages of the true property owner. The insurer provided a defense under a reservation of rights but refused to pay the damages assessed.

In Probuilders Specialty Ins. Co. v. Coaker, Slip Copy, 2015 WL 7018415 (W.D.Wash., 11/10/2015) Probuilders Specialty Insurance Company, RRG’s (“PBSIC”) moved for summary judgment seeking a declaration that PBSIC owed no duty to indemnify Defendants Michael and Marilee Coaker (“the Coakers”), Sundance Builders, Inc. (“Sundance”), and Mike’s Roofing, Inc. (“Mike’s Roofing”) for damages arising out of the construction of the Coakers’ single-family home in Duvall, Washington.

BACKGROUND

This is an insurance coverage case that arises out of a mistake concerning property lines.

In 2004, the Coakers purchased a piece of real property in Duval, Washington, for the purpose of building one or more houses there. Adjacent to the Coakers’ property sits a parcel of undeveloped forest land owned by three brothers named Chen (“the Chens”). The Chens’ property included a 30–foot by approximately one-quarter-mile strip of land known as “the panhandle” that extended out to the west from the bulk of the Chens’ property. The panhandle lay between the southern border the Coakers’ property and the northern border of the property of another neighbor, Robert Wilan. Mr. Coaker did not know of the panhandle when he and his wife purchased their property, and he mistakenly believed that his southern property line abutted Mr. Wilan’s northern property line.

Sundance Builders, Inc. is a company that the Coakers formed in 2005 for the purpose of constructing residential homes and townhouses. Their policies provided three coverages: Bodily Injury and Property Damage (Coverage A), Personal Injury and Advertising Injury (Coverage B), and Medical Payments (Coverage C).

In 2008, the Coakers, acting through Sundance, began building a house for themselves. Defendants believed that they were building the house entirely on the Coakers’ property, but in fact the house encroached on the Chens’ panhandle.  When Mr. Coaker learned of the error, he contacted Eric Chen and began negotiating a possible solution. The boundary agreement ultimately fell through, however, and at some point negotiations ceased.

In 2014, the Chens filed suit against the Coakers, Sundance, and Mike’s Roofing in King County Superior Court alleging causes of action for trespass and negligence and seeking damages, ejectment, and specific performance of the boundary agreement. PBSIC received notice of the Chens’ suit on August 8, 2014. PBSIC defended under a reservation of rights.

The case proceeded to a bench trial before the Honorable Samuel Chung, and on August 17, 2015, Judge Chung found that the Coakers had been negligent in building the house on the Chens’ panhandle. Nevertheless, Judge Chung concluded that the appropriate remedy was to quiet title to the panhandle in the Coakers and require the Coakers to pay the Chens the monetary value of that land.

On December 12, 2014, PBSIC sued contesting coverage. PBSIC sought summary judgment declaring that the policies it issued to Sundance provide no coverage for any damages arising out of the construction of the Coakers’ house. PBSIC offers several arguments to support this request, including that (1) no “property damage” occurred, as the policies define that term, and (2) even if property damage did occur, various exclusions preclude coverage.

DISCUSSION

Insurance Contract Interpretation

The interpretation of an insurance policy is a question of law for the court.

Bodily Injury, Advertising Injury, and Personal Injury

PBSIC argues, with citations to relevant policy provisions, that neither the allegations in the underlying litigation nor any facts in the record in this case trigger bodily injury, advertising injury or personal injury coverages. The court agreed with PBSIC and finds that summary judgment in PBSIC’s favor is appropriate on this issue of whether it owes indemnity. PBSIC has no duty under the policies’ bodily injury, advertising injury, and personal injury coverages to indemnify Defendants for damages arising out of the construction of the Coakers’ house.

Property Damage & Exclusion (J)(5)

PBSIC’s motion turns on the parties’ dispute over whether the policies’ property damage coverage applies here. PBSIC asserts that such coverage does not apply because the underlying litigation did not involve “property damage,” as the policies define that term. PBSIC further argues that even if the underlying litigation involved property damage, multiple exclusions bar coverage for such property damage.

The court concluded that exclusion (J)(5) precludes coverage for damages arising out of the construction of the Coakers’ house. Even if the underlying litigation involved property damage as the policies define that term, the policies’ property damage coverage remains subject to multiple exclusions. Pursuant to exclusion (J)(5), however, “[t]his insurance does not apply to … [p]roperty damage to … [a]ny real property on which you … are performing operations, if the property damages arises out of those operations ….”

It is undisputed that Sundance was in the home construction business that Sundance selected the site for the Coakers’ house and constructed the house on that site, that the house encroached on the Chens’ real property, and that the construction caused the alleged damage to the Chens’ real property. As such, the Chens’ property damage was (1) property damage to real property on which Sundance was performing operations, and (2) property damage that arose out of Sundance’s operations. Exclusion (J)(5) therefore bars coverage in this case. Under that exclusion, the Chens’ property damage was not “property damage to which this insurance applies.”

The court concluded that the policies excluded coverage for damages arising out the construction of the Coakers’ home.

ZALMA OPINION

The exclusion on which the court relied was clear an unambiguous. Even if it did not exist there was no bodily injury, property damage or personal injury as those terms are defined in the policy. The court decided to use the exclusion since it was more clear than relying on a definition to avoid coverage although both were appropriate.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on CGL Provides No Cover For Building House on Someone Else’s Land

30 Year Failure of Notice Bars Coverage

Ignorance Can Be Cured But When it Was Not Insured Lost $8 million

When a client is sued the first question every defense lawyer should ask of the client is: “what insurance do you have that could possibly provide coverage for defense or indemnity?” Then, if the claims relate back many years, the lawyer must insist the client research all insurance policies whether current or expired. Failure to do so can be very expensive to the client who may find the insurance it paid for is not required to provide defense or indemnity because of the failure of the insured to comply with the notice provision of the policy(ies) because satisfaction of the notice provision in an insurance policy is a condition precedent to coverage for the policyholder.

In The Travelers Indem. Co. v. U.S. Silica Co., — S.E.2d —-, 2015 WL 7045391 (W.Va.. 11/10/2015) the failure to locate policies cost U.S. Silica more than $8 million. In cases which involve liability claims against an insurer, several factors must be considered before the Court can determine if the delay in notifying the insurance company will bar the claim against the insurer. The length of the delay in notifying the insurer must be considered along with the reasonableness of the delay. If the delay appears reasonable in light of the insured’s explanation, the burden shifts to the insurance company to show that the delay in notification prejudiced their investigation and defense of the claim. If the insurer can produce evidence of prejudice, then the insured will be held to the letter of the policy and the insured barred from making a claim against the insurance company. If, however, the insurer cannot point to any prejudice caused by the delay in notification, then the claim is not barred by the insured’s failure to notify.”

The Travelers Indemnity Company (“Travelers”) appealed from an order entered March 5, 2014, by the Circuit Court of Morgan County that denied Travelers’ post-trial motions for judgment as a matter of law or a new trial following the court’s entry of a jury verdict against Travelers, and in favor of U.S. Silica Company (“U.S.Silica”), in the amount of $8,037,745. By its March 5, 2014, order, the circuit court also awarded U.S. Silica attorney’s fees and prejudgment interest.

FACTUAL HISTORY

U.S. Silica mines and processes silica sand.  As a producer of silica sand, U.S. Silica, as well as its predecessors, has been named as a defendant in numerous silica claims seeking damages for injuries allegedly caused by exposure to silica sand. The first silica claims were filed against U.S. Silica when it was known as PGS in 1975. From the record in this case, it appears that U.S. Silica incurred the majority of its unreimbursed defense and settlement costs related to silica claims between 2001 and 2005.

In 2005 U.S. Silica reviewed its policies of insurance to determine whether any coverage existed to pay its unreimbursed silica claims costs. Travelers had policies in effect from April 1, 1949, until April 1, 1958. Upon its belated discovery of these policies, U.S. Silica sent Travelers a letter on September 20, 2005, informing Travelers of the silica claims and requesting coverage under these Travelers policies for out-of-pocket expenses.

A jury trial was held in September 2013, resulting in a jury verdict in favor of U.S. Silica. As noted in the circuit court’s October 15, 2013, “Order of Judgment,” the jury found for U.S. Silica in the amount of $8,037,745.00.

DISCUSSION

Each of the three Travelers policies of insurance at issue contained a notice provision requiring U.S. Silica to notify its insurer Travelers: “If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative.”

With respect to this type of notice provision, the Supreme Court of Appeals of  West Virginia previously observed, and now expressly holds, that the satisfaction of the notice provision in an insurance policy is a condition precedent to coverage for the policyholder. The duty to notify an insurance company of potential liability is a condition precedent to the company’s liability to its insured.

If U.S. Silica failed to comply with the notice provision, such lack of notice is a bar to coverage, and Travelers has no duty to provide insurance for the losses claimed by U.S. Silica. However, if U.S. Silica properly notified Travelers of its claims for which it seeks coverage, Travelers would be required to provide the requested insurance unless another policy exclusion operates to preclude coverage.

The pivotal issue in this assignment of error is whether U.S. Silica complied with the notice provision in its policies of insurance when it requested Travelers to provide coverage for silica claims on September 20, 2005, by way of reimbursement for settlement and defense costs U.S. Silica had incurred before that date.

Where the provisions of an insurance policy contract are clear and unambiguous they are not subject to judicial construction or interpretation, but full effect will be given to the plain meaning intended.  Finally, an insurance policy should never be interpreted so as to create an absurd result, but instead should receive a reasonable interpretation, consistent with the intent of the parties.

It is impossible to calculate the precise length of U.S. Silica’s delay in notifying Travelers of the claims for which it seeks coverage. It is undisputed that U.S. Silica first requested coverage from Travelers on September 20, 2005, for silica claims that it previously had defended and settled before this date. However, given that the plain language employed by the notice provision requires an insured to “immediately forward to the company every demand, notice, summons or other process received by him or his representative.”  The policies required notice to be provided when the insured, i.e., U.S. Silica, received a “demand, notice, summons or other process” in the silica claims for which it now seeks coverage. Therefore, U.S. Silica, or its predecessor, was required to notify Travelers of such claims when it first received them, which, as supported by the record evidence in this case, occurred as early as 1975 and continued through the date that U.S. Silica first contacted Travelers in 2005. With respect to some of these claims it is apparent that approximately thirty years elapsed between U.S. Silica’s receipt of the silica claims, which sought damages for injuries allegedly caused by silica exposure, and U.S. Silica’s notice to Travelers of the silica claims’ existence.

The Supreme Court concluded, without hesitation, it is difficult to fathom how such a substantial delay in providing notice could be perceived as reasonable.

Prior cases also have concluded that such a determination of reasonableness is a question of fact for the jury. However, when the facts of the case are not in dispute, what constitutes reasonable notice is a question of law for the court to decide.

Throughout these proceedings, U.S. Silica repeatedly has explained that it failed to provide timely notice to Travelers because it simply did not know that it had policies of insurance that would have provided coverage for the defense and settlement costs it incurred in the silica claims. U.S. Silica also contends that, despite repeated due diligence inquiries conducted in conjunction with its several changes of ownership, the subject Travelers policies were not discovered —until U.S. Silica searched its own insurance files upon the expiration of the ITT indemnity agreement in September 2005. An insured’s lack of knowledge of its own policies of insurance does not, however, provide reasonable grounds to justify its late provision of notice to its insurer.

ZALMA OPINION

The court could not accept the excuse that an insured, who claims the benefits of an insurance policy, did not know for more than two and one half years that such a policy existed. The insurance company is severely prejudiced by a more than 30 year delay. Prejudice should be obvious since most witnesses are unavailable and probably dead. Therefore, the failure of counsel for U.S. Silica and its predecessors, to find the Travelers policies and give notice of the claims, defeat the current claim and the jury verdict was reversed.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on 30 Year Failure of Notice Bars Coverage

Zalma’s Insurance Fraud Letter – November 15, 2015

BZINCLOGO.gif
In this, the twenty second issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on
November 15, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:

  • More on Failed CO-OPs – How Government Programs Failed For Lack of Subidie
  • Guilty of 31 Counts of Insurance Fraud Sustained.
  • Convicted of Arson-For-Profit in Iowa.
  • Fraud After Catastrophes.
  • Good News From The Coalition Against Insurance Fraud
  • Convictions for Health Insurance Fraud & P&C Insurance Fraud

Visit the Website of Zalma Insurance Consultants

Insurance Publications by Barry Zalma

Insurance Claims: A Comprehensive Guide

     For Readers of ZIFL a Special 25% Discount

Insurance Law

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

In addition the standard FC&S Online published by The National Underwriter Company now includes a Fraud Channel with the majority of the information taken from my work on insurance fraud. It is available at http://www.nationalunderwriterpc.com/Pages/default.aspx. The Fraud Channel covers issues like: Fraud Basics, Checklists and Charts, Investigation, Ethics, Reference Materials, Fraud Of The Week, and  both the full text and summaries of insurance fraud Cases.

Buyer Bonus:

You automatically receive-AT NO ADDITIONAL COST-a subscription to the author’s e-newsletter: The Monday Claims Report, a weekly e-newsletter featuring coverage and analysis on the top insurance law court decisions from across the country.

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» 1-Hour Webinar: Construction Defect Insurance Claims 101
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1-Hour Webinar Covers:
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http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library/construction-defect-insurance-claims-101-webinar.html

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Filed Rate Doctrine Defeats Class Action

Forced Placed Insurers Face Higher Risks of Loss

No one, neither the lender nor the borrower, like forced placed policies because they only protect the lender and are invariably expensive because of the increased risk faced by the lender dealing with a borrower who fails to buy insurance directly.  The borrower who is required to pay the high premium for the forced placed policies will complain that the higher premiums are due to tortious or criminal conduct rather than admitting that their failure to buy insurance increased the risk of loss the insurers are taking. Regulators understand the additional risk and will approve the higher rates.

In Trevathan v. Select Portfolio Servicing, Inc., — F.Supp.3d —-, 2015 WL 6913144 (S.D.Fla., 11/06/2015) Assurant, Inc. Moved to Dismiss the Class Action Complaint With Prejudice, American Security Insurance Company moved to Dismiss the Class Action Complaint With Prejudice, and Select Portfolio Servicing, Inc. moved to Dismiss Class Action Complaint (the “Motions”).

BACKGROUND

Plaintiff, on behalf of himself and all other persons similarly situated sued Defendants Select Portfolio Servicing, Inc. (“SPS”), Assurant, Inc. (“Assurant”), and American Security Insurance Company (“American” and, together with Assurant, the “Assurant Defendants”) for damages incurred as a result of placement of force placed insurance on the Plaintiff.  SPS services and/or owns mortgage loans secured by real property.

The terms of all standard mortgage loans require borrowers to purchase and maintain property insurance coverage on the secured property as a condition to funding. Such standard mortgage terms typically permit the lender or servicer to “force place” insurance if a borrower fails to maintain adequate hazard, flood, or wind insurance coverage themselves.

The Plaintiff alleged that SPS, in collaboration with the Assurant Defendants, charged inflated and unnecessary force place flood insurance policy premiums to borrowers whose loans it serviced or owned. Plaintiff obtained a mortgage loan, serviced by SPS, secured by real property located in a low-risk flood zone in Broward County, Florida in 2006. On the open market, the premium for flood insurance coverage of $250,000 would cost about $414.00. From 2010–2014, SPS force placed insurance on his property, issued by American, as Plaintiff failed to provide acceptable proof of coverage. The insurance premium for the coverage of $250,000 ranged from $1,493.58 to $2,326.50 per year-long policy period.

Plaintiff alleges that SPS and the Assurant Defendants failed to disclose to him that the premium included “unearned kick-backs to SPS and the cost of servicing SPS mortgage portfolios.”  Plaintiff brings six counts: Count I: Breach of Contract (against SPS); Count II: Breach of the Implied Covenant of Good Faith and Fair Dealing (against SPS); Count III: Unjust Enrichment (against SPS); Count IV: Unjust Enrichment (against the Assurant Defendants); Count V: Violation of the Truth in Lending Act (“TILA”) (against SPS); and Count VI: Tortious Interference with a Business Relation (against all Defendants).

DISCUSSION

Each of the three Defendants filed Motions to Dismiss. SPS argues that the Complaint should be dismissed because: (1) Plaintiff does not allege compliance with the requirement that he provide SPS notice and an opportunity to cure; (2) Plaintiff’s common law claims (Breach of Contract, Implied Covenant, Unjust Enrichment, and Tortious Interference) fail as a matter of law; (3) Plaintiff’s TILA claim fails; and (4) the filed-rate doctrine bars Plaintiff’s “excessive premium” claims. American argues that this action should be dismissed because: (1) the filed-rate doctrine bars Plaintiff’s “excess premium” claims; (2) controlling authority bars Plaintiff’s claims; and (3) Plaintiff has failed to exhaust administrative remedies under Florida law.

Filed-rate Doctrine Bars Plaintiff’s Inflated Premiums Claims

Defendants argue that Plaintiff’s claims based on “excessive premiums” must fail, because the premiums American charged were the exact amounts authorized by Florida insurance regulators. Under the filed-rate doctrine, a regulated entity is forbidden to charge rates for its services other than those properly filed with the appropriate federal regulatory authority. The two principles underlying the doctrine are nondiscrimination and nonjusticiability. Under the nondiscrimination principle, the doctrine bars any claim that would allow an award of damages to effectively change the rate paid by that plaintiff to one below the filed rate paid by other customers. Under the nondiscrimination principle, a claim is barred if an award of damages to the plaintiff would result in judicial reasonableness of the rate even if the claim does not directly attack the filed rate.

Plaintiff argues that it is not the rate itself, but rather the “kickback” present in the inflated rate and the Defendants’ alleged “collusion and self-dealing” that is at issue. Defendants respond that the purported distinction is meaningless.  The Court found that all of Plaintiff’s claims arising from inflated rates, as to each of the three Defendants, should be dismissed with prejudice.

Only Count IV, for Unjust Enrichment, and Count VI, for Tortious Interference with a Business Relation, are asserted against the Assurant Defendants. The unjust enrichment claim is predicated solely upon excessive premiums that included kickbacks. The tortious interference with a business relation claim alleges only against the Assurant Defendants that they offered kickbacks to entice SPS to utilize their services, resulting in additional debt arising from inflated force placed insurance premiums. Thus, as both of the claims against the Assurant Defendants fall within the purview of excessive insurance coverage or inflated premiums, all claims against the Assurant Defendants are dismissed.

Plaintiff’s “inflated premium” claims are dismissed with prejudice on the basis of the filed-rate doctrine;

The remaining claims are DISMISSED without prejudice;

Plaintiff may file an Amended Complaint on or before December 3, 2015.

ZALMA OPINION

This suit could have been avoided by the plaintiff buying insurance directly to protect him against the risk of losing his home and concurrently insure his lender against the same risk. By his breach of the loan document he allowed the lender to force place insurance at a rate approved by the state. This is what the lender and the insurers did and the claims failed. The Plaintiff, and those similarly situated, had no one to blame but themselves.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Filed Rate Doctrine Defeats Class Action

It’s The Insured’s Fault

The Duty of an Insurance Producer is Limited in Illinois

In the news today it appears clear that no one is willing to take responsibility for his or her own acts. If something goes wrong, if someone loses money, if a building is damaged, if insurance does not cover a loss, it’s someone else’s fault. No one seems willing to take responsibility for their own acts or errors.

In Office Furnishings, Ltd. v. A.F. Crissie & Co., Ltd., — N.E.3d —-, 2015 IL App (1st) 141724, 2015 WL 6939958 (Ill.App. 1 Dist., 11/9/2015) the plaintiff suffered serious damage to its inventory when the roof leaked and water rained into the building like its interior was a rain forest. It made a claim to its insurer only to have the claim denied because the loss was not fortuitous and because they misrepresented material facts in the application for insurance. Rather than accepting they did wrong the insured’s sued their insurance producer for failing to obtain appropriate coverage. At trial the plaintiff won only to have the court enter judgment for the defendant not withstanding the jury’s verdict (“NOV”).

BACKGROUND

In 1993, plaintiff leased warehouse and office space in a building located at 725 South 25th Avenue in Bellwood, Illinois. Brathan Property LLC (Brathan) purchased the property in 2000, and plaintiff continued to lease space from the building. Ray Meyers holds controlling ownership in both Brathan and plaintiff Office Furnishings Ltd.

The building had two types of roofing. One section of roof was made of PVC membrane and the other was made of tar and gravel. When Brathan purchased the property, the building’s roofing was inspected by a roofing contractor.  The report stated that the PVC membrane had shrunk and that “a substantial amount of water is trapped between the two layers of roofing.” It recommended that the roof be replaced within one or two years.

Jim Werner was the insurance producer for plaintiff doing business through his agency, A.F. Crissie & Company (Crissie). Up to December 2002, plaintiff and Brathan were insured by a policy from Meridian Insurance Company. In August 2002, Meridian informed Werner that it would not be renewing coverage for plaintiff. Meridian did not renew plaintiff’s policy because it had paid out more in claims than it received in premiums. Werner testified that he did not know the age of the building’s roof.

As plaintiff’s insurance producer, Werner sought replacement coverage from other insurance companies through the ACORD application. Werner sent the ACORD application to eight insurance companies in October 2002. After reviewing the application, the eight companies declined to offer insurance to plaintiff due to past loss experience. Acting as a broker Werner went to another broker who was able to place insurance with American Family.

American Family’s agent, had “his own application that needed to be—that he would ask questions and that had to be signed.” Werner was present at that meeting because they did not know Joe Kobel.

At the meeting, Kobel used the ACORD application to obtain some information he needed, and he asked more questions of Meyers and Johnson to complete the application. The American Family insurance application stated that the building’s roof was five years old. This information was not listed on the ACORD application. The application listed no problems with the roof.

The American Family policy provided insurance coverage to plaintiff from December 1, 2002, to December 1, 2003.

On January 31, 2003, when Meyers went to the warehouse he saw that “[i]t was raining like a rain forest” inside. He and his employees protected as much of the merchandise as they could, but the company sustained more than $1 million in damages.

Plaintiff submitted a claim to American Family. In investigating the claim, American Family discovered that plaintiff misrepresented the age and condition of the roof on their application. American Family denied the claim because “the alleged occurrence was not a fortuitous event.” It also pointed out other misrepresentations, including that plaintiff never made a claim for damages caused by wind to the roof, and that no contractors had ever examined the roof’s condition.

Plaintiff and Brathan filed this professional negligence claim against defendants, alleging damages of $1,349,872 for damage to the building, $759,259 for damage to business personal property, and $88,074 for expenses related to installing a temporary roof.

Three issues of negligence were presented to the jury: (1) Werner failed to ensure that plaintiff understood the questions on the American Family application; (2) Werner failed to ensure that plaintiff understood that coverage could be denied if the answers on the application are not correct; and (3) Werner failed to ensure that the information on the application accurately reflected the information provided. The jury found in favor of Office Furnishings for $467,721.50, but found against Brathan.

Defendants filed a motion for a judgment n.o.v. arguing that the verdict reflected an improper imposition of a duty upon Werner, and the manifest weight of the evidence warranted a new trial. The trial court granted the judgment n.o.v., finding that Werner had no duty “to verify the information on the application” or to review the application with Meyers. Werner’s duty was only to procure the insurance request of plaintiff, and since “[h]e did provide the coverage and everything that he was looking for,” Werner fulfilled his duty.

ANALYSIS

Generally, to state a cause of action for negligence, plaintiff must show that defendant owed plaintiff a duty, defendant breached that duty, and defendant’s breach was the proximate cause of plaintiff’s injury. In the context of an insurance broker procuring insurance on behalf of the plaintiff, the primary function of an insurance broker as it relates to an insured is to faithfully negotiate and procure an insurance policy according to the wishes and requirements of his client.

This common law duty of a broker is codified in section 2–2201(a) of the Code of Civil Procedure (Code) (735 ILCS 5/2–2201(a), which requires an insurance producer to “exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.” Under this section, the duty to exercise ordinary care arises only after coverage is requested by the insured or proposed insured. Once such coverage is requested, insurance producers exercise ordinary care and skill in responding to the request, either by providing the desirable coverage or by notifying the applicant of the rejection of the risk.

The Illinois Supreme court in the past has determined that such a duty may not be imposed based on a vague request to make sure the insured is covered. Here, plaintiff contends that in finding that Werner had no duty to verify the information on the American Family insurance application, or to review the application with plaintiff, and granting the motion for judgment n.o.v., the trial court confused duty with evidence of conduct proving breach of a duty. In order to find a duty to provide specific coverage, the insured must make a request for that specific coverage; a general request to make sure the insured is covered is insufficient to create such a duty.

The evidence shows that Meyers did not make a specific request for coverage, only that it was assumed Werner would find replacement insurance for plaintiff. Werner, as the insurance producer, found an insurer, American Family, to provide a replacement policy as requested. Through Kobel, American Family’s agent, plaintiff was issued a replacement policy. This evidence is undisputed. Imposing a duty on Werner makes no sense here, where the evidence showed that Werner did not know the age of the roof and could not have known whether Meyers or Johnson answered that question accurately.

Where no duty is owed, there is no negligence, and the plaintiff is precluded from recovery as a matter of law.

ZALMA OPINION

When a business owner ignores the advice of professional roofers to replace a worn out and defective roof, when the business has its policy cancelled because of multiple claims resulting from leaks in the defective roof, and then allows a false application to be submitted to a new insurer, that business has no one to blame but itself for the loss of coverage. The agent and broker were not negligent, the insured was, and the court refused to allow the plaintiff to recover from the broker for the insured’s negligence and what was apparently intentional misrepresentations to get the insurance.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Coverage for Consequential Property Losses

Claim for Coverage for Consequential Property Losses

California Code of Regulations, Section 2695.9. Additional Standards Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage provides: ”

Section 2695.9. Additional Standards Applicable to First Party Residential and Commercial Property Insurance Policies

(a) When a residential or commercial property insurance policy provides for the adjustment and settlement of first party losses based on replacement cost, the following standards apply:

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.

(b) No insurer shall require that the insured have the property repaired by a specific individual or entity.

Not all states have codified the “line of sight rule” but most apply it. Without the Regulation like that imposed by the state of California, litigation often results. Such was the case in Great American Insurance Company of New York Vs. The Towers of Quayside No. 4 Condominium Association, Slip Copy, 2015 WL 6773870 (S.D.Fla., 11/05/2015) where the District Court for the Southern District of Florida was called upon to deal with damage to a 25 story condominium building who wanted replacement of both damaged and undamaged portions of the building to allow all 25 floors to be aesthetically the same.

Great American moved for Summary Judgment.

BACKGROUND

Great American issued Quayside a property insurance policy that provided first-party property insurance coverage for the premises located at 4000 Towerside Terrace, Miami, Florida 33038, which includes a condominium building that is the subject of this action. A release of water from a broken valve on an air conditioning unit in the building caused water damage to the drywall, carpeting, baseboards, insulation, and wallpaper in the east hallways of the eleventh floor and the floors below. Floors three through twenty-five of the building have a uniform appearance by design with respect to the carpet, wallpaper, and woodwork in the common area hallways. The carpeted east hallways of the building are separated from the carpeted west hallways by a tiled elevator landing on each floor.

Quayside submitted a claim to Great American for loss and/or damage to the building arising from the release of water, including loss and/or damage to drywall, carpeting, baseboards, insulation, and wallpaper of the east hallways of the eleventh floor and floors below. Great American paid Quayside a total of $170,291.84 for the damage to the east hallways of the eleventh floor and the floors below. Quayside asserts that this amount does not fully compensate it for the direct physical loss caused by the water damage.

Quayside sought coverage to repair or replace undamaged carpeting, wallpaper, baseboards, and woodwork in 1) the west hallways and elevator landings of the eleventh floor and floors below and 2) floors twelve through twenty-five. Quayside contends it is entitled to repair or replacement of these undamaged components because 1) it will otherwise not be possible to achieve aesthetic uniformity between the new carpeting, wallpaper, baseboards, and woodwork installed in the area that suffered water damage and the rest of the building and 2) the loss of aesthetic uniformity devalues the building and constitutes a loss to the building. Great American disputes this position, and informed Quayside that no coverage is available for repair or replacement of building components that were not physically damaged.

THE POLICY

The policy’s Difference in Conditions (‘DIC‘) Coverage Form provides: “We will pay for your ‘loss’ to Covered Property from a Covered Cause of Loss.” The DIC Declarations form provides: “DIC Direct Physical ‘Loss’ The most we will pay for direct physical ‘loss’ from a Covered Cause of Loss … is … [the limits of insurance set forth in the policy.]” As amended by an endorsement, the policy defines “Covered Cause of Loss” as “direct physical loss” to Covered Property, except those causes of “loss” listed in the exclusions. Through its Specified Cause of Loss Form, the policy specifically excludes coverage for consequential loss, which it defines as “Delay, loss of use, loss of market, or any other consequential loss.”

DISCUSSION

The policy plainly only provides coverage for “direct physical loss,” specifically excludes coverage for consequential loss, and makes no mention of “matching” or “aesthetic uniformity” at all. While the Court concluded that coverage for matching, for the purpose of achieving aesthetic uniformity, is appropriate where repairs concern “any continuous run of an item or adjoining area” for materials such as wallpaper, baseboards, woodwork, and carpeting, it is plain that matching is not otherwise required under the policy. To hold otherwise would do violence to either the parties’ mutual duties of good faith or the plain terms of the policy.

Accordingly, the Court concluded that Great American is entitled to a declaration that it has no obligation to provide coverage to replace: 1) undamaged components on floors twelve through twenty-five or 2) undamaged carpeting in the west hallways of floors three through eleven.

However, as it is unclear whether the wallpaper, baseboards, and woodwork on floors three through eleven form a continuous run from one end of the building to the other, or whether these components are separated from each other in the same manner the carpeting in the east and west hallways is separated by the central elevator lobby on each floor, Great American has failed to establish it is entitled to summary judgment with respect to whether it must provide “matching” coverage for these components. That determination is left to the presentation of further evidence.

ZALMA OPINION

First party property insurance is designed to indemnify the insured for losses incurred. It is not a means of remodeling and making new a 25 story condominium structure. Although the lack of a complete match of materials throughout the structure might not be aesthetically perfect the contract did not promise to pay for both direct and consequential losses. The District Court refused, therefore, to rewrite the policy. It followed the “line of sight rule” codified by California.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on Coverage for Consequential Property Losses

Connecticut Explains Meaning of “Arising Out Of”

Loss Arising Out Of Business Excluded

No matter how egregious the fact situation; no matter how badly a claimant was injured; no matter who is claiming what, when there is an exclusion for a loss arising out of a business pursuit, an injury that arises out of the insured’s business pursuits may never be a covered loss for defense or indemnity.

In Nationwide Mut. Ins. Co. v. Pasiak, — A.3d —-, 2015 WL 6688097 (Conn.App., 11/10/2015) Nationwide lost  a declaratory judgment action attempting to be relieved of the duty to defend and/or indemnify its insured. Nationwide appealed.

THE ISSUE

The dispositive issue in this appeal is whether the court properly determined that a provision in the umbrella policy excluding occurrences “arising out of the business pursuits or business property of an insured” from coverage did not bar the defendant’s indemnification claim.

FACTS

Sara Socci was an employee of the defendant’s company, Pasiak Construction Services, LLC, and worked out of an office located on the second floor of the defendant’s home. On May 9, 2006, while she was working alone at the office, a masked intruder entered the office carrying a gun and demanded that she open the safe. Unaware that a safe even existed in the home, she could not provide the intruder with the safe’s combination. The intruder led her into a bedroom, where he tied her hands, gagged her and blindfolded her. At one point, he pointed a gun at her head and threatened to kill her family if she did not give him the combination.

The defendant returned home during the incident and was attacked by the intruder. The defendant, Pasiak identified the assailant as Richard Kotulsky, a friend. Pasiak conversed with Kotulsky and was lead to the bedroom, where Sara Socci was found on the floor, crying and hysterical. Pasiak picked her up and removed her restraints, all the while conversing with Kotulsky.  She asked to leave, but the Pasiak told her to stay and sit down. After further discussions with Kotulsky, the defendant allowed him to leave the house. Only after he drove Sara Socci to Greenwich to discuss the incident with a mutual friend did he allow her to leave. Eventually, the police were contacted, ultimately leading to Kotulsky’s arrest and subsequent conviction.

As a result of the incident, Sara Socci developed post-traumatic stress disorder, requiring extensive therapy, and was unable to return to work. She and her husband, Kraig Socci, sued Pasiak alleging causes of action for false imprisonment, negligence, intentional, reckless, and negligent infliction of emotional distress, and loss of consortium (Socci action). On February 23, 2010, a jury returned a general verdict in favor of the Soccis. It awarded Sara Socci compensatory damages of $628,200 and punitive damages of $175,000, and awarded Kraig Socci $32,500 for loss of consortium.

Although Nationwide provided the defendant with counsel they notified him by letter on that they were reserving their right to contest coverage. Nationwide eventually sued and sought a declaration that the plaintiffs did not have a duty to defend the defendant in the Socci action under any of his policies with the plaintiffs; and a declaration that the plaintiffs had no duty to indemnify the defendant under those policies.

Regarding Nationwide’s argument that the duty to defend was barred pursuant to the policies’ business pursuits exclusions, the trial court found that although it was undisputed that the defendant owns and operates a construction business that employed Sara Socci to assist in office related work, the complaint did not expressly allege that Sara Socci was injured as a result of her employment. The allegations regarding the tortious conduct of the defendant related to his treatment of her after the attempted robbery of his home.  The trial court ultimately concluded that the exclusion did not apply because the evidence “strongly support[ed] the conclusion that [the defendant] was attempting to protect his friend” rather than further his business pursuits.

ANALYSIS

The plaintiffs argue that the language of the exclusion establishes a broad causal standard, which was satisfied by the evidence introduced at trial, and that the court improperly focused on the defendant’s motivations rather than on determining whether his conduct arose out of his business pursuits.

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.  However, when the words of an insurance contract are, without violence, susceptible of two equally responsible interpretations, that which will sustain the claim and cover the loss must, in preference, be adopted. This rule of construction favorable to the insured extends to exclusion clauses.

Homeowners’ liability policies typically exempt from coverage bodily injury or property damage arising out of or in connection with a business engaged in by an insured. People characteristically separate their business activities from their personal activities, and, therefore, business pursuits coverage is not essential for their homeowners’ coverage and is excluded to keep premium rates at a reasonable level.

The provision relevant to this appeal provides in relevant part that “[e]xcess liability and additional coverages do not apply to … [a]n occurrence arising out of the business pursuits or business property of an insured.” “Occurrence” is defined in the policy as “an accident including continuous or repeated exposure to the same general conditions. It must result in bodily injury, property damage, or personal injury caused by an insured.” The term “business” is defined as “a trade, profession, occupation, or employment including self-employment, performed on a full-time, part-time or temporary basis.”

Nationwide argued that the defendant’s coverage claim falls within the scope of this exclusion because the incident giving rise to the claim—essentially, the defendant’s refusal to let Sara Socci leave his presence and her resulting injuries—arose out of the operation of his construction business. More particularly, they argue that Sara Socci would not have been attacked by Kotulsky, and consequently would not have been threatened and restrained by the defendant, if she had not been at the office of the defendant’s construction business performing her duties as an employee.

It is sufficient to show only that the accident or injury was connected with, had its origins in, grew out of, flowed from, or was incident to the use of the business, in order to meet the requirement that there be a causal relationship between the accident or injury and the use of the business. Thus, when used in an exclusionary clause of an insurance agreement, the term “arising out of” establishes an “[expansive] standard of causation” and must be “interpreted broadly.

Applying this broad standard to the facts Sara Socci’s injuries arose out of the defendant’s business pursuits. The sine qua non of the defendant’s tortious conduct was Sara Socci’s presence at his business office fulfilling her responsibilities as his employee. Had Sara Socci not been at the office performing her duties as an employee of the defendant’s business, there is no reason to believe that she would have been assaulted by Kotulsky and, consequently, detained by the defendant. Indeed, there was no other reason for Sara Socci’s presence on the premises, and her acquiescence in obeying the defendant’s commands to wait and not leave were, in part, a function of their employer-employee relationship. Accordingly, the defendant’s conduct, and Sara Socci’s resulting injuries, were connected with, had their origins in, grew out of, flowed from, or were incident to the defendant’s business pursuits.

It is sufficient for Nationwide to demonstrate that the tortious acts and resulting injuries in the underlying action were connected with, had their origins in, grew out of, flowed from, or were incident to the defendant’s business pursuits to establish the necessary causal nexus. The fact that Sara Socci’s injuries would not have occurred had she not been engaged in work for the defendant’s business at the time of her injuries is sufficient to require the exclusion to be enforced.

ZALMA OPINION

The exclusion clearly applied since the injuries suffered by Sara Socci grew out of, flowed from, or were incident to the defendant’s business pursuits. Therefore, no coverage under the homeowners or umbrella policy. Of course, and not touched on by this case, is the fact that as an employee she is entitled to Workers’ Compensation benefits as an exclusive remedy available to her for the injuries incurred in the course and scope of her employment. How she obtained a judgment against her employer is a mystery and not spoken of by the Court of Appeal.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Connecticut Explains Meaning of “Arising Out Of”

Medical Liens – A Way to Avoid The Limits of Howell v. Hamilton

Does a Medical Lien Have Any Relationship to The Value of the Medical Services?

Some physicians and health care providers are willing to provide services on a lien where they agree to be paid only after the injured person recovers money in a suit. In such a situation the health care providers are gambling that the patient wins his or her suit. If he or she loses there will be no coverage. Since the health care providers are gambling the billing is usually inflated to hedge the bets they make. Usually, the health care providers then discount their lien so that the injured person can recover more. Essentially, their billing have little or no relationship to the value of the services provided.

Defendants and their insurers who are faced with a plaintiff who uses health care providers who agree to take a lien and wait for payment (if any) until the suit is resolved, must work to determine the true value of the services provided. Failure to do so will invariably be expensive. In Uspenskaya v. Meline, — Cal.Rptr.3d —-, 2015 WL 6510915 (Cal.App. 3 Dist., 10/28/2015) the California Court of Appeal pointed out the danger and expense of failure to obtain evidence – expert testimony – of the true value of the services provided.

FACTUAL BACKGROUND

Defendant Clare Meline appealed from the entry of judgment on a jury verdict finding her negligent and awarding plaintiff Anna Uspenskaya $261,713.71 in past medical expenses.

This case raised an issue in the evolving body of case law on the calculation of reasonable medical expenses in economic damages awards. Plaintiff lacked medical insurance and contracted with her medical providers to treat her in exchange for a lien on whatever she might recover from defendant in this lawsuit. A third party assignee, MedFin Managers, LLC (MedFin), purchased the lien from the medical providers for a discounted amount.

Plaintiff remained liable on the total bill. Defendant contends that the trial court erred in denying her motion to admit evidence of the amounts MedFin paid to purchase the right to recover the full amounts plaintiff’s medical providers billed plaintiff. Defendant argued that the trial court should have allowed her to introduce evidence of the amounts MedFin paid to the medical providers (the MedFin payments) as evidence of the reasonable cost of treatment provided plaintiff, particularly since the court denied defendant’s motion to exclude evidence of the billed amounts.

The jury found defendant negligent and awarded plaintiff a total of $429,773.71 in damages, including $261,773.71 in past medical expenses, which was the full amount of her medical bills. The trial court then entered judgment on the verdict.

DISCUSSION

Exclusion of Evidence under Evidence Code Section 352

The trial court ruled that the collateral source rule is inapplicable in this case because plaintiff did not receive compensation from MedFin nor did MedFin pay her medical bills on her behalf. On the contrary, she still owes MedFin the full billed amounts pursuant to the liens.

Defendant frames this appeal as a question of first impression in California courts related to the aforementioned established principles: “whether the amounts a medical provider accepts from a non-insurer third-party are admissible as evidence of the reasonable value of the service.” The court ruled that without any evidence tending to show that the MedFin payments represented a reasonable value of the treatment provided, evidence of those amounts was likely to confuse the jury and cause the jury to speculate.

The MedFin payments are relevant because they have a tendency in reason to prove reasonable value. However, without evidence that those payments represented a reasonable value for the treatment, the probative value of that evidence as to reasonable value was minimal. There was a substantial danger of undue prejudice and that the evidence of the MedFin payments would confuse or mislead the jury. These dangers substantially outweighed any probative value that evidence of the payments may have had.

The problem in cases involving MedFin, or similar companies purchasing accounts receivable (sometimes referred to as factors), is that MedFin’s purchase price represents a reasonable approximation of the collectability of the debt rather than a reasonable approximation of the value of the plaintiff’s medical services. In other words, the health care providers evaluate the risk of collectability and make a decision to settle for some amount that may or may not reflect the actual value for those services. As the California Supreme Court held in Howell v. Hamilton, 52 Cal.4th 541257 P.3d 1130129 Cal.Rptr.3d 325 (2011) even if evidence of payments is relevant, “under Evidence Code section 352 the probative value of a collateral payment must be ‘carefully weigh[ed] … against the inevitable prejudicial impact such evidence is likely to have on the jury’s deliberations.’ ”

Defendant proposed to admit the amount MedFin paid as her only evidence of the reasonable value of plaintiff’s medical services.  Thus, the evidence of the MedFin payments, without additional testimony, presented a substantial danger of misleading the jury to conclude that the MedFin payments were a reasonable valuation of the medical services rather than a reasonable valuation of plaintiff’s likelihood to pay her debt.

This case does not involve a transaction between the buyer of health care treatment (the injured party and that person’s health care insurance carrier) and the seller of that treatment (the health care provider). It involves the sale of an asset—the right to collect the injured person’s debt—to a third party buyer unrelated to the person who has been injured.

As we see it, the inquiry into reasonable value for the medical services provided to an uninsured plaintiff is not necessarily limited to the billed amounts where a defendant seeks to introduce evidence that a lesser payment has been made to the provider by a factor such as MedFin. In such cases, the inquiry requires some additional evidence showing a nexus between the amount paid by the factor and the reasonable value of the medical services.

As the trial court observed, such evidence was not offered here. The trial court did not abuse its discretion when it excluded evidence of the MedFin payments.

ZALMA OPINION

This case is an example of the use of a method to avoid the application of Howell and use the lien to inflate the value of the health care provided to the plaintiff. Defendants, and their insurers, can defeat this type of medical billing inflation by retaining the services of a professional medical biller or physician to appear as an expert witness and explain to the trier of fact the true value of the services rendered. Without such evidence, billings whether inflated or not, will be allowed as evidence with no ability to find true value of services rendered.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Medical Liens – A Way to Avoid The Limits of Howell v. Hamilton

Accident Must “Arise out of” the Use of Auto

Nexus to Injury Required

Automobile insurance is, by definition, limited to actions or events causing bodily injury or property damage arising out of or as a result of the operation, use, loading or unloading of a vehicle. It is not enough to find coverage that a vehicle was close to the site where the injury occurred and might have been used in the future. In Selective Ins. Co. of America v. Zurich American Ins. Co., Not Reported in A.3d, 2015 WL 6758358 (N.J.Super.A.D., 11/06/2015), Plaintiff, Selective Insurance Company of America (Selective), appealed the trial court’s granting of summary judgment to defendants Zurich American Insurance Company (Zurich), and Republic Services, Inc., doing business as Midco Waste Systems (Midco) claiming that since the vehicle was at the location to do work its insurer should provide coverage for the injury incurred by its driver. The court needed to determine, therefore, whether there was any nexus between the vehicle and the injury.

FACTS

In May 2009, trees and vegetation were being cleared from a right-of-way owned by Public Service Electric and Gas (PSE & G).  The initial tree-cutting was done by Nelson Tree Service (Nelson). Dante Enterprises (Dante) was engaged to remove the vegetation and the trees felled by Nelson. Midco was hired to provide a truck and a driver, Nicholas Ciuba, to haul away the trees and vegetation.

After all of the trees had been cut by Nelson and were left wherever they fell. Ciuba drove his truck to the site and parked near a retaining wall at the bottom of a hill. Dante employees were responsible for “staging” the logs, which required moving the logs down the hill to the edge of the retaining wall, and loading them into the Midco truck. The hill was too steep for a machine, so the logs had to be moved by hand. Dante employees brought the logs to the edge of the retaining wall, then Ciuba would move his truck as close to the wall as possible and the logs would be rolled into the truck.

Ciuba was injured by a rogue log that rolled from the hill and over the retaining wall, striking him in the head and causing severe injuries. At the time of the accident, three Dante employees were on the jobsite.

All of the Dante employees confirmed that no one was near the rogue log when it began to roll down the hill. Although Dante employees were working their way up the hill clearing logs row by row, the closest Dante employee was about twenty feet from the rogue log as it was rolling down the hill.

Ciuba sued PSE & G, Nelson, and Dante, claiming they failed to provide him with a safe place to work. On the date of Ciuba’s accident, Selective was the general liability insurer for Dante and Zurich was Midco’s commercial automobile insurer.

The underlying action settled with Selective paying $800,000 on Dante’s behalf. Zurich and Midco did not contribute to the settlement. Selective then sued seeking contribution. The trial court concluded that Zurich did not afford coverage to Dante for Ciuba’s accident because the log that struck Ciuba was never given into Midco’s possession, which is a requirement to be part of the loading and unloading process; and Dante’s “staging” of the logs was not part of the loading process because it was “not necessary for Midco’s truck to be at the site for this staging to occur.”

ANALYSIS

The Zurich policy covers “all sums an insured legally must pay as damages because of bodily injury … caused by an accident and resulting from the ownership, maintenance or use of a covered auto.”

Because it is not disputed that the Midco truck was a covered vehicle under the auto policy, the issue is whether the accident to Ciuba arises out of the vehicle’s use. “[T]he phrase ‘arising out of’ must be interpreted in a broad and comprehensive sense to mean ‘originating from’ or ‘growing out of’ the use of the automobile.” Penn Nat. Ins. Co. v. Costa, 198 N.J. 229, 237 (2009) (internal citations omitted).

For an injury to arise out of a vehicle’s use, there must be a substantial nexus between the injury suffered and the asserted negligent use of the motor vehicle. Automobile insurance coverage only comes into play if the injuries were caused by a negligent act and that negligent act, although not foreseen or expected, was in the contemplation of the parties to the insurance contract a natural and reasonable incident or consequence of the use of the automobile.

In Penn, a worker was injured as he was leaving his employer’s property after offering to assist his employer in changing a tire on a pickup truck parked in the employer’s driveway. The worker slipped on ice on the driveway and struck his head on a bumper jack that was being used to lift the truck.  The Court held that there was not a substantial nexus between the maintenance of the truck by the employer and the worker’s fall because the injury occurred as a result of the employer’s failure to keep his driveway clear of ice rather than the vehicle’s maintenance.

Plaintiff argues that the “staging” was done in preparation for the loading of the Midco truck, and that the purpose was to facilitate the loading of the logs. Here, it is undisputed that Dante employees were not engaged in loading the Midco truck when the rogue log struck Ciuba. Rather, they were engaged in staging the logs at the time of the accident. Dante’s staging of logs was not an integral part of the loading process. It was not even necessary for Midco’s truck to be at the site for staging to occur.

Indeed, as the motion judge observed, the staging could have been completed “even before Midco was hired.”

Therefore the motion judge correctly determined that the staging of the logs was not part of the “loading and unloading” process and did not constitute “use” of the Midco truck.

Ciuba’s accident arose not from any loading or unloading activities but from the negligent acts of those involved in the clearing of the trees. As such, those involved parties were in the best position to avert harm and Dante’s insured is not entitled to contribution from defendants.

ZALMA OPINION

The accident did not arise out of the operation or use of the vehicle. When an accident is caused by the negligent maintenance of the premises and the only connection to that event is the fact that the motor vehicle is present no realistic social or public policy is served by straining to shift coverage from the property owner’s insurer to the auto insurer. The only connection with the vehicle in this case was that it was close by not a cause of the injury.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Accident Must “Arise out of” the Use of Auto

Insurance 101 – Volume 35 – Liability Insurance

Liability Insurance

Liability insurance is a promise made by an insurer to pay for all or part of a loss of money that results from a specified type of accident. The promise is in the form of a written, legal contract (the insurance policy) that spells out the kinds of losses that will be paid and the extent of payment. The insurance company’s promise is given in exchange for the insured’s promise to pay money (the premium).

The following video was adapted from my book, “Insurance Claims A Comprehensive Guide” Published by the National Underwriter Company and is available at the Zalma Insurance Claims Library.

(c) 2015, Barry Zalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance 101 – Volume 35 – Liability Insurance

Precise Use Of Language in Policy Controls

Second Circuit Applies Policy Language as Written

What should be obvious to anyone reading Zalma on Insurance is that insurance is nothing more than a contract. When a dispute arises the court is required to look to the words of the policy and, if unambiguous, must apply those clear and unambiguous terms. They must also avoid the application of precedent when the policy wording is different than that in the earlier cases.

In Endurance American Specialty Ins. Co. v. Century Sur. Co., — Fed.Appx. —-, 2015 WL 6717686 (C.A.2 (N.Y.) 11/4/2015) The Century Surety Company (Century) appealed from a final judgment entered  by the United States District Court for the Southern District of New York (Peck, M.J.), which granted the Endurance American Specialty Insurance Company’s (Endurance) motion for summary judgment in full, denied the Century’s cross-motion for summary judgment in full, and entered judgment against Century for its share of the cost of the underlying defense of the state court action.

On appeal Century claimed that the district court erred when it found that the relevant insurance policy’s Action Over Exclusion clause, when read in combination with the policy’s Separation of Insureds clause, did not exclude the additional insured coverage of the general contractor, Hayden Building Maintenance Corporation (“Hayden”) for an injury to an employee of the subcontractor, Pinnacle Construction and Renovation Corporation (“Pinnacle”).

THE POLICY

The Second Circuit, initially, concluded that the language of Century’s insurance policy (the “Policy”) is unambiguous. Its Action Over Exclusion clause, which excludes insurance coverage for injury to certain employees, states as follows: “‘bodily injury’ to: ¶ (1) An “employee” of the named insured arising out of and in the course of:  ¶ (a) Employment by the named insured; or ¶ (b)Performing duties related to the conduct of the named insured’s business….”

The Policy clearly states, in its Declarations section, “NAMED INSURED: Pinnacle Construction & Renovation Corp.”  Section II of the Policy, entitled “Who Is An Insured” further clarifies that the named insured is “[a]ny organization you newly acquire or form, other than a partnership, joint venture or limited liability company … will qualify as a Named Insured if there is no other similar insurance available to that organization.”  And “you” is defined as follows: “[t]hroughout this policy the word[ ] ‘you’ … refer[s] to the Named Insured shown in the Declarations.”

Here, the only named insured is Pinnacle. And the insurance coverage sought is to defend Hayden in a lawsuit brought by one of Pinnacle’s employees, Arthur Sleszynski, for injuries he incurred during the course of his employment with Pinnacle. Accordingly, the Second Circuit concluded that the text unambiguously excludes insurance coverage for injuries to Sleszynski.

ANALYSIS

Century contends that the Separation of Insureds provision requires this Court to read the Action Over Exclusion provision from the perspective of the particular insured seeking coverage. The Separation of Insureds provision states that: “Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies: ¶ a. As if each Named Insured were the only Named Insured; and ¶ b. Separately to each insured against whom a claim is made or “suit” is brought.”

Thus, “the named insured” in the Action Over Exclusion provision should, according to Endurance, be replaced with “Hayden,” because “this insurance applies … [s]eparately to each insured.”  Because Sleszynski was not an employee of Hayden, Endurance contended that the Policy would therefore not exclude coverage to Hayden for Sleszynski’s injuries.

This logic would apply only if the Action Over Exclusion clause used the language “the insured” rather than “the named insured.” In that scenario, the provision would be read to replace “the insured” with “Hayden,” because Hayden is seeking coverage. But here, the Action Over Exclusion clause states “the named insured.”

In analogous circumstances, where, for example, employee exclusions have altered the language “the insured” to language expressing a different intent, such as “any insured,” courts have held that the insurance policy precludes coverage of injuries to any employee, whether employed by the insured seeking coverage or not, because to do otherwise would render the unambiguous language referring to any insured “a nullity.” Here, like the language “any insured,” the language “the named insured” evinces that the Action Over Exclusion clause specifically exclude coverage for bodily injury to employees of the named insured, Pinnacle.

Hayden is not a named insured; rather, it is an additional insured. Indeed, the Action Over Exclusion clause replaced and explicitly modified the previous employee liability clause to change the words “the insured” to “the named insured.”

Thus, the district court erred in reading “Hayden” into the words “the named insured” in the Action Over Exclusion provision and its decision was reversed.

ZALMA OPINION

By changing the wording from “any insured” to the “named insured” the insurer limited its coverage for additional insureds and deprived the additional insured of the right to defense from the insurer who made it an additional insured. The words used in an insurance policy must always be precise and if the insurer wishes to limit its exposure it must always used precise language. In this case replacing “any insured” with the “named insured” the insurer effectively limited coverage.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Precise Use Of Language in Policy Controls

Mailing Sufficient to Establish Cancellation

Failure to Get Photo of Vehicle Required Cancellation

In New Jersey state law requires that a new policy of auto material damage insurance cannot be in force if the vehicle is not photographed.  After plaintiff damaged his automobile by  driving his truck off the road and crashing it into a telephone pole his claim was denied because his coverage had been cancelled for failure to have the truck photographed.

FACTS

In Garcia v. USAA Cas. Ins. Co., Not Reported in A.3d, 2015 WL 6629771 (N.J.Super.A.D., 11/02/2015) Charles J. Garcia appealed from an order granting defendant, USAA Casualty Insurance Company, summary judgment and dismissing his complaint with prejudice. On appeal, he argued there were several issues of fact which precluded summary judgment relative to a notice of cancellation sent by defendant to plaintiff, and the court improperly allowed e-mail as notice of the insurance cancellation required under N.J.A.C. 11:2–36.7(b).

The parties do not dispute that when plaintiff purchased the truck in August 2010, he borrowed money from a lender, Americredit Financial Services, Inc., and obtained insurance for the vehicle, including collision coverage, from defendant. They also do not dispute that plaintiff failed to have the truck produced for a photo inspection, as required by defendant, pursuant to N.J.A.C. 11:3–36.3.  There is also no dispute defendant denied coverage because the photo inspection was not completed and that the New Jersey Department of Banking and Insurance investigated a complaint filed by plaintiff and determined that defendant’s actions were “in accordance with the policy contract provisions, applicable statutes and regulations.”

Their material dispute focused only on whether defendant sent plaintiff notice of cancellation of the collision coverage in accordance with the applicable insurance regulations, based on his failure to have the photo inspection completed.

In support, defendant filed numerous documents relative to a notice it sent to plaintiff about the need for the photo inspection, a notice that his policy’s collision coverage would be cancelled if he failed to produce the vehicle, and a “Notice of Suspension of Physical Damage Coverage,” dated September 23, 2010.

A proof of mailing also produced by defendant consisted of a copy the notice of suspension with a certification confirming mailing on September 27, 2010, with the name “T. Copeland” stamped on the signature line. In addition, defendant produced a U.S. Postal Service Form 3877 indicating the post office’s receipt of letters for mailing from defendant addressed to various people, including plaintiff and Americredit, with a copy of a postmark bearing the same date as Copeland’s certification.

In addition, defendant produced a copy of its amended declaration, dated November 10, 2010, indicating a substantial reduction in plaintiff’s premium as a result of the loss of coverage. That document, addressed to plaintiff, expressly stated that there was no longer any collision coverage. There was no evidence that plaintiff took any action as a result of receiving the declaration statement with the reduced premium, other than apparently paying the amount billed.

Plaintiff filed certifications in opposition to defendant’s motion in which he denied ever receiving the notice of suspension. He did not deny receiving any other document defendant sent to him at the same address.

Plaintiff also alleged that, contrary to defendant’s cancellation notice, Americredit never received the notice of cancellation either. However, in a certification filed by plaintiff’s attorney, counsel supplied a copy of a letter from Americredit confirming it received an e-mail—but not “an actual letter forwarded to you”—notifying it of the cancellation of plaintiff’s coverage on September 23, 2010, and that it notified plaintiff in its October 5, 2010 billing statement that he no longer met “the minimum coverage requirements for [his] motor vehicle.”

ANALYSIS

The judge recognized that there is one “critical” factual dispute that he identified as being “whether the insurance cancellation notices were in fact sent to Plaintiff … or Americredit.” He identified plaintiff’s challenges to the record evidence produced in support of the motion and concluded plaintiff’s assertions were incorrect.

First, the judge was satisfied Americredit received notice of the cancellation and advised plaintiff through its October 2010 billing of his lack of coverage. Second, the court rejected plaintiff’s argument the postal service representative’s certification created a material fact. The judge found the arguments were “not sufficient to” defeat summary judgment. The judge reviewed how each and every document confirmed defendant warned plaintiff that he had to have the truck inspected, if he did not do so his policy would be cancelled, and when it was not accomplished, the coverage was cancelled.

Importantly, plaintiff received an amended declaration page which clearly indicated he no longer had the coverage and his premium was substantially reduced. The judge noted: “On page two of the declaration sheet, the policy states, ‘The following coverages defined in this policy were not provided for comprehensive, collision, rental reimbursement, towing and labor.’ Furthermore, Plaintiff was advised that his annual premium was revised and there was a significant annual decrease of $2158.69. Plaintiff acknowledges receipt of the declaration sheet. These exhibits, especially when combined, demonstrate that [defendant] provided sufficient notice to Plaintiff. Plaintiff admits he knew he needed to obtain a photo inspection to retain coverage, but that he did not obtain one. It is clear that Plaintiff understood the basic conditions of his insurance coverage, even if he did not read the ‘fine print.’”

The court correctly entered summary judgment and dismissed the complaint, substantially for the reasons stated in Judge Isman’s well-reasoned decision. Plaintiff’s view of the insignificance of the photo inspection was misplaced from the time he was notified by mail of his obligation to have it completed, a notification which he never denied receiving. The requirement serves an important state policy. Specifically, N.J.S.A. 17:33B–34(a) states “[a] newly issued policy shall not provide coverage for automobile physical damage perils prior to an inspection of the automobile by the insurer.” This provision was “designed to locate and penalize uninsured drivers and cut down on fraud and other unnecessary costs to the automobile insurance system.” Assembly Appropriations Committee Statement A. 1. (L. 1990 c. 8 § 1).

For that reason, regulations make the inspection mandatory for coverage to be valid. “If the inspection is not conducted … the insurer shall suspend automobile physical damage coverage on the automobile….” N.J.A.C. 11:3–36.7(a) (emphasis added).

The court concluded that the documents produced by defendant that it complied with each of the regulation’s requirements and it was entitled to the presumption of receipt, especially in light of plaintiff never challenging the correctness of the address to which the required notification was sent or explaining why, of all the numerous documents sent to his home, there was only one notice he did not receive. Plaintiff’s reliance upon the postal service’s representative’s statement to create a question of material fact was unpersuasive because it did not refute the notice’s proof of mailing and, under the totality of the circumstances, failed to create a question of fact of a substantial nature warranting the denial of summary judgment.

ZALMA OPINION

Claiming that he did not receive the notice was obviously a ploy to avoid reality since the plaintiff had no trouble with the decreased coverage and lower premium until he drove his truck into a pole. That is why proof of mailing is always sufficient because people will invariably claim – faced with a loss after cancellation – that they did not receive the notice. The court, thankfully, did not fall for the ploy.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Mailing Sufficient to Establish Cancellation

What Is Needed to Prove Rescission in New York

Court Explains Proof Required to Rescind Policy

The District Court for the Western District of Pennsylvania was faced with a major lawsuit between a large and sophisticated corporation and an experienced and powerful insurer over whether a misrepresentation – whether intentional or innocent – is sufficient to allow the insurer to rescind the policy from its inception and a declaration that the policy never existed.

In H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., Slip Copy, 2015 WL 6643674 (W.D.Pa., 10/30/2015) the court did not decide the issues but did set forth the legal issues that control the upcoming trial that clearly explains the law of rescission in New York which follows the Marine Rule first stated in 1766 in the House of Lords in a case called Carter v. Boehm.

THE ISSUES

This case involves an insurance coverage dispute between H.J. Heinz Company (“Heinz”) and Starr Surplus Lines Insurance Company (“Starr”). Starr’s Counterclaim for Rescission of the insurance policy will be decided as “Phase One” of this matter.

After thorough briefing by the Parties, the Court ruled that the law of New York applies to this matter. In light of that decision, the Court sought further briefing from the Parties regarding New York’s applicable laws on rescission and the appropriate standards of law and burdens of proof that will be presented to the factfinder.

Secondly, and currently, the Parties and the Court have been focused on the next level of decisions through the filing of the Parties’ proposed Verdict Slips and proposed Jury Instructions. The Court’s analysis of these, in conjunction with the Parties’ briefs on the applicable laws and standards reveal the following legal issues to be resolved by the Court at this time:

(1) whether an insurance policy may be rescinded for an intentional or unintentional misrepresentation under New York law;

(2) the burden of proof for a party seeking rescission of an insurance policy; and

(3) the burden of proof for Heinz’s affirmative defenses.

DISCUSSION

Section 3105 of New York’s Insurance Law sets forth the basic framework for rescission. It states in relevant part that: “No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material.”

The Parties dispute whether rescission is available to an insurer where an insured has made an unintentional or mistaken representation. New York caselaw instructs that both intentional and unintentional misrepresentations will void a contract of insurance if the misrepresentation is material. See Matter of Liquidation of Union Indem. Ins. Co. of New York, 89 N.Y.2d 94, 651 N.Y.S.2d 383, 674 N.E.2d 313, 320 (N.Y.1996) and Mutual Ben. Life Ins. Co. v. JMR Electronics Corp., 848 F.2d 30, 32 (2d Cir.1988) that held that even an innocent misrepresentation will allow rescission.

There is no substantive difference in the Parties’ recitation of the applicable legal standards regarding the materiality of a misrepresentation in a claim for rescission, which is codified in the statute as: “No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.” N.Y. Ins. Law § 3105(b)

Burden to Prove Material Misrepresentation Generally

Starr has cited to the New York pattern jury instructions regarding insurance contracts and misrepresentation-which state that a preponderance of the evidence standard should be used.

Accordingly, the Court finds that, at the trial of Phase One of this matter, Starr must prove by a preponderance of evidence that Heinz made a material misrepresentation (intentional or unintentional) in order to void the insurance policy.

Misrepresentation Due to Omission or Silence

On the other hand, there is some indication from the preliminary submissions by the Parties that this case may involve a potential misrepresentation due to the omission of information or silence. If this issue becomes relevant in this matter, then intent may also be at issue. An insured has no duty under New York law to volunteer information which has not been requested and nondisclosure of such information will only void an insurance policy in instances where the insured sought to defraud the insurer by failing to disclose the information.

The Parties seem to also raise the sub-issue of misrepresentations made by brokers. Because the law is unambiguous that any misrepresentation made by a broker is imputed to an insured, the Court will not address this issue in detail.

Burden to Prove Misrepresentation by Omission or Silence

The caselaw concerning the burden to prove a misrepresentation due to omission or silence, where the scienter of the insured is a requirement, is less clear. Here, the Court finds Heinz’s argument for use of the clear and convincing standard applied in insurance fraud cases in New York to be persuasive.

Affirmative Defenses of Waiver of Right to Seek Rescission

Heinz asserts that Starr’s (1) failure to perform a reasonable investigation into the information provided in Heinz’s application for insurance; (2) unreasonable delay in pursuing rescission after learning of a material misrepresentation; or (3) accepting a benefit from the policy (such as a premium payment) after learning of a material misrepresentation results in waiver of Starr’s right to seek rescission of the policy and that Heinz must prove these affirmative defenses by a preponderance of the evidence.

The Court will apply the preponderance of the evidence standard to Heinz’s affirmative defenses.

CONCLUSION

In summary, with respect to its Counterclaim for rescission, Starr must prove by a preponderance of the evidence that Heinz made a material misrepresentation (whether intentional or unintentional) in its application for insurance. However, if Heinz allegedly made a material misrepresentation by silence or omission, Starr must prove fraudulent intent by clear and convincing evidence. Regarding its Affirmative Defenses, Heinz must prove waiver of Starr’s right to rescission by a preponderance of the evidence.

ZALMA OPINION

Rescission is an equitable remedy that has been part of the common law since before the United States was formed and has been part of our legal system since the first U.S. judge was appointed and sat to hear a legal dispute. It is applied differently in different jurisdictions. For example New York requires that the insurer prove it would not have issued the policy to prove materiality while California only requires that the insurer react differently to prove materiality so that just a higher premium or a different deductible would be sufficient to prove materiality. This will be an interesting trial and I look forward to learning what the final decision the court reaches.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What Is Needed to Prove Rescission in New York

First Party “All Risk” Policies Can be Stacked

Ambiguity Costs Insurer More Than $25 Million

Insurance companies and their lawyers work very hard to write insurance policies that are clear and unambiguous. It is a difficult task since courts interpret policies based upon a set of facts that was not anticipated by the insurer or its insured at the time the policy contract was acquired. As a result, when there is a major loss, litigation goes forward and courts must interpret the policy as it relates to the facts of the case.

When courts point out problems in policy wording prudent insurers and those that serve them by writing policies amend the policy wording to more closely fulfill their intent.

In Lion Oil Company v. National Union Fire Insurance Company of Pittsburgh, PA, Slip Copy, 2015 WL 6680899 (W.D.Ark., 11/2/2015) the District Court for the Western District of Arkansas was faced with an insured who had incurred a loss in excess of $50 million and who sought coverage under two different insuring agreements to obtain indemnity for its loss claiming the two coverages both applied and could be stacked to combine two $25 million limits to a single loss. Its decision should cause insurers and the ISO to reword first party policies.

FACTS

After four days of trial, outside of the presence of the jury, both parties orally moved for judgment as a matter of law on the same two issues: the applicability of the insurance policies’ service interruption provision and whether “stacking” of coverages is allowed under the policies.

The parties agree that interpretation of the insurance policies in this diversity case is governed by Arkansas substantive law. If the language is unambiguous, its construction and legal effect are questions of law for the court to decide and the court will give effect to the plain language of the policy without resorting to the rules of construction. However, when ambiguous language is used in the contract, other rules apply.

ANALYSIS

Service Interruption Provision

The policies at issue here include multiple time element extensions. One such extension relates to Service Interruption, which states: “(5) Time Element Extensions ¶ (a) This policy, subject to all provisions and without increasing the limits of this policy, also insures against loss resulting from damage to or destruction by causes of loss insured against, to: ¶ (i) Service Interruption: electrical, steam, gas, water, sewer, incoming or outgoing voice, data, or video, or any other utility or service, transmission lines and related plants, substations and equipment situated on or outside of the premises; ….” (emphasis added)

Both parties argue that the service interruption provision is unambiguous and that the Court should give effect to the plain language of the policy. Plaintiff argues that the ordinary meaning of the terms in the service interruption provision require coverage. Defendants, however, argue that the application of two certain rules of construction lead to only one reasonable interpretation of the service interruption provision—that is, by its plain language, the provision does not apply to a crude oil pipeline.

Both parties agree that, to trigger the service interruption coverage, the property damaged must be “transmission lines and related plants, substations and equipment situated on or outside of the premises” that carry “electrical, steam, gas, water, sewer, incoming or outgoing voice, data, or video, or any other utility or service” to Plaintiff’s refinery. None of the terms found in the service interruption provision are defined within the policies. Plaintiff argues that the ordinary meaning of the term “transmission line” includes a crude oil pipeline and that the ordinary meaning of the term “service” includes the delivery of oil. Thus, according to Plaintiff, applying the plain and ordinary meaning of the policies’ terms leaves little doubt that the Northline rupture triggered the service interruption provision because its losses resulted from the interruption of EMPCo’s crude oil delivery service via the transmission line. Defendants, on the other hand, argue that the plain meaning of “transmission line” does not include a crude oil pipeline and that the phrase “any other utility or service” does not include the delivery of oil.

A crude oil pipeline transmits oil from one place to another. Thus, the plain and ordinary meaning of “transmission line” includes a crude oil pipeline. Because the term “service” is susceptible to more than one reasonable interpretation, the Court finds that the service interruption provision’s language is ambiguous.

In construing an ambiguous statute, court have turned in the past to the doctrine of ejusdem generis (of the same kind). Here, because the Court has determined that an ambiguity exists, the use of these rules presents a reasonable interpretation of the policy. However, because this is an insurance case, the Court is required to apply the interpretation that favors the insured, which is Plaintiff in this case.

“Stacking” Coverages

In addition to the time element extension that covers service interruption, the policies at issue provide an extension that covers contingent business interruption. The issue before the Court is whether these insurance policies, which provide service interruption coverage of $25 million and contingent business interruption coverage of $25 million, provide an aggregate coverage of $50 million or a coverage limited solely to $25 million. In other words, the dispute is whether Plaintiff may recover under both the service interruption and contingent business interruption coverages. Courts sometimes refer to this practice as “stacking.”  In Arkansas, stacking is not prohibited by statute and may be precluded by an applicable anti-stacking clause.

The policies at issue here do not contain an anti-stacking provision. There is no language that restricts the number of coverage grants or sub-limits that apply to a given occurrence. Defendants argue that the amount of recovery under the policy is limited to $25 million because stacking the contingent business interruption coverage and the service interruption coverage would allow a double recovery for the same damages. Plaintiff, however, suffered a net margin loss that is more than $50 million. Thus, stacking the two coverages would not allow double recovery because Plaintiff is not seeking to recover an amount that is greater than its actual loss.

Neither Arkansas nor another state has addressed the propriety of stacking coverages in an all-risk insurance policy. There is no case or statute in Arkansas that would prevent Plaintiff from stacking coverages in an all-risk policy. Defendants could have prevented the stacking of coverages by including an anti-stacking provision in the policies.

As a general rule, a claimant may recover under all available coverages provided that there is no double recovery. For these reasons, the Court found that the service interruption coverage and contingent business interruption coverage in the policies at issue can be “stacked” to provide an aggregate coverage of $50 million.

ZALMA OPINION

This is a case of first impression – no one has ever tried to stack multiple first party coverage on a policy of all risk or direct risk of physical loss policies. It seems odd that an insurer that insured a refinery argued that an oil pipeline was not a transmission line since that is how its insured received product to refine. This case should instruct the insurers and the ISO to define terms more carefully and to include anti-stacking provisions in similar policies if they don’t want the coverages stacked.

After the court allowed the stacking, on November 4, 2015, an Arkansas jury awarded an oil company $71.7 million in a lawsuit filed against insurers in connection with lost income and expenses stemming from a 2012 oil pipeline breach. The U.S. District Court in El Dorado, Arkansas, awarded Brentwood, Tennessee-based Lion Oil Co. $60.4 million in income loss and $11.3 million in expenses in connection with the incident, in litigation filed by the company against 16 insurers, according to court papers in Lion Oil Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., et al.

Lion Oil owns and operates a refinery in El Dorado that was supplied crude oil primarily by a pipeline owned and operated by ExxonMobil Pipeline Co., a unit of Irving, Texas-based Exxon Mobile Corp., according to the original complaint, filed Oct. 8, 2013.

A rupture on April 28, 2012, resulted in the pipeline’s immediate shutdown, according to the complaint. The company began receiving shipments of crude oil through the pipeline again on March 18, 2013.

Lion Oil contended in its lawsuit that it suffered losses of more than $80 million as a result of the incident and that it was a covered loss under an “all risk” policy issued by the defendant insurers.

The insurers denied coverage, according to the complaint, contending the claim fell into two policy exclusions: one that states the policy did not insure against the cost of making good defective design or specifications, and a second that applies to “ordinary wear and tear.”

The jury verdict in Lion Oil’s favor came after a six-day trial. Plaintiff attorney Geoffrey J. Greeves, a partner with Pillsbury Winthrop Shaw Pittman L.L.P. in Washington, said in a statement that he was not surprised “the El Dorado jury concluded that Lion Oil’s insurers breached their obligations by failing to live up to their all-risk insurance contracts.”

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on First Party “All Risk” Policies Can be Stacked

Insurer Can’t Exclude Cover for No-Fault Limits

Insurers Dispute Who Needs to Defend and Indemnify the Insured

Insurance companies have the right to include any language in an insurance policy that the person insured is willing to accept unless the language included violates the local law. In this case two insurance companies could not resolve among themselves which was required to defend and indemnify an insured sued as a result of an automobile accident so they filed suit.

In William Lee Maher and Selective Insurance Company of South Carolina v. Federated Service Insurance Company, Aon Automotive Group, Inc. d/b/a Brooklyn Ford and Melissa Strang, Slip Copy, 2015 WL 6449379 (E.D.Mich., 10/26/15), the District Court for the Eastern District of Michigan was called upon to resolve the dispute between the  insurance companies.

Plaintiffs William Lee Maher (“Maher”) and Selective Insurance Company of South Caroline (“Selective”) asked the court to rule that Defendant Federated Service Insurance Company (“Federated”) owed a duty to defend and indemnify Maher up to the limits of the insurance policy it issued to Aon Automotive Group, Inc. d/b/a Brooklyn Ford (“Brooklyn Ford”) in an automobile accident case pending in the Jackson County Circuit Court, Melissa Strang v. William Lee Maher and Aon Automotive Group, Inc. d/b/a Brooklyn Ford (“the underlying case”).

BACKGROUND

At the time of the underlying case, Maher was an employee of West Michigan Auto Auction (“West Michigan Auto”). Brooklyn Ford has a contract with West Michigan Auto to auction vehicles Brooklyn Ford owns. Before an auction, West Michigan Auto sends an employee to pick up the vehicles from Brooklyn Ford and takes them to the auction site. West Michigan Auto provides its own license plates for the vehicles which its employee attaches prior to taking a vehicle from Brooklyn Ford to the site.

On August 1, 2013, Melissa Strang (“Strang”) sustained injuries as a result of an automobile accident involving Maher while he was driving a Brooklyn Ford vehicle to an auction. Maher was acting within the course and scope of his employment with West Michigan Auto. He had changed the plate on the Brooklyn Ford vehicle to the plate provided by West Michigan Auto. Maher was driving the Brooklyn Ford vehicle with Brooklyn Ford’s permission at the time of the accident.

Federated initially denied Maher’s request citing a specific provision referred to as the Auto Sales Exception within the “Who Is An Insured” provision in the Garage Coverage section of the Federated Policy. The Auto Sales Exception provides no coverage for “Someone using a covered ‘auto’ while he or she is working in a business of selling, servicing or repairing ‘autos’ unless that business is your ‘garage operations.’”

Maher disputed Federated’s denial. Federated later agreed to defend Maher with respect to the underlying case subject to a full reservation of rights. Plaintiffs filed a motion for judgment on the pleadings seeking a declaration that Federated has the sole and primary duty to defend and indemnify Maher in the underlying case up to the limits of any insurance policy it insured Brooklyn Ford.

Plaintiffs further seek a declaration that Federated is obligated and has a duty to reimburse Selective for any defense costs that have been incurred in connection with the defense of Maher in the underlying case.

DISCUSSION

The Plaintiffs’ argued that Federated’s Auto Sales Exception provision is void as a matter of law because Federated is attempting to exclude from coverage an entire class of permissive users, i.e. those permissive users of vehicles owned by Brooklyn Ford separate from Brooklyn Ford’s “garage operations.”

To support its argument, Plaintiffs cite multiple cases which reiterate the rule that Auto Sales Exception provisions that preclude coverage for permissive users of insured vehicles are invalid under Michigan law. Federated attempted to deny liability coverage by operation of an Auto Sales Exception provision to a certain class of permissive users, namely permissive users except those that were uninsured or underinsured. The Michigan Supreme Court held that this was not something that Federated could lawfully do because it violated the No-Fault Act.

The District Court concluded that the Auto Sales Exception provision is unenforceable. Federated admits that the provision, if enforced, would preclude coverage to an entire class of permissive users but argues that its provision is materially different than any other void Auto Sales Exception provision. Federated argued that because the purpose of the Auto Sales Exception provision is to shift liability to West Michigan Auto and not Maher personally, there is a distinction between the case law Plaintiffs cite and the case law it cites.

The case law interpreting the No-Fault Act draws no such distinction. Michigan courts have held similar provisions to the Auto Sales Exception provision in question to be void. In both Citizens Ins. Co. of America v. Chrysler Ins. Co., 2001 WL 1135298 (Mich. App.) and Flint Auto Auction, Inc. v. Universal Underwriters Ins. Co., 2013 WL 6409984 (E.D. Mich. 2013), the court voided the exclusionary provision in dispute between an owner’s carrier and a driver’s employer’s carrier.

Michigan courts are clear in their holdings that the key question to determine coverage is whether the language of the policy, if enforced, would preclude coverage to a certain class of permissive users. (The “no-fault act unambiguously requires that a policy of automobile insurance, sold to a vehicle owner pursuant to the act, must provide coverage for residual liability arising from use of the vehicle so insured.”

Here, there is no dispute that Maher was a permissive user of the Brooklyn Ford owned vehicle.

Therefore, the District Court concluded that because Federated is relying on an invalid exclusion in its policy, the Auto Sales Exception provision is void and Federated is responsible for Maher’s defense and indemnity up to the limits of the policy it issued to Brooklyn Ford that was in effect at the time of the accident.

Duty to Defend

Plaintiffs also seek declaration that Federated is obligated and has a duty to reimburse Selective for the defense costs it incurred in the defense of the claims asserted against Maher in the underlying case. Since the no-fault act unambiguously requires that a policy of automobile insurance must provide coverage for residual liability rising from use of the vehicle so insured.

Federated has the primary duty to defend and indemnify Maher up to its policy limits.

  1. Federated is obligated to provide Maher’s primary defense in the underlying case;
  2. Federated has the primary duty to indemnify Maher up to the limits of the policy issued to Brooklyn Ford that was in effect at the time of the underlying accident;
  3. Federated is obligated and has a duty to reimburse Selective for the defense costs it incurred in the defense of the claim asserted against Maher in the underlying case.

ZALMA OPINION

Although insurance companies are, by common law, allowed to include any language they wish they cannot do so in violation of the law. Since Michigan requires all permissive drivers to be insured under its no fault insurance scheme, an insurer who tries to limit the coverage for permissive drivers is in violation of local law and public policy.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurer Can’t Exclude Cover for No-Fault Limits

It’s Not Nice To Lie to Your Insurance Company

A Lie About a 15-Year-Old Living in the House Voids Coverage

Insurance,  as I have said often, is a business of the utmost good faith and neither party should do anything to deprive the other of the benefit of the contract. Lay people believe only the insurance company must treat the insured in good faith and that they can lie and cheat their insurer with impunity. They are wrong. Therefore, when filling out an application a prospective insured must carefully answer all questions posed honestly and fully or find that the insurance policy is voidable at the option of the insurer.

For more than one hundred and thirty years, this Mississippi Supreme Court has held that an insurance company may void a policy when the insured made material misrepresentations during the application process. When Safeway Insurance Company learned that Michelle Busby had made a material misrepresentation when she applied for the motor-vehicle-liability policy at issue here, it had the policy declared void and litigation followed trying to get the benefits promised for parties injured by Busby’s son.

FACTS

While driving his mother’s 2003 Chevy Silverado in Rankin County, sixteen-year-old William Busby crashed into Kenneth Tarlton’s car, which in turn collided with a car driven by Katrice Jones–Smith.

When William’s mother, Michelle, applied to Safeway Insurance Company for an insurance policy on the Silverado, the application required her to warrant that she had provided the names of all regular frequent drivers of the covered vehicles, as well as all residents of her household fourteen years old or older. Michelle failed to disclose that fifteen-year-old William resided in her home, and Safeway issued her a policy on the Silverado at a premium that was lower by over 200% than the premium would have been had Safeway known about William.

So after William’s accident, Safeway sought a declaratory ruling that Michelle’s failure to identify William was a material misrepresentation, rendering the policy voidable. In response, Katrice—along with her mother Nancy Jones, who owned the car Katrice was driving—filed an answer and counterclaim asserting that William was at fault in the accident and that he was covered by the Safeway policy. The parties filed competing motions for summary judgment, and the circuit judge—finding Michelle’s failure to disclose William was a material misrepresentation—granted summary judgment to Safeway.

ANALYSIS

The question in this case is not whether the terms of Michelle’s policy with Safeway covered the accident, but whether the policy itself was voidable.

In 1876, the Mississippi Supreme Court held that “Nothing is better settled, both in regard to insurance contracts and contracts of all sorts, than that an untrue statement by either party, as to a matter vital to the agreement, will avoid it, though there be no intentional fraud in the misrepresentation.”  Coop. Life Ass’n of Miss., 53 Miss. at 12.

An immense amount of labor and learning is displayed in the books in the consideration of what are, and what are not, material matters in contracts of insurance, a false statement in relation to which will avoid the policy; and it is impossible to resist the conclusion, in perusing the cases, that the courts, in order to avoid supposed hardships in this class of suits, have been disposed to adopt other rules than those applicable to ordinary contracts. Contracts of insurance are neither prohibited because they are evil or prohibited because of their existence. Where a contract is entered into by capable persons are to be regulated and determined by the same rules that govern ordinary agreements, with neither more nor less favor than is shown in other cases.

If the insurance companies, conforming their policies to the requirements of each successive decision, have protected themselves against all possible loss by any misrepresentation, no matter how insignificant or unintentional, it would be most unseemly in the courts to seek, by new exactions, to nullify these advantages. It is neither the duty nor the right of courts to protect adults against the consequences of their agreements incautiously entered into. In other words, jurists had been reluctant to invalidate insurance policies based on the misrepresentations of the insured when the invalidation would deny innocent beneficiaries the right to recover, giving rise to the idea that insurance policies should not be treated equally with other contracts.

Applying this century-old precedent on insurance contracts to the facts before us today, there can be no doubt that the circuit judge properly voided the policy issued by Safeway.

The application required Michelle to warrant that she had provided the names of all residents of her home over the age of fourteen. She admittedly failed to do so by failing to disclose fifteen-year-old William, to whom she even gifted a car covered by the policy. Because the parties to the contract characterized this assertion as a warranty, its materiality need not be questioned, and the circuit judge properly voided the contract because the statement was not literally true.

And we would reach the same result even if we characterized Michelle’s failure to disclose William as a misrepresentation, because it was both material and not substantially true.

The representation was entirely false because the application required Michelle to disclose all household residents over age fourteen and she did not provide all of the names she was required to provide. The representation was material because, without a 209 percent increase in Michelle’s rate, Safeway would not have issued the policy.

ZALMA OPINION

A warranty in a policy establishes, as a matter of law, materiality. In this case failing to advise the insurer of the existence of a 15-year-old resident concealed from the insurer that the risk it was asked to take was greater than it believed as a result of the statements and warranties in the application. Since the premium would have been 209% higher had it known the truth materiality was obvious and the Supreme Court found the policy void from its inception.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on It’s Not Nice To Lie to Your Insurance Company

Zalma’s Insurance Fraud Letter – 11-1-2015

Insurance Fraud & Weapons to Defeat Fraud

Zalma’s Insurance Fraud Letter

November 1, 2015
Volume 19, No. 21

Welcome to the November 1, 2015

Click Here and Download ZIFL-11-01-2015

In this, the twenty first issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on November 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:

  1. Is This Fraud? Failures of the Affordable Care Act
  2. Proformative Academy – Continuing Education materials by Barry Zalma by subscription.
  3. Lack of Evidence Reverses Insurance Fraud Conviction
  4. New Books by Barry Zalma
    1. Insurance Fraud & Weapons to Defeat Fraud
    2. Random Thoughts on Insurance – Volume III
    3. The Zalma Insurance Claims Library
    4. Insurance Law
    5. Insurance Claims: A Comprehensive Guide
    6. Mold Claims Coverage Guide
    7. Construction Defects Coverage Guide
  5. Seventeen Years in Prison for STOLI Fraud Conspiracy
  6. Good News From The Coalition Against Insurance Fraud
  7. Convictions for Health Insurance Fraud & P&C Insurance Fraud

ZIFL is published 24 times a year by ClaimSchool, Inc. 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 below.

Insurance Publications by Barry Zalma

Visit the Zalma Insurance Claims Library

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide
     For Readers of ZIFL a Special 25% Discount
URL:  www.nationalunderwriter.com/InsuranceClaims

Insurance Law

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

In addition the standard FC&S Online published by The National Underwriter Company FC&S Online now includes a Fraud Channel with the majority of the information taken from my work on insurance fraud.

It is available at http://www.nationalunderwriterpc.com/Pages/default.aspx. The Fraud Channel covers issues like: Fraud Basics, Checklists and Charts, Investigation, Ethics, Reference Materials, Fraud Of The Week, and  both the full text and summaries of insurance fraud Cases.

Subscribers of Zalma’s Insurance Fraud Letter SAVE 25% on Insurance Claims: A Comprehensive Guide!  To Save, Apply Coupon Code Zalma25.

Buyer Bonus:

You automatically receive-AT NO ADDITIONAL COST-a subscription to the author’s e-newsletter: The Monday Claims Report, a weekly e-newsletter featuring coverage and analysis on the top insurance law court decisions from across the country.

New From The American Bar Association

Diminution in Value Damages, How to Determine the Proper Measure of Damage to Real and Personal Property

This book was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) and includes cases dealing with the use of diminution in value as a method of determining the amount of loss incurred by a plaintiff seeking indemnity for damage to real or personal property.

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired, Diminution In Value Damages assists the reader in answering the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions.

This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.

ISBN: 978-1-63425-295-8, Product Code: 5190524, 2015, 235 pages, 7 x 10, Paperback
Available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Zalma on Insurance – A Blog

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

  • Fiduciary Who Must Obtain Insurance Ordered
  • Can an Insurer Be a Victim?
  • Prior Publication Defeats Coverage
  • Insurance 101 – Volume 24 – Mortgagee’s Rights When Insured’s Claim Is Denied
  • Insurance 101 – Volume 23 – The Rights of the Mortgagee
  • Again Court is Asked to Decide Who’s On First
  • Insurance 101 – Volume 22 – The Direct Risk of Physical Loss Policy
  • Definitions Make Policy Wording Clear & Unambiguous
  • Insurance 101 – Volume 21 – What is a Direct Physical Loss?
  • Insurance 101 – Volume 20 – What is an Application for Insurance?
  • Suing an Insurance Company Can be Expensive
  • Insurance 101 – Volume 19 – The Problem With Binders
  • Insurance 101 – Volume 18 – Reasonable Expectations
  • An Occurrence Is a Single Unified Event
  • Insurance 101 – Volume 17 – More on Interpreting Insurance Policies
  • Insurance 101 – Volume 16 – Interpreting Insurance Policies
  • Insurance 101 – Volume 15 – The Contract of Personal Indemnity
  • Public Adjuster With Contingent Fee Contract Cannot Testify as an Expert
  • More than Judgment Is More Than Enough.
  • Check in every day for a case summary and video.

Also Consider:

Barry Zalma’s Continuing Education Courses at WebCE.

Barry Zalma blogs now at LexisNexis Insurance Law Center at http://law.lexisnexis.com/blogs/Insurance

Follow Barry Zalma on Twitter at https://twitter.com/bzalma

Sign up for ZIFL at http://ui.constantcontact.com/d.jsp?m=1122537382212&p=oi

Spread the Word: http://ui.constantcontact.com/sa/fwtf.jsp?m=1122537382212&ea=zalma%40zalma.com&a=1122720049868

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – 11-1-2015

You Will Lose Your Rights if you Sit on Them

 

Brief Opinion Explains Why Failure to Sue Promptly Is Prohibited

If an insurance company treats you, its insured, badly you have every right to sue it to recover the proceeds of the policy and under certain circumstances, tort damages. However, the law looks askance at a suit brought late where the insured ignored his or her rights to sue for several years.

In Hakim v. Roma Bank, Not Reported in A.3d, 2015 WL 6473315 (N.J.Super.A.D., 10/28/15) Plaintiffs (Hakim) appealed the trial court’s order denying reconsideration of the trial judge’s dismissal of the case as to all defendants.

FACTS

This action was filed on April 1, 2013, seeking insurance coverage for damage that was sustained to Hakim’s warehouse as a result of a storm which had occurred six years before in April 2007. On October 18, 2013, the case was dismissed by the court without prejudice for lack of prosecution under New Jersey Rule 1:13–7(a) which states that: “whenever an action has been pending for four months … without a required proceeding having been taken … the court shall issue written notice to the plaintiff advising that the action as to any or all defendants will be dismissed without prejudice 60 days following the date of the notice…. If no such action is taken, the court shall enter an order of dismissal without prejudice as to any named defendant.”

After the dismissal, Roma Bank was served with the complaint in November 2013, and Nottingham, Backes, and Nautilus Insurance Co. were all served in January 2014. Nottingham and Roma filed motions to dismiss the complaint with prejudice in March 2014, alleging that service had occurred after the running of the statute of limitations, and they had incurred substantial prejudice due to the lengthy passage of time since the occurrence of the events alleged by Hakim.

It was not until after the filing of those motions that Hakim filed its motion to reinstate the complaint. The judge granted defendants’ motions, denied Hakim’s motion and dismissed the complaint with prejudice. The judge denied Hakim’s motion for reconsideration and this appeal followed.

ANALYSIS

The judge concluded that Hakim had not provided any reasons for the 230–day delay between the filing of the complaint and the issuance of summonses. Hakim must show exceptional circumstances for a reinstatement of its complaint. Hakim merely stated that it was a complex case with multiple defendants.  The New Jersey appellate court concluded that Hakim failed to provide any reasons, and certainly no exceptional circumstances, for its failure to serve defendants within the statute of limitations and within the time imposed under Rule 4:4–1.  Defendants showed substantial prejudice as the factual circumstances surrounding the insurance coverage issues date back to 2003 and 2005 as well as the storm in 2007.

Therefore, all of Hakim’s arguments are without sufficient merit to warrant further discussion in a written opinion.

ZALMA OPINION

Sometimes, much to the shock of litigators and appellate lawyers a court of appeal issues a short, succinct, intelligent and definitive opinion that is, like this case, truly brief. No one should be able to bring an action against an insurer seven to eleven years after the incidents that are the subject of the claim. This is not just laches it is sloth and a failure to exercise the rights of the insured filing suit.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on You Will Lose Your Rights if you Sit on Them

STOLI Fraud Is Despicable

Seventeen Years in Prison for STOLI Fraud Conspiracy

Life insurance is designed to protect families against the unexpected death of a family member on whom the family relies for its livelihood. It is not designed as a profit making enterprise. When the AIDS epidemic first struck, young men found they had a short life expectancy and sold their life insurance policies to obtain cash and allow the purchasers to make money by paying premium for a short period of time because the AIDS victims died quickly. Unfortunately the legitimate sale of life policies to provide cash to AIDS victims to pay for their last days on earth, criminals saw the purchase of life policies of people who were sure to die quickly, became a temptation to defraud insurers for fun and profit.

In U.S. v. Binday, — F.3d —-, 2015 WL 6444932 (C.A.2 (N.Y.) 10/26/15) a group of  insurance brokers were convicted in the United States District Court for the Southern District of New York of conspiracy to commit mail and wire fraud, mail fraud, wire fraud, and conspiracy to obstruct justice through destruction of records. They appealed.

Defendants Michael Binday, James Kevin Kergil, and Mark Resnick appeal from judgments of conviction in the United States District Court for the Southern District of New York (Colleen McMahon, Judge ) for conspiracy to commit mail and wire fraud, mail fraud, and wire fraud. Kergil and Resnick were also convicted of conspiracy to obstruct justice through destruction of records. The convictions arise from an insurance fraud scheme where defendants, who were insurance brokers, induced insurers to issue life insurance policies that defendants sold to third-party investors, by submitting fraudulent applications indicating that the policies were for the applicants’ personal estate planning.

BACKGROUND

Defendants’ Scheme

The defendants participated in an insurance fraud scheme involving “stranger-oriented life insurance” (“STOLI”) policies. A STOLI policy is one obtained by the insured for the purpose of resale to an investor with no insurable interest in the life of the insured — essentially, it is a bet on a stranger’s life. Notably, every relevant state’s law provides that, after a life insurance policy has been issued, an insured may resell that policy to an investor, who would become the policy’s beneficiary and assume payment of the premiums. Thus, with respect to transferability, the difference between non-STOLI and STOLI policies is simply one of timing and certainty. A non-STOLI policy might someday be resold to an investor. A STOLI policy is intended for resale before its issuance. While life insurers are required by law to permit resale of policies originally obtained for estate planning purposes, they are not obligated to issue policies intended for resale from the outset.

STOLI policies became a popular investment in the mid 2000s for hedge funds and others eager to bet that the value of a policy’s death benefits would exceed the value of the required premium payments. Insurance brokers, such as the defendants, who received commissions from insurers for new policies that they brokered had a financial incentive to place STOLI policies by disguising them to the insurer as non-STOLI policies.

By matching a potential insured with a STOLI investor, a broker could generate a commission on a policy that would not have been issued had the insurer known the policy’s true purpose.

In 2006, defendant Michael Binday assembled a network of independent brokers to assist his company in placing STOLI policies through such deceit.  Straw buyers were enticed to participate by promises of six-figure payments once the policies were sold to third-party investors—promises which defendants in some cases honored and in others did not. Binday explained to the field agents that he sought straw buyers who were “between 69 and 85 years’ old,” and “in good enough health to get preferred health or standard health [premium] rates,” but who would not live “too long, to the point where the investors … would be paying the premium too long.”

Along with falsifying the straw insured’s financial information, defendants lied in response to the insurers’ questions aimed at detecting STOLI policies, including the purpose of the policy, how the premiums would be paid, and whether the applicant had discussed selling the policy. Defendants also lied to the insurers by providing required certifications that, to their knowledge, the policies were not STOLI.

Indictment

The indictment alleged that defendants defrauded insurers by causing them to issue STOLI policies through misrepresentations regarding: the applicants’ financial information; the purpose of procuring the policy and the intent to resell the policy; the fact that the premiums would be financed by third parties; and the existence of other policies or applications for the same applicant.

Trial and Sentencing

At trial, the government established the scheme through documentary evidence and testimony from cooperating witnesses and other employees. Defendants did not dispute that they had submitted applications with misrepresentations in order to generate commissions by inducing the insurers to issue STOLI policies. Instead, they argued that that conduct was not fraudulent because the insurers in fact happily issued STOLI policies, while paying lip service to weeding out STOLI policies for public relations reasons.

The jury returned a verdict the same day it was charged and returned a guilty verdict on all charge. The district court elected to calculate the Guidelines loss amount based on actual loss, and adopted the government’s calculation of that figure, resulting in a 22–level increase to the base offense levels. That yielded a Guidelines range of 168 to 210 months’ imprisonment for Binday, 155 to 188 months for Kergil, and 87 to 108 months for Resnick. On July 30, 2014, the district court sentenced Binday principally to 144 months’ imprisonment, Kergil to 108 months, and Resnick to 72 months.

DISCUSSION

Mail and Wire Fraud—Cognizable Harm and Right to Control Property

The crux of defendants’ argument on appeal is that the government failed to prove that they contemplated harm to the insurers that is cognizable under the mail and wire fraud statutes.

Applicable Law

The “essential elements of” both offenses are “(1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme.” Fountain v. United States, 357 F.3d 250, 255 (2d Cir.2004). It is not required that the victims of the scheme in fact suffered harm, but the government must, at a minimum, prove that defendants contemplated some actual harm or injury to their victims.

The requisite harm is shown where defendants’ misrepresentations pertained to the quality of services bargained for.

Sufficiency of the Evidence

Defendants argue that the evidence was insufficient to show that they exposed the insurers to an unexpected risk of economic harm, because the evidence did not establish that STOLI policies were in fact any different economically than non-STOLI policies.

The Third Circuit recognized that the value of insurance transactions inherently depends on the ability of insurance companies to make refined, discretionary judgments on the basis of full information. Insurance is based on managing probabilities. The fraud deprived the insurers defrauded of managing the probabilities of loss to the lives they insured.

Actual and Specific Harm

Suppose an applicant obtained an insurance policy after falsely representing that he did not smoke. The deceit would fall short of Kergil’s conception of economic harm, even if it were undisputed that smokers on average die sooner than non-smokers, because a court could not know that the risk to which the insurer was exposed—namely, the applicant’s earlier-than-expected death due to smoking—would certainly materialize. The mail fraud statute does not require the government to prove that the victims of the fraud were actually injured.

The brokers fees received for services that were not performed in the manner agreed upon. Thus, whether payment of commissions would constitute a standalone harm absent a showing of economic difference between STOLI and non-STOLI policies is of no consequence for this case. Because the jury reasonably found that the defendants deprived the insurers of economically valuable information, the payment of commissions that were not legitimately earned merely represents an additional economic harm.

Intent to Inflict Cognizable Harm

It is not necessary that a defendant intend that his misrepresentation actually inflict a financial loss—it suffices that a defendant intend that his misrepresentations induce a counter-party to enter a transaction without the relevant facts necessary to make an informed economic decision. Sufficient evidence supports an inference of fraudulent intent in this case.

Destruction of Hard Drive

In June 2010, Binday learned that the FBI was investigating him and had begun interviewing straw insureds.  After learning of the FBI investigation in June 2010, Kergil instructed Resnick to “get rid” of his “hard drive” and to “get rid of everything with the name Michael Binday’s name on it … and get rid of it.”

Here, there is no dispute that Resnick was aware of a scheme to destroy evidence promoted by Kergil, and there was ample evidence for the jury to conclude that Resnick “joined and participated” in the scheme when he flew from New York to Florida to delete the contents from his hard drive.

Restitution Amount

After the judgment in the case was entered, the parties agreed that the total restitution award should be reduced to $37,433,914.17. Because the defendants had by that point appealed their convictions, the district court was without jurisdiction to amend the amount as agreed upon by the parties.

ZALMA OPINION

The STOLI fraud that Binday organized was a very successful criminal enterprise since the amount of restitution was agreed to be reduced to $37,433,914.17 which means that the amount they obtained by fraud was probably a great deal more. To use elderly people to act as straw buyers for only six figures when the commissions obtained at the payment of the first premium exceeded the payment by large multiples and made the fraud perpetrators rich was despicable.ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on STOLI Fraud Is Despicable

Fiduciary Who Must Obtain Insurance Ordered

No Liability for Broker Fiduciary Who Fulfills Promise to Buy Policy

Insurance brokers can be found to have a fiduciary obligation to the insured, a duty greater than that of the average agent who needs only to get the insurance ordered.

In Thomas v. Dion, Not Reported in A.3d, 2015 WL 6394443 (N.J.Super.A.D., 10/23/2015), Michael Thomas, was injured when he fell off a scaffold while employed by a subcontractor retained by the general contractor, Prestigious Homes, Inc. (Prestigious). Plaintiff subsequently obtained a $750,000 default judgment against Prestigious. When plaintiff was unable to collect on that judgment, he sued Fetterman, Millinghausen, & McNutt, Inc. (FMM), the agency that procured Prestigious’s general liability insurance policy, and defendant Michael Dion, an insurance producer employed by FMM. Plaintiff alleged that defendants “were negligent in failing to make Prestigious [ ] aware that it needed to have certain insurance terms and requirements in the contracts it had with its subcontractors.”

THE INSURANCE POLICIES

Neil Lansman contacted FMM to procure general liability insurance on behalf of Prestigious, which he wholly owned. On December 23, 2003, Prestigious executed a Contractors General Liability Application for Insurance. In this application, Prestigious answered questions affirming that it (1) obtained certificates of insurance from any subcontractors used; (2) required minimum limits of $1,000,000 from subcontractors; (3) did not use uninsured subcontractors; (4) obtained written contracts from all its subcontractors that included a hold harmless clause in Prestigious’s favor; and (5) would be listed as an additional insured under any subcontractors’ policies.

On February 12, 2004, National issued Prestigious a general liability insurance policy covering the period from January 28, 2004, to January 28, 2005. The policy contained an endorsement entitled “Independent Contractors and Subcontractors Coverage Requirement—Exclusion” (Subcontractor Endorsement), which states in capital letters at the top of the page that “THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.” The Subcontractor Endorsement provides: “[t]his insurance does not apply to “bodily injury,” “property damage,” or “personal or advertising injury” arising out of operations performed for you by independent contractors or sub-contractors unless: ¶ (1) Such independent contractors or sub-contractors agree in writing to defend, indemnify, and hold harmless you and your affiliates, subsidiaries, directors, officers, employees, agents, and their representatives from and against all claims, damages, losses, and expenses attributable to, resulting from, or arising out of the independent contractor’s or sub-contractors’s operations performed for you, caused in whole or in part by any act or omission of the independent contractor or sub-contractor or any one directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by you; and ¶(2) Such independent contractors or sub-contractors carry insurance with coverage and limits of liability equal to or greater than those carried by you, including commercial general liability, workers’ compensation and employers’ liability insurance; and ¶ (3) Such commercial general liability insurance provides coverage for the independent contractors’ or sub-contractors’ indemnity obligations set forth in paragraph (1) above; and ¶ (4) Such commercial general liability insurance names you as an additional insured with coverage consistent with the coverage provided in the ISO CG 2009 endorsement.”

On delivery the broker advised:  “Please read all exclusions and limitation forms. Please make special note for subcontractors to have Prestigious Homes of PA, Inc. named as additional insured on their policy and sign a hold harmless agreement (see form M–5095 which is part of your policy).”

THE ACCIDENT AND UNDERLYING LITIGATION

On August 6, 2006, Prestigious entered into a contract with Golden Hands Inc. to perform work at a residential housing project in Atlantic City. Golden Hands was one of approximately fifteen subcontractors retained by Prestigious to work on the project. Plaintiff received workers compensation benefits, and also brought a negligence action against Prestigious.

National received notice of plaintiff’s initial claim on December 8, 2006. Following its investigation, National disclaimed coverage on May 30, 2007, because of Prestigious’s failure to comply with the requirements of the Subcontractor Endorsement. Specifically, Prestigious failed to procure a written indemnification agreement from Golden Hands, and was not named as an additional insured on Golden Hands’s policy.

EXPERT OPINIONS

Plaintiff retained Armando Castellini as his insurance practices expert. In his report and deposition, Castellini opined that (1) the broker and agency should have provided specific information to Prestigious about the nature of the coverage and the exclusionary endorsement requiring the insured to obtained named insured status and indemnification from subcontractors; (2) the warning about the limited nature of the coverage should have been in writing and should have been repeated at every renewal; (3) there should have been a survey of risks facing Prestigious completed to ensure that coverage was proper for its particular needs; and (4) a broker must evaluate a client’s needs on an ongoing basis to ensure appropriate coverage for its particular needs. Thomas Ahart, defendants’ liability expert, opined in his expert report that defendants “did not fail in any professional obligation to its client, Prestigious, or to [plaintiff] as a[t]hird-[p]arty [b]eneficiary.” He also stated that because plaintiff was not FMM’s client, FMM “owed no professional obligation” to plaintiff.

THE TRIAL COURT DECISION

The judge determined that Prestigious breached the contract by failing to abide by the policy’s conditions, and that there can be no third party beneficiary to a contract which is null and void as a result of a breach. Accordingly, the court found no genuine issue of fact even when viewing all facts in a light most favorable to plaintiff, and granted summary judgment.

ANALYSIS

A “negligence cause of action has four elements: (1) duty of care, (2) breach of duty, (3) proximate cause, and (4) actual damages. An insurance broker owes a duty to his principal to exercise diligence in obtaining coverage in the area his principal seeks to be protected. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. Both agents and brokers are obliged to inform insureds of available coverage.

As insurance brokers, defendants were required (1) to procure the insurance; (2) to secure a policy that is neither void nor materially deficient; and (3) to provide the coverage he or she undertook to supply. Defendants fulfilled this duty by procuring the insurance from National through Delaware Valley Underwriting Agency, which was the only quote tendered due to the lack of a domestic market interested in Prestigious’s risk. That policy was neither void nor materially deficient.

Moreover, the exclusion set forth in the Subcontractor Endorsement was clear and unambiguous. Defendants provided additional explanations of the policy to Lansman and Prestigious beyond the plain language of the endorsement, further fulfilling their fiduciary duties. Dion’s unrebutted testimony was that he explained “the exclusion and warranty in the policy regarding the contractors and the additional insured and the hold harmless agreements … during the quotation process” and that Lansman “was made aware of the warranty in the policy” that “he had to have certificates of insurance from his subcontractors and he had to have contracts and hold harmless agreements, which he said he had in the applications.”

All of these measures clearly demonstrate defendants’ adherence to their insurance broker fiduciary duties. Since Prestigious could have no claim against defendants, plaintiff’s third-party beneficiary claim based on breach of that relationship similarly fails.

The undisputed documentation, accompanied by Dion’s unrefuted deposition testimony, clearly establishes Prestigious’s recognition and awareness of the requirements necessary to ensure coverage under the Subcontractor Endorsement, and Prestigious’s material breach of those requirements.

ZALMA OPINION

The insurance broker who has a fiduciary duty to the insured must both provide the insurance required by the insured’s order and explain the terms and conditions to the insured and warn the insured to read the policy. The insured – with knowledge of the requirements of the policy – did not obtain an additional insured endorsement nor an agreement from the subcontractor to indemnify it. The insured then went broke so the only chance the injured person had in addition to workers’ compensation benefits was to sue the broker. He failed because they did nothing wrong.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fiduciary Who Must Obtain Insurance Ordered

Can an Insurer Be a Victim?

Restitution in Ohio Is Limited to Amounts Not Covered by Insurance

Insurance is a risk spreading device. It is not a social welfare program. When an insurer pays its insured for a loss it steps into the shoes of the insured and gains, contractually, every right the insured has against the insurer. When the insured is a victim of a crime, however, the courts in Ohio are compelled to ignore the loss incurred by the insurer and can, strangely, only order restitution to the victim for losses not covered by insurance,

In In re T.C., Slip Copy, 2015 WL 6393844 (Ohio App. 8 Dist.), 2015 -Ohio- 4384n(10/22/2015), T.C., a minor appealed from the juvenile court’s judgment of delinquency that ordered T.C. committed to the Ohio Department of Youth Services (“ODYS”) and made him responsible for restitution. On appeal, T.C. raises two assignments of error concerning only the magistrate’s order of restitution.

FACTS

In November 2014, Cleveland police filed a complaint in juvenile court alleging that T.C., a seventeen-year-old minor, was delinquent of numerous criminal violations. The complaint accused T.C. of receiving stolen property; carrying a concealed weapon; failure to comply (all fourth-degree felonies if committed by an adult); possessing criminal tools; (a fifth-degree felony if committed by an adult); and assault (a first-degree misdemeanor if committed by an adult).

On November 20, 2014, Cleveland police officers observed T.C. and three codefendants traveling in a stolen 1998 Dodge Stratus. The officers followed the car in an attempt to stop the vehicle but eventually called off the pursuit for safety reasons when the driver ignored all indications to pull over. Soon, the police spotted the vehicle stopped on the side of the road. T.C. and his codefendants had exited the vehicle and were walking down the street in different directions. T.C. and the codefendants began to run after the police ordered them to stop. During the foot chase, a civilian attempted to stop T.C., but T.C. assaulted the civilian and broke free. Police eventually apprehended T.C. and found him to be in possession of a screwdriver and a stolen, loaded firearm. Police identified T.C. as the driver of the vehicle, and the police report indicated that the screwdriver was used to “punch” the ignition.

T.C. eventually admitted to the allegations contained in the complaint, and the court adjudicated him delinquent. At the dispositional hearing, the court ordered T.C. to consecutive six-month terms of commitment, with the possibility of extension up until T.C.’s 21st birthday, at ODYS on the receiving stolen property charge and the concealed weapon charge. T.C. was ordered to serve concurrent six-month terms at ODYS on the remaining charges and also ordered to pay $2,600 in restitution. Defense counsel did not object to the order or the amount of restitution.

THE ISSUES

T.C. raises two assignments of error on appeal. His first is that the trial court committed reversible error when it failed to ensure that the restitution amount was based on competent and credible evidence of the actual amount of harm caused to the vehicle, and second, that his counsel was ineffective for failing to object to the order of restitution.

The statute allows courts to grant restitution states that the court may base the restitution order on “an amount recommended by the victim * * * a presentence investigation report, estimates or receipts indicating the cost of repairing or replacing property, and any other information * * *.”  The statute further provides that the amount of restitution “shall not exceed the amount of the economic loss suffered by the victim as a direct and proximate result of the delinquent act * * *.”  “In determining the amount of restitution, the definition of economic loss must be strictly construed against the State and in favor of the of the accused.

ANALYSIS

It is well settled that the record must contain sufficient evidence for the court to ascertain the amount of restitution to a reasonable degree of certainty.  This is because due process mandates that the amount of restitution bear a reasonable relationship to the loss suffered.

A court commits plain error when it orders restitution that is not based on competent, credible evidence proving the victim’s economic loss, because the defendant has a due process right to a determination that the amount of restitution bears a reasonable relationship to the loss suffered.

The prosecutor advised the trial judge that  $2,700 was the estimate for the damage to the car and that he did not know whether the car was insured.

The appellate court could not conclude that the court’s restitution order was supported by competent and credible evidence that established that the amount of restitution bore a reasonable relationship to the amount of loss suffered by the owner of the car because there was no direct evidence of the amount only hearsay. The court concluded that the entire award of restitution appears to be based on unsubstantiated hearsay statements of the prosecutor and another unidentified individual in the record named Ms. Gina. The prosecutor never explained to the court what damage to the car proximately resulted from T.C.’s actions. In fact, the only reference to potential damage caused by T.C. is the reference to the “punched” ignition in the police report. The prosecutor never explained to the court that the punched ignition necessitated repairs nor did she state that the victim’s estimate for repairs reflected costs involved in repairing or replacing the ignition column.

Lastly, the court’s own statements on the record seem to question the accuracy of the requested amount. When told by the prosecutor at the December 3, 2014 hearing that restitution for the car was $2,700, the court responded, “[w]hat? [t]here was no insurance?” The prosecutor told the court that she did not think that the victim had insurance but that she would check with him. The question of whether the victim had insurance that might cover all or part of the cost of repairs remained unresolved at the time the court awarded restitution.

The resolution of this question was necessary because restitution amounts should reflect only the victim’s out-of-pocket economic losses and should not include amounts covered by insurance carriers. State v. Mobley–Melbar, 8th Dist. Cuyahoga No. 92314, 2010–Ohio–3177, ¶ 41; see also State v. Aguire, Slip Opinion No.2014–Ohio–4603. Indeed, in Mobley–Melbar the court found plain error when the trial court ordered restitution to the victim without considering possible insurance coverage.

The appellate court reversed and remanded back to the trial courtfor a restitution hearing.

ZALMA OPINION

This is a case of a stupid law ignoring the reality of insurance and converting it into a social program so that the true victim of a loss, the insurer, could never obtain restitution. I always demanded, and recovered for my insurer clients, restitution when a criminal was prosecuted for a covered loss or for fraud. Ohio needs to reconsider its position.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | 3 Comments

Prior Publication Defeats Coverage

Insurance Must be in Effect at Time of Loss

Insurance, as I have said here many times, requires that any loss reported to the insurer must be fortuitous as it relates to the terms and conditions of the policy. When a loss occurs before the inception of the policy it is not fortuitous even if it continues to cause damage for periods after the inception of the policy. Insurers, especially insurers who provide coverage for liability for trademark infringement do not rely on the doctrine of fortuity add suspenders to the belts holding up their pants by specifically excluding losses due to a publication prior to the inception of the policy.

In Hanover Ins. Co. v. Urban Outfitters, Inc., — F.3d —-, 2015 WL 64 05763 (C.A.3 (Pa.), 10/23/2015 an insurer sued its insured seeking a judicial declaration that it was not responsible under commercial general liability policies (CGL) for the insured’s defense or indemnification in an underlying trademark infringement action.

The Prior Publication Exclusion

The “prior publication” exclusion of liability insurance contracts prevents a company from obtaining ongoing insurance coverage for a continuing course of tortious conduct. In this appeal, the Third Circuit considered the scope of the “prior publication” exclusion.

FACTS

On February 28, 2012, in the U.S. District Court in New Mexico, the Navajo Nation and its affiliates (collectively Navajo Nation) sued Urban Outfitters and its affiliates (collectively Urban Outfitters) for trademark infringement and related common law and statutory violations. Navajo Nation’s central allegation was that Urban Outfitters “advertised, promoted, and sold its goods under the ‘Navaho’ and ‘Navajo’ names and marks” on the Internet and in retail stores “[s]ince at least March 16, 2009.”  Urban Outfitters tendered the complaint to OneBeacon America Insurance Company and Hanover Insurance Company.

Navajo Nation alleged that Urban Outfitters engaged in “trademark infringement, trademark dilution, unfair competition, false advertising, commercial practices laws violations, and [ ] violation of the Indian Arts and Crafts Act,” but offered little specificity as to when the offensive conduct occurred. At least as early as March 16, 2009, Urban Outfitters started using the “Navajo” and “Navaho” names in its product line, or in connection with the sale of its goods, online, in its catalogs, and in its physical stores. Defendant’s use has included, and includes (but is not limited to): clothing, jewelry, footwear, handbags, caps, scarves, gloves, undergarments, and flasks. Defendant’s items sold under the “Navajo” and “Navaho” names and marks evoke the Navajo Nation’s tribal patterns, including geometric prints and designs fashioned to mimic and resemble Navajo Indian-made patterned clothing, jewelry and accessories. Urban Outfitters has sold and is selling over 20 products using the “Navajo” and “Navaho” trademarks in its retail stores, its catalogs, and its online stores.

OneBeacon provided commercial general liability and umbrella liability coverage to Urban Outfitters prior to July 7, 2010. The Insuring Agreement specifically included “personal and advertising injury” coverage. On July 7, 2010, OneBeacon issued a “fronting policy” to Urban Outfitters providing identical coverage for which Hanover served as the responsible insurer. The policy was in effect from July 7, 2010, to July 7, 2011. Hanover subsequently issued separate commercial general liability and umbrella liability policies to Urban Outfitters, which were effective from July 7, 2011, to July 7, 2012. The “fronting policy” and Hanover-issued policies excluded coverage for “personal and advertising injury” liability “arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”

The District Court held that Hanover had no duty to defend or indemnify since Hanover did not begin insurance coverage of Urban Outfitters until sixteen months after the alleged infringement began. The District Court found that, because the claims in the underlying action alleged injuries stemming from advertisements published prior to the policy inception date, any resulting injury fell within the Hanover policies’ “prior publication” exclusions.

Urban Outfitters contends that the District Court erred in finding that Navajo Nation’s trademark infringement allegations fall under the Hanover policies’ “prior publication” exclusions.

ANALYSIS

In interpreting an insurance contract, when the language of the policy is clear and unambiguous, the court must give effect to that language. In determining the existence of a duty to defend, the factual allegations of the underlying complaint against the insured are to be taken as true and liberally construed in favor of the insured.

The Hanover policies’ “personal and advertising injury” provisions clearly and unambiguously cover Urban Outfitters’ alleged trademark infringement and related common law and statutory violations. Nonetheless, Hanover contends that it has no duty to defend since its policies specifically excluded coverage for “personal and advertising injury” liability “arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.” The “fronting policy” under which Hanover first assumed responsibility for Urban Outfitters’ liability coverage became effective on July 7, 2010.

Navajo Nation fixed March 16, 2009 (if not earlier) as a start date for Urban Outfitters’ alleged misconduct. Under the terms of the Hanover policies’ “prior publication” exclusions, the court was compelled to treat this date of “first publication” as a landmark. Because Hanover was not responsible for Urban Outfitters’ liability insurance coverage until sixteen months thereafter, the exclusions apply—that is, unless the underlying complaint contains allegations of “fresh wrongs” that occurred during Hanover’s policy periods.

There is no binding authority in this Court on what constitutes a “fresh wrong.” The Ninth Circuit Court of Appeals, however, recently considered the question on analogous facts. In Street Surfing, LLC v. Great American E & S Insurance Co., the court defined “fresh wrongs” as “new matter,” which in turn “is material not ‘substantially similar’ to the material published before the coverage period.” The court emphasized that “courts have not considered all differences between pre-coverage and post-coverage publications, but have focused on the relationship between the alleged wrongful acts manifested by those publications. A post-coverage publication is ‘substantially similar’ to a pre-coverage publication if both publications carry out the same alleged wrong.”

As with the duty to defend, the allegations in the underlying complaint control. Where a plaintiff alleges a substantive difference between allegedly infringing advertisements, published before and during the relevant policy period, the later advertisements are “fresh wrongs” that fall outside the “prior publication” exclusion. But variations, occurring within a common, clearly identifiable advertising objective, do not give rise to “fresh wrongs.”
When a purported advertising violation stems from such common, clearly identifiable objectives, the “prior publication” exclusion applies to excuse an insurer from its duty to defend if that insurer has assumed coverage responsibility after the insured has commenced the liability-triggering conduct.

Urban Outfitters stands accused of an apparently continuous string of trademark infringement and related violations. In the underlying complaint, where Navajo Nation affixed dates to Urban Outfitters’ purported misconduct, the dates were generally accompanied by qualifiers denoting continuity (e.g., Urban Outfitters has infringed “since” or “[a]t least as early as” March 2009). Navajo Nation provided more chronological specificity only in describing particular Urban Outfitters advertisements which fit the alleged pattern of infringement. It is apparent from Navajo Nation’s complaint that Urban Outfitters’ advertisements, which predated Hanover’s coverage period, share a common objective with those that followed. Thus, we conclude that the latter ads are not “fresh wrongs.” The “prior publication” exclusions apply, and Hanover has no duty to defend Urban Outfitters in the underlying action.

Risk is a concept with which courts are intimately acquainted. Those who wager correctly are rewarded and those who guess wrong suffer losses. The purpose of insurance is to disperse that risk. “But an insured cannot insure against something that has already begun and which is known to have begun.” (emphasis added) 

The prior publication exclusion prevents a continuing tortfeasor from passing the risk for its misconduct on to an unwitting insurer. Taking Navajo Nation’s underlying allegations as true, Urban Outfitters engaged in similar liability-triggering behavior both before and during Hanover’s coverage period. Therefore the exclusion applies.

ZALMA OPINION

The Third Circuit emphasized what should have been obvious. An insured cannot insure against something that has already begun and which is known to have begun. This is the definition of the fortuity doctrine. Attempting to obtain coverage after a loss has begun is an attempt to steal from an insurer and the Third Circuit correctly prevented the theft but did so without accusing any of the parties of a crime.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Prior Publication Defeats Coverage

Again Court is Asked to Decide Who’s On First

Primary v. Excess

Litigation to Determine What Should Have Been Decided Between the Insurers

In major construction contracts multiple parties insure each other  as additional insured and each claim the other must defend and indemnify with each insurer wishing to be the excess insurer and have the other insurers be declared primary. Construction projects are notorious for raising issues about who is on first and who must defend and indemnify the parties sued.

In Muss Development, LLC v. Nationwide Ins. Co., Slip Copy, 2015 WL 6160240 (E.D.N.Y., 10/20/15) the construction managers and owner of a construction site, sought declaratory judgment that they are covered as additional insureds under the electrical subcontractor’s insurance policy. Defendant and third-party plaintiff, the electrical subcontractor’s insurer, argues that primary coverage should be provided by plaintiffs’ insurer, the third-party defendant.

BACKGROUND

John Mustakis, the plaintiff in the underlying bodily injury action, was employed by Urban Power & Lighting, Inc. (“Urban”) to work as an electrician on a construction site at 40–22 College Point Boulevard, Flushing, New York (the “Construction Site”). The Construction Site was owned by Flushing Town Center III, L.P. (“Flushing”) and managed by Muss Development Corp. (“Muss”) and Tishman Construction Corp. of New York (“Tishman”).

Urban’s work at the Construction Site was insured, at least in part, through an insurance policy (the “Nationwide Policy”) issued by Nationwide Insurance Company (“Nationwide”). Flushing, Muss, and other eligible contractors and subcontractors at the Construction Site were insured, at least in part, through Flushing’s commercial general liability owner-controlled insurance program (the “Illinois National OCIP”), issued by Illinois National Insurance Company (“Illinois National”).

On February 24, 2010, Mustakis slipped and fell at the Construction Site, injuring his left rotator cuff. One year later, Mustakis sued Flushing, Muss, and Tishman, seeking damages for his injuries. Urban’s insurer, Nationwide, originally acknowledged that it was obligated to defend Muss in the underlying bodily injury action as an “additional insured” under the Nationwide Policy. Nationwide later argued, however, that primary coverage should be provided by Flushing’s insurer, Illinois National.

Flushing, Muss, and Tishman (together, the “Plaintiffs”) sued Nationwide, alleging breach of contract and seeking declaratory judgment that Nationwide was obligated to, inter alia, “defend and indemnify Plaintiffs” in the underlying bodily injury action as additional insureds under the Nationwide Policy. Nationwide filed a third-party complaint against Illinois National, also alleging breach of contract and seeking declaratory judgment that Illinois National was obligated to “afford primary coverage for the defense and indemnity of” Muss, Flushing, Tishman, and Urban in the underlying bodily injury action “as members of the [Illinois National] OCIP.”

DISCUSSION

Parties Covered by the Illinois National OCIP and the Nationwide Policy

First, the Court granted Illinois National’s motion for declaratory judgment that Urban is not entitled to coverage under the Illinois National OCIP. The record contains no evidence that Urban was an insured under the Illinois National OCIP.

Second, the Court granted Illinois National’s motion to dismiss those portions of Nationwide’s declaratory judgment claim that allege that Flushing, Muss, and Tishman are entitled to coverage under the Illinois National OCIP. The District Court concluded that the record is clear that Flushing, Muss, and Tishman are insureds under the Illinois National OCIP. Illinois National does not dispute this coverage and has assumed their defense in the underlying bodily injury action. There is a justiciable controversy, however, as to whether the coverage owed to Flushing, Muss, and Tishman under the Illinois National OCIP is primary or excess to any coverage owed under the Nationwide Policy,.
Nationwide Policy

Policy Requirements

The additional insured provision in the Nationwide Policy extends coverage to “any … organization for whom [Urban] [is] performing operations” when the following three conditions are met: (1) “[Urban] and such … organization have agreed in writing in a contract or agreement”; (2) “that such … organization be added as an additional insured on [Urban’s] policy”; and (3) the coverage is requested “with respect to liability for ‘bodily injury’ … arising out of … [Urban’s] acts or omissions … in the performance of [Urban’s] ongoing operations for the additional insured ….“ Only Muss meets all three of these requirements.

Nationwide correctly notes that New York courts have interpreted identical additional insured provisions as requiring contractual privity between the insured and each organization seeking coverage as an additional insured under the relevant policy.
The only signatories to the Urban Trade Subcontract are Urban and Muss. Therefore, by the plain terms of the Nationwide Policy, Flushing and Tishman are not covered as additional insureds, because they lack privity of contract with Urban.

Despite Nationwide’s arguments to the contrary, the Urban Trade Subcontract is clear and unambiguous that Urban is required to add Muss as an additional insured on the Nationwide Policy.

Plaintiffs have sufficiently established that the coverage is requested with respect to liability for “bodily injury” arising out of Urban’s acts or omissions in the performance of Urban’s ongoing operations for the additional insured, thereby triggering Nationwide’s duty to defend Muss in the underlying bodily injury action. However, the question of Nationwide’s duty to indemnify Muss cannot be resolved without a determination of liability in that underlying action because the narrower duty to indemnify arises only if the claim for which the insured has been judged liable lies within the policy’s coverage.

Estoppel

An essential element of reliance estoppel, however, is proof that the insurance broker who issued the certificate of insurance to Flushing was acting on the authority of Nationwide. Yet, the record contains no evidence to establish such a relationship. Therefore, there is an issue of fact as to whether Nationwide is estopped from denying Flushing’s coverage as an additional insured under the Nationwide Policy, based upon the certificate of insurance.

Accordingly, on the issue of whether Flushing, Muss, and Tishman are covered under the Nationwide Policy as additional insureds, the Court ruled as follows:

(1) questions of material fact preclude the Court from determining whether Flushing is entitled to additional insured coverage under the Nationwide Policy at this stage;

(2) Muss is entitled to additional insured coverage under the Nationwide Policy, because the Urban Trade Subcontract required Urban to add Muss as an additional insured on the Nationwide Policy; and

(3) Tishman is not entitled to additional insured coverage under the Nationwide Policy, because Tishman lacks privity of contract with Urban.

(4) The question of Nationwide’s duty to indemnify cannot be resolved without a determination of liability in the underlying bodily injury action.

Primary Coverage vs. Excess Coverage

All parties seek declaratory judgment defining, to the extent that coverage under the Nationwide Policy and the Illinois National OCIP overlap, which policy’s coverage is primary and which policy’s coverage is excess. Where there are multiple policies covering the same risk, and each generally purports to be excess to the other, the excess coverage clauses are held to cancel out each other and each insurer contributes in proportion to its limit amount of insurance. This rule is inapplicable, however, where it clearly distorts the plain meaning of the terms of the policies of insurance.

The Illinois National OCIP insurance manual requires that Flushing and Muss be named as additional insureds under Urban’s general commercial liability insurance policy on a “primary and non-contributory” basis. New York case law provides that coverage for additional insureds is primary coverage unless unambiguously stated otherwise.

Even if this were not the case, however, the general rule of ratable contribution is inapplicable because the Nationwide Policy provides that its coverage is primary except where there is other primary insurance available, whereas the Illinois National OCIP is excess over any other insurance, including other excess insurance coverage.

Consequently, coverage provided to Muss as an additional insured under the Nationwide Policy is primary and must be exhausted before the excess coverage provided under the Illinois National OCIP becomes effective.

ZALMA OPINION

The District Court was forced to read multiple insurance policies and construction contracts to reach the conclusions it did. It found who was insured and who was not and which policy was primary and which were excess. The insurers should, rather than litigating the issue, should have met and done the analysis the court did and worked together to protect their insureds.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Again Court is Asked to Decide Who’s On First

Definitions Make Policy Wording Clear & Unambiguous

Insured May Not Recover For Expenditures to Avoid Collapse

Insurance is nothing more than a contract that must be interpreted as written. When a property is threatened with imminent damage a homeowner has a personal obligation to protect the property from loss, whether insured or not insured. The question whether the expenses incurred are covered under a homeowners policy depends upon the actual wording of the policy not on what seems fair or reasonable or what the insured thinks the policy should have said.

In Grebow v. Mercury Insurance Company, — Cal.Rptr.3d —-, 2015 WL 6166610 (Cal.App. 2 Dist., 10/21/2015)  Arthur and Helen Grebow (the Grebows) appeal from a summary judgment in favor of defendant and respondent Mercury Insurance Company (Mercury) for causes of action for breach of contract and tortious breach of insurance contract.

STATEMENT OF THE FACTS

The Grebows’ general contractor and structural engineer advised them that the rear of the residence was in the process of falling to the ground and strongly advised them not to enter the second story of the house until they repaired the damage. The Grebows spent over $91,000 on such repairs. They then made a claim for reimbursement of that amount against Mercury, their homeowner’s insurer, because they claimed that at least a portion of the house had collapsed and because the expenditure was to avoid imminent insurable damage and to mitigate damages.

The trial court granted a motion for summary judgment in favor of Mercury and denied the Grebows’s motion for summary adjudication.

The Grebows owned a residence located in Tarzana, California (the property). In February 2002, they purchased a Superior Property Homeowners Policy (the policy) from Mercury that provided coverage for the property. The policy limits were $1,466,000, with a $2,500 deductible.

At the request of the Grebows a structural engineer inspected the property and agreed with the general contractor’s assessment. The engineer believed the failure of the poles and beams was caused by decay and corrosion, which were concealed by the deck floor and patio ceiling. On May 17, 2013, the Grebows authorized the purchase of material for shoring and had it installed the next day. On May 28, 2013, the Grebows entered into a construction contract. On June 19, 2014, they orally notified Mercury of their claim for reimbursement of their repair expenses, and on June 20, 2013, sent a written claim for the reimbursement. Mercury denied the claim.

DISCUSSION

The policy adds to its definitions and exclusions that “collapse” does not include “settling, cracking shrinking, bulging, expansion, sagging or bowing, nor a substantial impairment of the structural integrity of a structure or building, nor a condition of imminent danger of collapse of a structure or building.”

The Grebows assert that the deck supporting the rear portion of the residence is a part of the building, that there was a collapse of that deck as that term is used in the policy because certain elements of the structure had become detached, and the collapse was due to hidden decay.  Mercury contends that the clear language of the insurance policy is inconsistent with the Grebows’s claims.

Because there was a split of authorities over the scope of collapse coverage when the policies leave the term “collapse” undefined insurance companies reacted by defining “collapse” and elaborating the provisions in an attempt to make the scope of coverage clearer. The policy includes clauses such as “sudden and complete breaking down or falling in or crumbling into pieces or into a heap of rubble or into a flattened mass” and excluding “substantial impairment of the structure or building” and “a condition of imminent danger of collapse of a structure or building.” As a result the appellate court concluded that this language renders the collapse clause unambiguous.

The undisputed facts show there was no “sudden and complete breaking down or falling in or crumbling into pieces or into a heap of rubble or into a flattened mass,” one of which is required by the policy for there to be a collapse. Rather, the Grebows contend there was a “substantial impairment of the structure or building” and a “condition of imminent danger of collapse of a structure or building,” but there are exclusions in the policy for such circumstances.

In Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1074 the Supreme Court held that under an insurance policy with similar language to the one in issue here, the policy did not cover an imminent collapse—just an actual collapse.  The court in Rosen concluded that when the policy language was clear it could not rewrite the coverage to conform to public policy or the insured’s expectations.

Reimbursement for Mitigation and Prevision of Imminent Loss

The Grebows claim they are entitled to be reimbursed for their costs as mitigation. Mercury argues that what the Grebows claim is mitigation is not covered because the clause applies after a loss occurs. The appellate court also concluded that the mitigation clause is unambiguous because the duty to mitigate only arises “[i]n case of a loss to which this insurance may apply.” In this case the only loss to which the insurance could apply is a collapse, which, as defined by the policy did not occur. The contractual duty to preserve or protect property on the part of the insured applies only after a covered loss occurs.

To read the policy as the Grebows do would mean that virtually all maintenance calculated to prevent ultimately an insurable loss would have to be reimbursed by the insurer. The parties could not possibly have intended that Mercury insured for deterioration or wear and tear thus converting their homeowner’s insurance policy into a maintenance agreement. Indeed, the policy excludes losses caused by wear and tear and deterioration, rust, or corrosion.

Mitigation Clause is Not a Sue & Labor Clause

The sue and labor clause found in marine and inland marine policies applies when a party takes steps to prevent an imminent loss that would be covered if it occurred, such as a collapse. The mitigation clause in the policy is not the same as the usual sue and labor clause, which provides for preventative work by the insured. The mitigation clause here only applies after the loss occurs. If there is no coverage for preventive efforts, an insured might decide to delay saving property until it has been damaged in order to trigger coverage. The insurer might have to pay for the insured’s increased loss under these circumstances.

In rejecting a claim for reimbursement for preventive measures, the court in Swire Pacific Holdings, Inc. v. Zurich Insurance Company (Fla.2003) 845 So.2d 161, 169 said: “The reasoning suggested by [the insured] is certainly logical, to the effect that the preventive measures may have conferred a benefit upon the insurance company. Regardless of the obvious good faith efforts of the plaintiff the court of appeal is not empowered to alter the terms of an otherwise unambiguous contract.

Absent a provision that provides for reimbursement, the insurer has no obligation to reimburse an insured for costs to prevent an imminent insurable occurrence from occurring.  The policy does not provide for reimbursement to prevent imminent insurable occurrence.

There is no implied obligation to reimburse an insured for costs to prevent an imminent insurance damage. Implied terms are not favored in the law, and should be read into contracts only upon grounds of obvious necessity.  A court does not have the power to create for the parties a contract that they did not make and cannot insert language that one party now wishes were there.  To compel the insurer to give more than it promised would allow the insured to get more than it paid for.

When an insured can prevent an insurable loss from occurring, he or she does so because he or she would rather have the house and property in it than insurance proceeds or reconstruction. The homeowner generally would rather stay in the house than have it reduced to rubble and not have to replace personal possessions. A homeowner has a considerable personal incentive to take corrective action to avoid the destruction of the house.

The summary judgment in favor of Mercury and denial of the Grebows’s motion for summary adjudication and new trial are affirmed. Each party shall bear its or their own costs.

ZALMA OPINION

The insureds incurred a serious expense to prevent damage to their home to prevent a loss brought about by rust and deterioration of portions of their home. They decided, intelligently, to not wait for the house to fully collapse and spent over $90,000 to repair the property and prevent a collapse. Although their actions were appropriate and in their best interest that fact did not allow the court to change the wording of the policy to provide coverage it did not provide and for which the insureds did not pay.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Definitions Make Policy Wording Clear & Unambiguous

Suing an Insurance Company Can be Expensive

Notice Must Be Provided E&O Insurer Promptly

Lawyers are often wiley. Even when they admit to error they do everything possible to pass the obligation for their error to another. This fact, coupled with the opportunity to profit by suing an insurance company for bad faith, plaintiffs with an excellent case against a lawyer that is eminently collectible, will gamble a sure thing for a big win.

In Samer Gandor v. Torus National Insurance Company, d/b/a State National Insurance Company, Slip Copy, 2015 WL 6043621 (D.Mass., 10/15/2015) Plaintiff Samer Gandor (“Plaintiff”) sued Torus National Insurance Company, d/b/a State National Insurance Company (“Torus”), for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen. Laws ch. 93A. Torus asserts a counterclaim for declaratory judgment.

This case arose out of Torus’s refusal to defend and indemnify Plaintiff’s previous attorneys for legal malpractice under the terms of two professional liability insurance policies. Torus moved for summary judgment.

BACKGROUND

Prior to 2010, Attorney Alan Shocket was a principal of the law firm Shocket & Dockser, LLP. Shocket & Dockser employed as an associate attorney Adam Lowenstein, who mishandled a real estate litigation matter in Massachusetts Superior Court in 2009. The client in that matter was Samer Gandor.

In the underlying case, Lowenstein failed to comply with certain procedural requirements for appealing a zoning decision that was adverse to Gandor and his plans to renovate a building in Woburn. Recognizing his error, Lowenstein agreed to dismiss the appeal with prejudice in September of 2009. Lowenstein left Shocket & Dockser that same year.

In January of 2010, Alan Shocket dissolved Shocket & Dockser and formed a new firm called Shocket Law Office, LLC. On January 12, 2010, shortly after leaving Shocket & Dockser, Lowenstein wrote a letter to Shocket in which he described the error he had made in handling Gandor’s zoning appeal. On January 22, 2010, Shocket sent a letter to Gandor in which Shocket communicated his opinion that Lowenstein’s errors did not amount to malpractice. Also in 2010, Torus issued a claims-made professional liability insurance policy to Shocket Law Office with a policy period of November 27, 2010 to November 27, 2011 (the 2010-11 Policy).

In July 2011, Gandor filed a malpractice suit against Lowenstein and Shocket Law Office in Massachusetts Superior Court (the “Lowenstein Action”) for Lowenstein’s mishandling of the zoning appeal. Upon learning of Gandor’s malpractice action, Shocket Law Office submitted a claim to Torus on the 2010-11 Policy. Torus denied coverage because, in part, Lowenstein was not named as an attorney under the policy, and the underlying conduct was subject to an exclusion. The Lowenstein Action settled in March of 2013. As part of the settlement, Lowenstein and Gandor executed an Agreement for Judgment in the amount of $500,000, and Lowenstein assigned to Gandor any rights against Shocket, Shocket & Dockser, and Shocket Law Office.

Two months later, Gandor filed suit in Massachusetts Superior Court against Alan Shocket individually (the “Shocket Action”). At the time, Shocket Law Office was covered by a claims-made malpractice insurance policy with a policy period of November 27, 2012 to November 27, 2013 (the 2012-13 Policy). The complaint sought relief for Alan Shocket’s failure to insure Lowenstein under his law firm’s malpractice insurance policy. Shocket Law Office filed a claim with Torus. The insurer denied coverage again, noting that coverage could not be created by recasting a previously reported claim as “new and distinct.” Just like in the Lowenstein Action, Shocket agreed to an entry of judgment in the amount of $500,000 and assigned to Gandor all rights to collect on the underlying judgments.

Gandor filed this action on November 13, 2013.

DISCUSSION

Massachusetts law regarding the interpretation of insurance policies governs this diversity action. Insurance policies in Massachusetts are construed in accordance with general principles of contract interpretation. Terms are given their ordinary meanings. When the insured party shows a possibility that a claim falls within the coverage, the burden shifts to the insurer to show that an exclusionary provision applies. If free from ambiguity, an exclusionary clause, like all other provisions of an insurance contract, must be given its usual and ordinary meaning.

Torus argues that coverage under the 2010-11 Policy is precluded by Exclusion II(B). That exclusion precludes insurance coverage for: “[A]ny CLAIM arising out of any WRONGFUL ACT occurring prior to the effective date of this policy if … the INSURED at or before the effective date knew or could have reasonably foreseen that such WRONGFUL ACT might be expected to be the basis of a CLAIM. However, this paragraph B does not apply to any INSURED who had no knowledge of or could not have reasonably foreseen that any such WRONGFUL ACT might be expected to be the basis of a CLAIM.”

Here, the effective date of the 2010-11 Policy was November 27, 2010; Lowenstein’s mishandling of Gandor’s appeal occurred in 2009. Accordingly, the pertinent inquiry is whether Shocket (the insured) knew or could have reasonably foreseen, prior to November 27, 2010, that Lowenstein’s mishandling of Gandor’s appeal might be expected to be the basis of a claim. Several exhibits reveal that the answer to this question is decidedly affirmative.

Shocket’s testimony showed that he could have reasonably foreseen—and actually did foresee—Gandor’s malpractice claim, as early as January of 2010 and certainly no later than April of that same year. Therefore, the unambiguous language of Exclusion applies. The 2010-11 Policy did not cover Lowenstein’s mishandling of Gandor’s zoning appeal.
In an attempt to salvage his claim, Gandor alleges that Torus erroneously applied the 2010-11 Policy to the claim made by Shocket Law Office in 2013. The first claim at issue was the Lowenstein Action, filed in 2011, in which Gandor sought damages for Lowenstein’s failure to comply with certain procedural requirements for appealing an adverse zoning decision.  This claim resulted in a $500,000 judgment against Lowenstein. According to the language of both the 2010-11 and 2012-13 Policies, the second claim is considered to have been made alongside the first one. The 2010-11 Policy was the appropriate instrument, and the Exclusion applies to the second claim as well as the first. Coverage was appropriately denied.

As explained above, Torus properly denied coverage for the two claims at issue in this case.

ZALMA OPINION

The insured duped the plaintiff into letting him go and take a chance against the insurer. He lost and now can’t collect the $500,000 judgment. Greed makes bad choices.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Suing an Insurance Company Can be Expensive

An Occurrence Is a Single Unified Event

Insurers Attempt to Avoid Defense Fails

Liability insurance is a contract containing multiple promises including the promises to defend and indemnify the insured. The promises to defend and indemnify can be avoided by other contract terms like exclusions, limitations and conditions.

In American Cas. Co. of Reading, P.A. v. Gelb, — N.Y.S.3d —-, 2015 WL 5972106 (N.Y.A.D. 1 Dept.), 2015 N.Y. Slip Op. 07531 (10/15/2015) the defendants were former directors and officers of Lyondell Chemical Company who seek insurance coverage for their defense of an adversary proceeding commenced by the creditors committee in Lyondell’s bankruptcy proceeding. The bankruptcy proceeding was commenced in 2009 by Lyondell, a company with which it had merged in 2007, and about 90 of their subsidiaries. Before the merger was consummated, a shareholder brought a putative class action challenging the merger price and alleging that Lyondell’s directors and officers had failed to get the best price possible for the company.

Plaintiffs, insurers of Lyondell, provided a defense for the directors and officers in that action, which eventually was dismissed (Lyondell Chem. Co. v. Ryan, 970 A.2d 235 [Del 2009]).

For the purpose of prosecuting the adversary proceeding, the creditors committee’s claims were assigned to a litigation trust, which alleged in its complaint that the merger price set by the directors resulted in a windfall to them, that the price was derived from misleading financial data, and that the financing arranged to consummate the merger was over-leveraged, leading to the bankruptcy.

Defendants seek coverage for the adversary proceeding under excess directors and officers liability policies issued by plaintiffs to Lyondell in various layers over the course of two separate policy periods running from 2006 to 2007 and from 2007 to 2013. The primary insurer provided a defense for the directors and officers in the adversary proceeding. However, after the primary policies were exhausted and the defense was tendered to plaintiffs, plaintiffs commenced this action for a declaration that they have no obligation to defend defendants in that proceeding.

Plaintiff claimed that the merger litigation that commenced in 2007 and the adversary proceeding that commenced in July 2009 arose out of the merger transaction and therefore must be treated as a single, unified claim that came into existence when the merger litigation was commenced, and that since that claim came into existence during the 2006–2007 policy period, it is subject to the exclusion in the 2006–2007 policies for claims brought by or on behalf of Lyondell against any of its own directors or officers (the “insured versus insured” [IVI] exclusion).

In April 2009, the IVI exclusion was narrowed so that it no longer excluded claims brought or maintained by, inter alia, a bankruptcy creditors committee.

The court rejected plaintiffs’ argument that the merger litigation and the adversary proceeding constitute one continuous claim. Noting that the two proceedings, while arising from the merger, are wholly different, with different parties, different allegations, and different causes of action.

In essence, the merger litigation was premised on the allegation that the price per share set by Lyondell’s directors and officers was too low, while the adversary proceeding is premised on the allegation that the price was in a sense too high, supported by unsustainable revenue projections and requiring excessive leverage by Lyondell to finance and consummate the transaction.

Thus, the adversary proceeding claim came into existence in July 2009, after the policy wording was amended, and is not subject to the IVI exclusion.

ZALMA OPINION

An occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In this case the insurers tried to avoid coverage by forcing a second litigation into the same occurrence as an earlier litigation to take advantage of an exclusion that did not exist in the newer suit. It failed because the allegations were different and arose from a different factual situation.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on An Occurrence Is a Single Unified Event

Public Adjuster With Contingent Fee Contract Cannot Testify as an Expert

Expert Must Be Impartial

Public adjusters almost always work on a contingency fee basis by entering into a contract with the insured to take an assignment of a percentage of whatever is paid by the adjuster’s client’s insurer. That fee arrangement makes the interest of the insured and public adjusters equal and gives the public adjuster a financial incentive to increase the benefits available to the insured who hired the public adjuster.

The fee arrangement is usually approved by the Department of Insurance in the state where the adjuster works and is, per se, legal. However, when the public adjuster attempts to act as an expert witness in a trial by the insured against the insurer, problems arise.

In Everett Cash Mutual vs. Bonnie Sue Gibble, In the Court of Common Pleas of Lycoming County, Pennsylvania, NO. 01-01,640 the court was faced with a motion to exclude expert Testimony of Patrick Cassidy, Defendants’ proposed expert witness.

BACKGROUND

When Ms. Gibble’s furnace emitted soot into her home and the claim made with her homeowner’s insurance company, was not handled to Ms. Gibble’s satisfaction. Ms Gibble sought the assistance of Mr. Cassidy, a public adjuster, and signed a “Public Adjustor Contract”, retaining Cassidy Public Adjustment “to advise and assist in the adjustment of the insurance claim”, agreeing to pay a contingent fee comprising a certain percentage “of the amount paid by the insurance companies in settlement of [the] loss and necessary expenses.”

After making several payments, including one which it offered as payment in full satisfaction of the claim, which payment Defendants refused to accept, Plaintiff filed the instant action, seeking a declaratory judgment that it had fulfilled all of its obligations under the insurance contract. Defendants counter-claimed for breach of contract, negligence, intentional infliction of emotional distress, unfair trade practices act violations and bad faith, and also joined the adjusters brought in by the insurance company as additional defendants. In support of their claims, Defendants plan to introduce the testimony of Mr. Cassidy as an expert witness, and in that regard have provided Plaintiff with a copy of his report, in which he opines, inter alia, that Plaintiff and Additional Defendants “did not follow proper claims practice.”

Gibble, in response, argue that Mr. Cassidy is acting as an expert in his role as a consultant, at the rate of $75 per hour, and only his work as a public adjuster is subject to the contingent fee agreement.

The long established rule of law that a special contract to pay more than the regular witness fees in ordinary cases is void for want of consideration and as being against public policy.   Section 552 of the Restatement of Contracts, which provides, in subsection (2): “[a] bargain to pay an expert witness for testifying to his opinion a larger sum than the legal fees provided for other witnesses is illegal only if the agreed compensation is contingent on the outcome of the controversy.”

It could be argued that the contract involved in the instant case is distinguishable from the normal contingent fee-witness contract since it segregates the services of appellee, the objectionable contingency arising only from his duties involved in the preparation of the appraisal and not from his contractual duties as a potential witness. Such an approach, however, does not, in fact, address itself to the actual concern of the courts in prohibiting enforcement of such contracts, for the segregation here is merely one of form, the bias feared in the preparation of the appraisal inevitably coloring, if not constituting the sole basis for, the testimony which the parties assume will follow.

In In re Mushroom Transportation Co., Inc., Debtor, 70 B.R. 416 (E.D. Pa. 1987),  the court precluded an expert witness from testifying at trial because of a contingent fee arrangement whereby the expert had been hired to assist the debtor in a bankruptcy proceeding in collecting monies allegedly due the debtor from a certain party.

The testimony of interested lay witnesses about historical facts generally does not pose a risk of the same proportion as that of an expert with a contingent financial interest. The concealment of a contingent financial arrangement with a witness would be unconscionable. With the disclosure of such an arrangement, an opinion proffered by an expert would likely be so undermined as to be deprived of any substantial value. See Gediman v. Sears, Roebuck & Co., 484 F. Supp. 1244, 1248 (D. Mass. 1980) that held that an agreement to give an opinion on a contingent basis, particularly on an arithmetical scale, attacks the very core of expert testimony.  Jurors, however, routinely take and assess the testimony of parties and persons related to them who have a direct financial interest in the outcome of a case. With many witnesses and, of course, parties, interest is unavoidable. An expert, however, whose only relevance is his expertise, should not have that expertise flawed.

As a result the Court found Defendants’ attempt to segregate Mr. Cassidy’s work as an expert witness from his work as a public adjuster “merely one of form”. It is also of no consequence that the public adjuster contract was entered into prior to the commencement of litigation.

Mr. Cassidy’s preparation of the expert report followed the commencement of litigation and, as Defendants admit, Mr. Cassidy will be entitled under the contingent fee agreement to a percentage of any damages awarded for their loss. The Court concluded, therefore, that the opinion rendered in the report is “so undermined as to be deprived of any substantial value”. While he may testify as a fact witness with respect to his adjuster role, Mr. Cassidy must be precluded from giving any opinion as an expert witness.

ZALMA OPINION

A contingent fee can bring the expert much more than an hourly rate would provide. Because of the opportunity of a windfall public adjusters and lawyers are willing to gamble they will get nothing for their efforts in exchange for the opportunity of a windfall. That opportunity colors the testimony a public adjuster, who will profit from a verdict, as an expert and such testimony must be precluded.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Public Adjuster With Contingent Fee Contract Cannot Testify as an Expert

More than Judgment Is More Than Enough

Greed Succeeds But Still Not Enough

Alabama has an interesting procedure when dealing with underinsured motorist (UIM) benefits. If the Underinsured Motorist’s insurer offers its limits and the UIM insured does not want to accept the offer the UIM insurer can pay the amount of the offer to its insured and opt out of the case. The UIM insured, as a result, has the benefit of the offer and can take the chance of trial. If a win at trial they keep give the UIM insurer the amount collected and keep any excess. The problem arises when the trial gives them less than the offer.

In State Farm Mut. Auto. Ins. Co. v. Brown, — So.3d —-, 2015 WL 5918750 (Ala.Civ.App., 10/09/2015) Insureds brought action against automobile insurer to recover underinsured motorist (UIM) benefits for punitive damages not covered by tortfeasor’s liability policy, even though insurer had advanced liability coverage limits to insureds. State Farm Mutual Automobile Insurance Company (“State Farm”) appeals from a judgment entered by the Mobile Circuit Court against State Farm and in favor of Jacqueline Brown and Cleo Brown.

The Browns sued John Joseph Kramer, seeking compensatory and punitive damages after the Browns had been involved in an automobile accident with Kramer. The Browns were insured by a State Farm policy, which provided underinsured-motorist (“UIM”) coverage for the Browns. Accordingly, the Browns also named State Farm as a defendant, seeking to recover UIM benefits. Kramer’s liability insurer, USAA Casualty Insurance Company (“USAA”), offered to pay the Browns $200,000, which represented the policy limits of Kramer’s policy, in full settlement of the Browns’ claims against Kramer.

State Farm, pursuant to the Alabama Supreme Court case Lambert v. State Farm Mutual Automobile Insurance Co., 576 So.2d 160 (Ala.1991), agreed to pay the Browns the $200,000 offered by USAA in order to secure its subrogation rights against Kramer. In doing so, State Farm substituted its funds for the $200,000 the Browns would have received in settlement from USAA. State Farm also elected to “opt out” of the litigation between the Browns and Kramer.

The Browns’ claims against Kramer proceeded to trial, and the jury rendered a verdict in favor of the Browns in the total amount of $90,000, which consisted of $80,000 in compensatory damages and $10,000 in punitive damages. Kramer’s liability policy with USAA did not provide coverage for punitive damages. Accordingly, USAA deposited a total of $80,000 with the trial court.

The Browns conceded that State Farm was entitled to the $80,000 based on the substitute payment it had made. A dispute, however, arose between the Browns and State Farm regarding the $10,000 punitive-damages award.

According to the Browns, because Kramer’s liability policy excluded coverage for punitive damages, Kramer was uninsured for such damages, and, thus, they argued, State Farm was required to pay $10,000 to the Browns pursuant to the Browns’ UIM coverage. State Farm, on the other hand, asserted that the Browns were entitled to retain all of the $200,000 that State Farm had advanced to the Browns which exceeded the total verdict by $110,000. Thus, State Farm argued, the Browns had already recovered more than the total amount of the verdict, and State Farm was not required to pay an additional $10,000.
The trial court agreed with the Browns and entered a judgment against State Farm in the amount of $10,000, plus interest. State Farm appealed.

ANALYSIS

USAA offered to pay the Browns $200,000 in full settlement of all of the Browns’ claims. State Farm advanced those funds to the Browns. At that point, the Browns had recovered all the funds to which they ultimately became legally entitled as a result of the jury’s verdict. Indeed, the Browns recovered more than the amount to which they were legally entitled, as State Farm concedes that the Browns had the right to keep the entire $200,000 advance made. Accordingly, we agree with State Farm’s argument that it was not required to pay the Browns an additional $10,000.

In Alabama, Omni Insurance Co. v. Foreman, 802 So.2d 195 (Ala.2001), holds that UIM benefits can include punitive damages that are owed by an underinsured tortfeasor. In the present case, although the Browns were legally entitled to recover punitive damages from Kramer, the Browns unquestionably received, pursuant to State Farm’s advance, more than the total sum of damages to which they were entitled.

Neither the letter nor the spirit of the Uninsured Motorist Act supports an additional award to the Browns of $10,000 from State Farm. By making an advance payment in accordance with Lambert, a UIM carrier assumes the risk that it may not be fully reimbursed by the tortfeasor’s liability-insurance carrier, but it does not assume the risk that it will become obligated to pay the insured UIM benefits for damages for which the insured has already been fully indemnified.

Thus, the trial court’s judgment against State Farm was reversed.

ZALMA OPINION

The procedure set up by the Alabama Supreme Court Worked. State Farm took a chance that the tort case the Browns’ brought was worth $200,000 or more. The Browns agreed and took their case to trial only to get a verdict of $90,000, $10,000 of which was punitive damages. They demanded an extra $10,000 from State Farm although they had already received more than the judgment and even convinced the trial court. The Court of Appeal used logic and law and refused to allow a bonus when the UIM insureds had already been fully indemnified.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on More than Judgment Is More Than Enough

You Only Get What You Order

Request for “Full Coverage” Is Not Specific Enough to Hold Agent Liable

It is common knowledge that most people buy insurance based on price and do not read anything provided to them by their insurance company. It is only when there is a loss for which there is no coverage that the insured then claims that their insurance agent or broker failed to properly protect them. Rarely do these attempts succeed. When they do it is because they set up a special relationship with their agent or broker.

In Watson v. Elswick, Not Reported in S.W.3d, 2015 WL 5896995 (Ky.App., 10/09/2015)  the Kentucky Court of Appeal was faced with an attempt to obtain from an insurance agent what the insured did not get when they failed to buy underinsured motorist (UIM) coverage.

FACTS

George Stephen Watson and Charmin Watson’s adult son, Dustin, was injured in an automobile accident. After discovering that their insurance policies did not include underinsured motorist (UIM) coverage, the parents filed a complaint alleging negligence against their insurance agent, Kenneth Elswick. The Scott Circuit Court granted summary judgment to Elswick.

Elswick is an agent for Kentucky Farm Bureau Insurance Company. The Watsons had been his clients for twenty-six years. According to Watson, he asked Elswick on several occasions if they had “full coverage” automobile insurance and was assured that they had “the best insurance money can buy.” Neither of the Watsons ever specifically asked about or requested UIM coverage, and testified that they did not even know what it was prior to their son’s accident.

At the time of Dustin’s accident in 2006, the Watsons had two insurance policies covering three vehicles. Neither policy included UIM coverage. Dustin, who was twenty-three years of age, resided with his parents. He was not a named insured on either of the policies. Dustin was a passenger in a pickup truck belonging to a third party that went off the road and down a hillside. Dustin sustained severe injuries to his arms. The Watsons’ attorney advised them to check with their insurance agent to see if they had UIM coverage. Elswick informed the Watsons that they did not have UIM coverage.

The trial court’s grant of summary judgment was based in part on its determination that, under the factual circumstances of this case, Elswick had no duty to advise the Watsons regarding the availability and function of UIM coverage.

STATUTORY REQUIREMENT

The question of duty presents an issue of law.  Generally, no affirmative duty to advise is assumed by mere creation of an agency relationship. A Kentucky statute requires that “Every insurer shall make available upon request to its insureds underinsured motorist coverage, whereby subject to the terms and conditions of such coverage not inconsistent with this section the insurance company agrees to pay its own insured for such uncompensated damages as he may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon, to the extent of the underinsurance policy limits on the vehicle of the party recovering.”

The statutes also provide that “[e]xcept where the maximum limits of coverage have been purchased, every notice of first renewal shall include a provision or be accompanied by a notice stating in substance that added uninsured motorists, underinsured motorists, and personal injury protection coverages may be purchased by the insured.”

ANALYSIS

In Kentucky UIM coverage is optional, not mandatory. The legislature obviously could have made underinsured coverage mandatory but elected to require it to be furnished only “upon request.”

There are numerous optional coverages available. For example, upon payment of additional premium, higher limits may be provided; coverage for various deductible amounts on collision insurance; reimbursement for car rentals while your car is being repaired; reimbursement for towing and labor; accidental death and dismemberment can be included; theft of radio and sound equipment coverage is available; reimbursement for loss of wages during disability is another option and many more options. There is no reasonable way for a court to conclude that a request for “full coverage” would include all or even any optional coverages, unless specifically requested. “Full coverage,” as used in relation to automobile or motor vehicle insurance, means insurance in such amount and for such coverage as is made mandatory by statute.

The court’s examination of the policies in the record showed that the notice provision required by the statute about uninsured and UIM coverage was included in a separate paragraph with an italicized heading stating “You Should Review Your Coverage”  The policies at issue complied fully with the statutory requirements.

In this case, there was no evidence that the Watsons paid Elswick any consideration beyond the policy premiums. Their twenty-six year course of dealing with Elswick was lengthy, but there was no evidence that they sought out and relied on his advice beyond the general request for “full coverage,” which precedent establishes was inadequate to trigger a duty to advise.

Indeed, the deposition testimony indicates that the Watsons never spoke with Elswick about any specific aspects of their insurance coverage beyond such generalities as “full coverage.” Finally, there is no evidence that the Watsons made a clear request for advice regarding their insurance coverage.

The trial court correctly ruled as a matter of law that Elswick did not breach statutory or common law duties to advise.

ZALMA OPINION

People who want an insurance agent to provide it with direct advice and counsel concerning the insurance they should buy must set up a relationship with the agent, agree to pay the agent for the service, and then take the advice given. If no, if price is all the insured cares about, then the insured must live with the coverage purchased. In this case the insureds ignored the advice in the policy about the availability of UIM coverage and then tried to blame their agent for not acquiring for them the coverage they did not order.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on You Only Get What You Order

Zalma’s Insurance Fraud Letter — 10-15-2015

The Essential Resource For The Insurance Fraud Professional

A ClaimSchool ™  Publication, Written by Barry Zalma, Esq., CFE
©  2015 ClaimSchool, Inc. & Barry Zalma
Volume 19, No. 20 –  October 15, 2015

Subscribe to e-mail Version, it’s Free! or read at http://www.zalma.com/ZIFL-CURRENT.htm 
Go to my blog Zalma On Insurance at http://zalma.com/blog

Go to Zalma Books – E-Books and Articles by Barry Zalma – http://www.zalma.com/zalmabooks.htm

Zalma’s Insurance Fraud Letter – October 15, 2015

Insurance Fraud & Ethics

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:
1.    The FBI and Medical Equipment Fraud
2.    Proformative Academy
3.    Ethics & Fraud Investigation
4.    New From Barry Zalma & E-Books from Barry Zalma
a.    Insurance Law
b.    Insurance Fraud and Weapons to Defeat Fraud
c.    Getting the Whole Truth
d.    Random Thoughts on Insurance – Vol. III
5.    Failure to Answer Questions at EUO Defeats Claim.
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.
ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

New to the Blog are Videos called “Insurance 101″ that explain in brief video presentations major issues in insurance and insurance claims handling adapted from “Insurance Claims: A Comprehensive Guide.” I intend to post a video five days a week along with my regular blog posts summarizing new appellate insurance coverage decisions. The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Insurance 101 – Volume 9 – What Kind of Investigation Needed to Determine Coverage? – October 14, 2015
•    Mistake of Legal Effect of Agreement Not Enough to Reform a Contract – October 14, 2015
•    Insurance 101 – Volume 8 – The Difference Between Property & Liability insurance – October 13, 2015
•    Follow Rules or Else! – October 13, 2015
•    Insurance 101 – Volume 7 – What Is Liability Insurance? – October 12, 2015
•    Actual Controversy Required for Declaratory Relief – October 12, 2015
•    Insurance 101 – Volume 6 – Conditions – October 9, 2015
•    $40 Million Bad Bet – October 9, 2015
•    Insurance 101 – Volume 5 – Adjusting and Ethics – October 9, 2015
•    Insurance 101 — Important Insurance Terms — Volume 4 – October 8, 2015
•    Insurance 101 — What Is Insured By a First Party Property Policy – October 8, 2015
•    Court Rules in part in Favor of Defendant Who Defaulted – October 8, 2015
•    Insurance 101 – Video 2 – Actual Cash Value – October 7, 2015
•    McCarran-Ferguson Act Prohibits RICO Action Against Insurer – October 7, 2015
•    What Is Insurance? – October 6, 2015
•    Insured Must Rebuild to Collect Holdback – October 6, 2015
•    Lie to Your Insurer at Your Risk – October 5, 2015
•    Materiality Needed to Rescind a Policy – October 2, 2015
•    Zalma’s Insurance Fraud Letter – October 1, 2015 – October 1, 2015
•    When a Court Errs by Ignoring a Full Credit Bid – September 30, 2015

NEW FROM NATIONAL UNDERWRITER
Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

New From The American Bar Association
How to Determine the Proper Measure of Damage to Real and Personal Property
This book was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) and includes cases dealing with the use of diminution in value as a method of determining the amount of loss incurred by a plaintiff seeking indemnity for damage to real or personal property.
This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.
ISBN: 978-1-63425-295-8, Product Code: 5190524, 2015, 235 pages, 7 x 10, Paperback
Available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
Barry Zalma
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.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.html 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.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

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Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter — 10-15-2015

Mistake of Legal Effect of Agreement Not Enough to Reform a Contract

Poor Lawyering Can’t Be Cured By Changing Contract

Greed, including the need seek punitive damages from an insurer, results in settlements where the defendant assigns its rights to sue its insurer, often results in poorly drafted agreements. The Supreme Court of Oregon, in A&T Siding, Inc. v. Capitol Specialty Ins. Corp., — P.3d —-, 2015 WL 5920072 (Or., 10/08/2015) was asked by the United States Court of Appeals for the Ninth Circuit to resolve Oregon law whether  a settlement that included an unconditional release and covenant not to execute against the builder could be amended to force an insurer to pay the agreed settlement that the original agreement prohibited.

After losing in its suit against the insurer because of the unconditional release, the homeowner’s association and the builder amended their settlement agreement to eliminate the unconditional release and covenant not to execute. They lost again in federal court seeking damages based on the amended agreement and pn appeal, the Ninth Circuit certified a question to the Oregon Supreme Court asking whether the homeowner’s association and the builder could amend their settlement agreement in such a way as to revive the liability of the builder’s insurer.

BACKGROUND

The Brownstone Homes Condominium Association discovered defects in the construction of its 26–building condominium complex, including wood decay, flashing delamination, and water penetration. Brownstone estimated that A & T’s share of the cost of repair was approximately $2 million. A & T was insured by Capitol Specialty Insurance Corporation and Zurich Insurance.

Brownstone eventually settled with A & T and Zurich. The settlement agreement included the following provisions that are relevant to the certified questions. First, A & T agreed to a $2 million stipulated judgment against it and in favor of Brownstone, $900,000 of which would be deemed satisfied by Zurich’s payment to Brownstone of that amount on A & T’s behalf. Second, Brownstone covenanted that “in no event will it execute upon or permit the execution of the stipulated judgment against A & T or its assets.” Instead, the parties agreed that Brownstone would be entitled “to seek recovery of the unexecuted portion of the judgment against Capitol.” The parties mutually agreed to release each other from “all past, present and future claims” arising out of the dispute. Capitol—whose liability is entirely derivative of its insured’s— claimed it was likewise released from any liability.

The trial court granted Capitol’s summary judgment motion, and entered judgment against Brownstone.

After judgment had been entered, Brownstone and A & T executed an “addendum” to their settlement agreement.  The addendum thereafter eliminated the original assignment of A & T’s claims against Capitol and replaced it with a requirement that A & T itself pursue any claims it might have against Capitol under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional covenant not to execute against A & T with a narrower promise not to execute against A & T while A & T’s action against Capitol was pending. The addendum further declared that Brownstone would provide a full satisfaction of the judgment against A & T upon payment of any proceeds obtained in the action against Capitol to Brownstone. Finally, the addendum replaced the original unconditional release of “each and every other settling party” with a release only of Zurich.

The District Court concluded that it would not “enforce an agreement entered into by the parties the express intent of which is to circumvent the finality of a valid order, and resulting judgment, that bar[s] the claim * * * sought to be asserted,” because doing so would undermine the finality of court actions.

ANALYSIS

No one contests the right of Brownstone and A & T to negotiate an amendment to the original settlement agreement. A & T’s sole argument appears to be that it and Brownstone, in effect, reformed the original settlement agreement, even if they did so without calling on the equitable authority of a court to effectuate that remedy. As A & T sees things, the original agreement contained a “mistake of law,” in that the parties “misapprehended” the legal effect of what they had agreed to and did not intend to execute an unconditional release and covenant not to execute that would relieve A & T—and, ultimately, Capitol—of any further liability. The negotiated reformation, A & T contends, rendered the original agreement void, so that any liability to which A & T agreed under the later, reformed agreement was not a new contractual liability, but instead related back to the underlying Brownstone litigation, which was covered by Capitol’s policy.

Reformation, strictly speaking, is an equitable remedy by which a court may revise the written expression of an agreement to conform to the intentions of the parties to it. Modern reformation doctrine provides that the judicial remedy is available when the parties, having reached an agreement and having then attempted to reduce it to writing, fail to express it correctly in the writing. Their mistake is one as to expression — one that relates to the content or effect of the writing that is intended to express their agreement — and the appropriate remedy is reformation of that writing properly to reflect their agreement.

According to A & T, even though the parties did not obtain the judicial remedy of reformation, they effected their own private reformation by executing the addendum to the original agreement. Because reformation is used to revise the written contract so that it conforms to the antecedent agreement, there can be no reformation without such an antecedent agreement.  The equitable doctrine applies when the parties have reached a mutual understanding as to the material terms of a contract, but that mutual understanding is confounded by an error in the form of the written terms of that contract. In this case, A & T makes no effort to identify the terms of its agreement with Brownstone that were not given proper form in the written settlement.

That leads to the second element of reformation, namely, a mistake in the drafting of the agreement such that it does not accurately express the parties’ actual agreement.  In this case, A & T argues that its original agreement contained a mutual mistake of law, in the sense that it and Brownstone did not anticipate the legal consequences of the original settlement agreement as they drafted it. As A & T explains, “Brownstone and A & T believed their original agreement was legally sufficient to seek recovery from Capitol.” That belief turned out to be incorrect, at least as determined by the trial court in the state garnishment proceeding.

In the words of the addendum to the settlement agreement, “the trial court’s decision in favor of Capitol [was] contrary to the settling parties’ intent.”

In Oregon there are two well-defined classes of mistakes common to parties entering into contracts: (1) A mistake in law as to the legal effect of the contract actually made by them; and (2) a mistake in law in reducing to writing the contract, whereby it does not carry out or effectuate the intention of the parties. In the former the contract actually entered into will seldom, if ever, be relieved against. In the second class the mistake is not in the contract, but terms are used or omitted which give the instrument a legal effect not intended by the parties, and different from the contract actually made; and here equity will always grant relief, unless barred on some other ground.

In this case, A & T’s own description of the transaction places it squarely in the category of mistakes for which the equitable remedy of reformation is not available. There is no suggestion that Brownstone and A & T negotiated an agreement that was not accurately or adequately described in the terms of the original settlement. Rather, A & T asserts only that the parties misunderstood the legal consequences of the settlement agreement to which they agreed.

The underlying historical and equitable rationale for reformation is that parties should not be held hostage to a mistake in drafting. In this case, there was no mistake in drafting, only a mistake in predicting how a court at some time in the future would rule on the legal effect of what the parties unquestionably agreed to. Equity, at least as it is exercised under the doctrine of reformation, has no role in remedying the parties’ mistaken prediction of court decisions.

A & T’s theory of reformation does not justify treating the addendum as relating back to the original settlement agreement.

ZALMA OPINION

It is difficult to support multiple efforts in multiple courts in an attempt to cure the poor legal drafting of a release and assignment. This litigation is a model for those who wish the U.S. to adopt the English rule that the losing party must pay all costs incurred by the winner including their reasonable attorneys fees incurred defeating what turned out to be a spurious lawsuit. The plaintiffs are not without a remedy, they can sue their lawyers, and probably should.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Mistake of Legal Effect of Agreement Not Enough to Reform a Contract

Follow Rules or Else!

Tardy & Incomplete Expert Report Stricken

The bane of every expert witness is the client who seeks an expert report shortly before the deadline set by the court. I have been called two hours before the deadline, sometimes a day before, and sometimes a week before. I turn those done because there is just not enough time to read the material and prepare a report even when I keep my case load small to allow me to time to work on cases assigned to me.

In The Phoenix Insurance Company, … and Cantex, Inc., Third Party Plaintiff, v. Scottsdale Insurance Company, and Continental Casualty Company, Third Party Defendants.Slip Copy, 2015 Wl 5864868 (D.Colo. 10/5/2015) Scottsdale Insurance Company fell into the trap of retaining an expert late. Cantex, Inc. (“Cantex”) moved the court to Strike Scottsdale Insurance Company’s Expert Witness Disclosures and the court ruled on the motion.

BACKGROUND

This case arises from disputes between insurers over coverage related to a construction defect case tried in Mohave County, Arizona state court. As pled in Cantex’s third-party Complaint, Cantex sued and obtained judgment against RBR Construction, Inc. (“RBR”) and Concrete Management Corporation (“CMC”) for provision of defective concrete in a construction project (“Underlying Litigation”).  After the judgment, RBR, CMC, and Cantex reached an agreement whereby RBR and CMC assigned their rights under their respective insurance policies at issue in this litigation to Cantex.

Cantex filed its third-party Complaint against Scottsdale Insurance Company (“Scottsdale”), alleging that Scottsdale failed to provide indemnification due on excess insurance policies issued to RBR. Scottsdale Insurance Company (“Scottsdale”) filed a motion to dismiss the third-party breach of contract and bad faith claims asserted by Cantex against Scottsdale.(the “Motion to Dismiss”).

Relevant Expert Disclosures and Cantex’s Motion to Strike

Cantex disclosed Charles Miller (“Mr. Miller”) as an expert witness. Mr. Miller’s expert report focused on whether insurers Continental Insurance Company and Continental Casualty Company (collectively, “CNA”) and Amerisure Insurance Company (“Amerisure”) complied with applicable insurance industry standards in handling claims for insurance coverage by RBR.

Scottsdale served a tardy “Expert Disclosure” designating Allan Windt (“Mr. Windt”) as someone “who may present expert testimony at trial, either in rebuttal or direct. The disclosure stated that Mr. Windt is an expert in “excess insurance,” and would be expected to testify “regarding triggering events and exhaustion of coverage triggering excess coverage.” Scottsdale, although tardy, served its “Supplemental Expert Disclosure,” attaching Mr. Windt’s expert report a month late.

Mr. Windt’s expert report opines that the Scottsdale policy at issue is excess coverage, that excess insurance coverage is not triggered until primary coverage is exhausted, and that RBR’s primary insurance coverage was sufficient to satisfy the judgment entered against RBR in the underlying litigation.

Scottsdale contended that, whether offered as a “rebuttal” witness or “otherwise,” Scottsdale should be permitted to call Mr. Windt to testify to help “explain to a jury the nature of an excess carrier’s obligations given the underlying coverage” involved in this litigation. Finally, in explaining Scottsdale’s belated designation of Mr. Windt and subsequent tardy disclosure of Mr. Windt’s expert report, Scottsdale points to the fact that Scottsdale only recently became obliged to answer Cantex’s third-party Complaint.

ANALYSIS

The determination as to whether a Rule 26(a) violation is justified or harmless is entrusted to the broad discretion of the court. Woodworker’s Supply, Inc. v. Principal Mt. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999). In exercising this discretion, the court’s consideration is guided by the following four factors: (1) the prejudice or surprise to the impacted party; (2) the ability to cure the prejudice; (3) the potential for trial disruption; and (4) the erring party’s bad faith or willfulness.

Application to Motion to Strike

For the purposes of this Motion, the court will assume, without deciding, that Mr. Windt is appropriately designated as a rebuttal, rather than an affirmative, expert. Even as a rebuttal expert, Scottsdale does not and cannot dispute that Mr. Windt’s expert report was not served until a date more than a month after the court-ordered deadline for such disclosures, and just days before the cut-off for all discovery in this action. In responding to Cantex’s Motion to Strike, Scottsdale has not made any effort to explain this course of conduct.

This court has an independent responsibility for case management and the scheduling orders cannot simply be cavalierly disregarded by counsel without peril. The record before the court indicates that Scottsdale was fully aware of the applicable deadlines set by the Scheduling Order as amended in this action. Counsel for Scottsdale appeared at the Rule 16 conference, and participated in the filing of the proposed Scheduling Order. Counsel for Scottsdale was served with a copy of the court’s order extending the expert deadlines.

Instead of seeking any type of relief from the court, Scottsdale simply identified Mr. Windt as an expert, with no report. Then, again without seeking any permission from the court to modify the date for rebuttal expert disclosures pursuant to Rule 16(b), Scottsdale chose simply to provide belated disclosures characterized as a “Supplemental Disclosure.” Rule 26(a)(2)(B) clearly provides that the disclosure of a retained or specially employed expert must be accompanied by a report that sets forth the following:

  1.  a complete statement of all opinions the witness will express and the basis and reasons for them;
  2. the facts or data considered by the witness in forming them;
  3. any exhibits that will be used to summarize or support them;
  4. the witness’s qualifications, including a list of all publications authored in the previous 10 years;
  5. a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
  6. a statement of the compensation to be paid for the study and testimony in the case.

In addition the expert’s written report also must identify the principles and methods on which the expert relied in support of his/her opinions and describe how the expert applied those principles and methods reliably to the facts of the case relevant to the opinions set forth in the written report. There is, and can be, no real dispute that the disclosure made by Scottsdale failed to even attempt to comply with the requirements for expert reports.

Even when Mr. Windt was identified his disclosure still failed to comply with Rule 26(a)(2)(B). In his belatedly served expert report, Mr. Windt states that he “reviewed the documents” on a purportedly “enclosed list.” Scottsdale does not dispute that the list was, in fact, not enclosed or subsequently provided to Cantex. Therefore, the report as propounded is incomplete to the extent Mr. Windt “read, thought about, or relied upon” undisclosed materials in reaching the “conclusions and opinions [ ] expressed” in his report.

Diligence

Scottsdale attempts to shift responsibility for its failure for timely disclosure on two grounds: (1) the opinions of Cantex’s expert, Mr. Miller, are unclear; and (2) the court had not decided its Motion to Dismiss, so it was not yet required to file a responsive pleading at the time of the rebuttal expert deadline. Neither point is well-taken.

Scottsdale concedes that Mr. Windt has issued a report that is independent from what Mr. Miller opined. To the extent that Scottsdale had those opinions to offer, it is unclear how waiting to seek leave from the court to do so, or failing to seek any guidance from the court regarding that disclosure, was appropriate.

Sanctions

In determining the proper sanction for Scottsdale’s untimely and deficient disclosure, the court must consider (1) the prejudice or surprise to the impacted party; (2) the ability to cure the prejudice; (3) the potential for trial disruption; and (4) the erring party’s bad faith or willfulness. Because Scottsdale served Mr. Windt’s expert report just days prior to the already extended discovery cut-off in this action, and because there is no indication in the record that Scottsdale sought to make Mr. Windt readily available for deposition prior to the expiration of the discovery cut-off, the court found that Cantex has suffered prejudice arising from Scottsdale’s tardy disclosure.

More generally, Scottsdale has not sought to explain how its belated disclosures were harmless and substantially justified, instead focusing on the alleged prejudice to Scottsdale if these untimely disclosures were to lead to Mr. Windt’s preclusion. The court was not persuaded.

Based on the foregoing, the court finds that Mr. Windt’s designation and disclosure should be and is stricken.

ZALMA OPINION

Counsel should always retain experts well before the need for the expert witness designation and give the expert the time needed to prepare a report based upon evidence. Counsel for Scottsdale did not serve Mr. Windt well by designating him late, not giving him enough time to prepare a report, submitted his report late, and did not seek assistance from the court because of the inability to submit a full report timely. As a result Mr. Windt, probably through no fault of his own, must bare the embarrassment of having his testimony excluded.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Follow Rules or Else!

Actual Controversy Required for Declaratory Relief

No Cover No Bad Faith

Plaintiffs and their lawyers prefer to sue insurance companies for bad faith because the fear of tort and punitive damages will often cause an insurer to pay a quick settlement of a tort or uninsured/underinsured motorist (UM/UIM) claims. The wise insurer does not fall prey to the attempt and fights the attempt Aggressively.

In Harding v. Safeco Insurance of Illinois, Slip Copy, 2015 WL 5828136 (M.D.Fla., 10/05/2015) the District Court for the Middle District of Florida was called upon to deal with just such a suit where the defendant insurer, Safeco, refused to fall for the ploy and moved to dismiss the parts of the litigation dealing with bad faith.

FACTS

This case arose out of a motor vehicle accident that occurred on August 15, 2014 in Orange County, Florida. At that time, a non-party driver collided with the vehicle being operated by Heidi Harding, in which Dean Harding and Cindy Harding were occupants. As a result of the collision, Plaintiffs suffered bodily injury. At the time of the collision, Plaintiffs were insured by Defendant, Safeco Insurance of Illinois (“Safeco”), under an automobile insurance policy that provided non-stacked underinsured/uninsured motorist (“UM/UIM”) coverage with limits of $300,000.  The non-party at-fault driver had an insurance policy with limits of $10,000. The insurance company for the non-party driver tendered its policy limits of $10,000 to Plaintiffs. Despite this tender, the non-party driver was underinsured for Plaintiffs’ injuries. Plaintiffs made a claim against Safeco to recover UM/UIM benefits under their insurance policy. Safeco refused to pay.

Plaintiffs’ sued, alleging four claims for relief: Count I asserts a claim for UM benefits; Count II asserts a claim for bad-faith; Count III asserts a claim for unfair claim settlement practices; and Count IV seeks a declaratory judgment to determine liability and damages. Safeco moved to dismiss Counts II, III, and IV of Plaintiffs’ Complaint.

DISCUSSION

Bad–Faith and Unfair Claim Settlement Practices

In Counts II and III, Plaintiffs assert a claim for bad-faith and a claim for unfair settlement practices against Safeco. Under Florida law, a claim for bad-faith does not accrue until there has been a determination of liability and damages in the underlying contract claim. A plaintiff who has an as-yet unresolved claim for UM/UIM benefits is not “entitled to relief” on its claim for bad-faith. Moreover, depending on the outcome of the UM/UIM claim, the plaintiff may never be entitled to relief on his or her bad-faith claim. Thus, it is this Court’s position that until a bad-faith claim has a factual basis to support it–i.e., the plaintiff’s claim for UM/UIM benefits has been resolved in the plaintiff’s favor–such a claim is premature.

Plaintiffs’ claim for unfair settlement practices (Count III) also had to be dismissed on the same grounds. If there is no insurance coverage, nor any loss or injury for which the insurer is contractually obligated to indemnify, the insurer cannot have acted in bad faith in refusing to settle the claim. Similarly, if there is no coverage, then the insured would suffer no damages resulting from its insurer’s unfair settlement practices.

Declaratory Judgment

In Count IV, Plaintiffs request that the Court enter a declaratory judgment determining liability and the total amount of damages suffered by Plaintiffs. Plaintiffs seek this declaratory judgment to avoid re-litigating the issue of liability and damages in their bad-faith claim. Safeco argues that Plaintiffs’ claim for declaratory judgment must be dismissed because no actual controversy exists.

The Court evaluated Plaintiffs’ declaratory relief claim pursuant to the Declaratory Judgment Act. To succeed, the controversy must not be conjectural, hypothetical, or contingent; it must be real and immediate, and create a definite, rather than speculative threat of future injury.

The Court has previously determined that Plaintiffs’ bad faith claim should be dismissed without prejudice as it is premature at this time. Moreover, a majority of courts dismiss similar declaratory judgment claims because no actual controversy exists prior to the determination of the damages suffered in the claim for UM benefits.

Here, the determination of liability and the total amount of damages suffered in the underlying contract claim have not been determined. Thus, as it now stands, there is no actual and definite controversy as the Declaratory Judgment Act does not permit a present attempt to quantify an amount of damages for a future bad faith claim because such a declaration does not resolve the entire controversy of whether bad faith occurred.

ZALMA OPINION

The Florida District Court, with intelligence and common sense, refused to allow the plaintiffs to force a UM/UIM insurer to litigate a claim of bad faith before the UM/UIM claim was resolved. The UM/UIM case remains and if Safeco’s position is upheld there is no possibility of a tot of bad faith claim. The attempt at extortion failed.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Actual Controversy Required for Declaratory Relief

$40 Million Bad Bet

The Insurance Version of a Bird In Hand Is Better than $40 Million in the Bush

When an insurer refuses to defend or indemnify its insured the insured is left to defend itself. The ability to recover tort and punitive damages from an insurer raise a temptation of the parties to take an assignment from the defendant of its right to sue the insurer and give up the opportunity to collect from the defendant. In Bond Safeguard Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa., — Fed.Appx. —-, 2015 WL 5781002 (C.A.11 (Fla.) 10/05/2015) an insurance company, Bond Safeguard Insurance Company and Lexon Insurance Company (collectively, “Bond–Lexon”) fell prey to the temptation, gave up the right to recover more than $40 million from a defendant who had personally guaranteed the debt, and sued the insurer who had refused to defend or indemnify the defendant. After the trial court granted summary judgment Bond-Lexon appealed the district court’s grant of summary judgment in favor of National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) on their declaratory judgment claim to the Eleventh Circuit.

BACKGROUND

This appeal involves an insurance coverage dispute involving a Policy issued by National Union to Land Resource, LLC and its subsidiaries (collectively, “LRC” or “the insured LRC”). The issue is whether a contractual-liability exclusion in the Policy applies to a lawsuit brought by Bond–Lexon against the insured LRC and the subsequent judgment Bond–Lexon obtained against the insured LRC.

The Policy

LRC and its subsidiaries were real estate development companies that contracted with municipalities to develop residential subdivisions in Georgia, Tennessee, and North Carolina. Robert Ward was LRC’s chief executive officer and primary owner.

During the times relevant to this appeal, Ward and LRC had insurance coverage under a Directors, Officers, and Private Company Liability Insurance Policy (the “Policy”) issued by National Union. Under the Policy, National Union agreed to provide coverage for the policy period of March 31, 2008, to March 31, 2009, as follows: “This policy shall pay the Loss of each and every Director, Officer or Employee of the Company arising from a Claim first made against such Insureds during the Policy Period or the Discovery Period (if applicable) … for any actual or alleged Wrongful Act in their respective capacities as Directors, Officers or Employees of the Company.”

National Union’s Policy thus covered losses of LRC’s Ward arising from claims made against him for any “wrongful acts” in his capacity as a director, officer, or employee of LRC.

The Policy also contains various exclusions limiting National Union’s coverage obligations. Relevant to this appeal, Exclusion 4(h) provides that National Union “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured [Ward] … alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement ” (emphasis added).

The Surety Bonds

As a developer, LRC arranged for the design and construction of subdivision improvements such as roads and utilities. The municipalities in which the subdivisions were located required LRC to obtain surety bonds to guarantee performance of LRC. LRC’s failure to complete the improvements as required would constitute a breach of the development contracts with the municipalities.

Bond–Lexon, the plaintiff here, is in the business of issuing surety bonds, including subdivision bonds. Beginning in 2003, Bond–Lexon issued subdivision bonds on behalf of LRC as principal. The bonds, which imposed obligations on Bond–Lexon as surety and LRC as principal, served to guarantee LRC’s timely completion of the subdivision improvements. If LRC defaulted, the bonds required Bond–Lexon to complete the improvements or pay the municipalities the principal amounts of the bonds.

As a prerequisite to issuing any bonds, Bond–Lexon required Ward and LRC to execute a General Agreement of Indemnity (“GAI”). On August 12, 2003, Ward signed the GAI individually and on behalf of LRC. By the summer of 2008, LRC had stopped making progress on the subdivision improvements covered by the bonds.

In October 2008, LRC filed a voluntary Chapter 11 bankruptcy petition, which was later converted to Chapter 7.

Underlying Action and Settlement Agreement

On April 19, 2011, Bond–Lexon filed a two-count complaint in the U.S. District Court for the Middle District of Florida against Ward and other directors and officers of LRC, seeking damages suffered as a result of LRC’s defaults on the projects covered by its development contracts.

After receipt of Bond–Lexon’s initial complaint, Ward demanded coverage from National Union under the Policy. On July 14, 2011, National Union denied Ward’s demand for coverage by virtue of Exclusion 4(h), maintaining that Bond–Lexon’s claims arose out of LRC’s and Ward’s contract liability, and, therefore, fell into the exclusion.

Meanwhile, the parties negotiated a global settlement in LRC’s bankruptcy proceeding. As part of this settlement, Ward assigned to Bond–Lexon his rights to assert any claims against National Union with respect to the Policy and the coverage denials under the Policy. Ward stipulated to a $40,410,729 judgment in favor of Bond–Lexon. In return, Bond–Lexon agreed not to seek to collect this judgment from Ward.

On December 12, 2012, Bond–Lexon filed its second amended complaint and Ward demanded coverage from National Union for the damages alleged in Bond–Lexon’s second amended complaint. National Union denied Ward’s demand for coverage based on Exclusion 4(h) of the Policy. On January 29, 2013, the district court entered a stipulated final judgment for Bond–Lexon against Ward in the amount of $40,410,729. T

Insurance Coverage Dispute with National Union

Bond–Lexon, as Ward’s assignee, then sued National Union for breach of the Policy. Bond–Lexon’s complaint sought a declaratory judgment that Bond–Lexon was entitled to full coverage under the Policy.

The district court granted National Union’s motion for summary judgment. The district court concluded that this phrase in Exclusion 4(h)—“arising out of, based upon or attributable to any … contractual liability”— was unambiguously broad so as to preclude coverage for tort claims that depended on the existence of the insured’s contractual liability under any express contract or agreement. The district court found that Bond–Lexon’s claim depended on—and was not merely incidental to—the contractual liability of Ward and LRC under the GAI, the bonds, and various development contracts.

DISCUSSION

To recover, Bond–Lexon must show that (1) National Union wrongfully refused to defend Ward in the underlying action brought by Bond–Lexon against Ward, (2) National Union had a duty under the Policy to indemnify Ward for the $40,410,729 judgment, and (3) the settlement between Bond–Lexon and Ward was reasonable and made in good faith.

In contrast to the duty to defend, the insurer’s duty to indemnify is determined by the actual facts of the underlying case rather than only the facts and legal theories alleged in the complaint. And the duty to indemnify arises only when the Policy covers the relevant claim against the insured Ward. The parties’ primary dispute on appeal is whether Exclusion 4(h) precludes coverage for Bond–Lexon’s lawsuit resulting in the $40,410,729 judgment against Ward.

Exclusion 4(h) Applies

According to Bond–Lexon, Ward’s negligent misrepresentations induced Bond–Lexon to issue the subdivision bonds and to rely on the GAI as adequate security. Bond–Lexon argues that its claim for fraudulent inducement sounded wholly in tort and not contract, and arose out of Ward’s misrepresentations that necessarily predated the bonds, rather than any subsequent contractual liability of Ward or LRC. Bond–Lexon therefore contends that coverage was not barred by Exclusion 4(h) in Ward’s Policy.

The premise of Bond–Lexon’s claim is that Ward is liable for the losses and expenses Bond–Lexon incurred in settling the municipalities’ claims on its bonds because it was Ward’s negligence that caused LRC and Ward to default on LRC’s contractual obligations to the municipalities in 2008. According to the second amended complaint, Ward’s alleged negligence included hiring incompetent architects to design the improvements, improperly supervising retained professionals and contractors, failing to budget for the payment of architectural services, and concealing LRC’s increasingly dire financial situation. This alleged negligence primarily occurred during the course of LRC’s performance under the development contracts with the municipalities.

Bond–Lexon’s pleading of its claim in tort does not alter the fact that all of its asserted losses arose from the Ward’s and LRC’s contractual breaches of the development contracts and the GAI. The plain language of Exclusion 4(h) does not limit its applicability to loss in connection with only contract claims. Given the Florida Supreme Court’s broad interpretation of the unambiguous phase “arising out of,” the Eleventh Circuit found a sufficient causal connection between Bond–Lexon’s purported negligence claim and the contractual liability of Ward and LRC to enforce the exclusion according to its terms.

Stated another way, under the particulars of this case, the alleged negligence and misrepresentations, which form the basis of the tort claim, had a clear nexus with the development contracts, and the tort claim is inextricably intertwined with the circumstances surrounding the development contracts, plus the resolution of the tort claim requires consideration of the losses and duties under the development contracts.

Because Exclusion 4(h) clearly applied to Bond–Lexon’s claim against Ward, National Union had no duty to indemnify Ward for the value of his settlement with Bond–Lexon.

ZALMA OPINION

The individuals sued by Bond-Lexon did not file bankruptcy. I can only assume they took the assignment because they believed they had no potential to recover any part of the $40 million from the individual guarantors. They took a bet on $40 million and recovered nothing where they might have collected more from the individuals since a competent surety would investigate the assets of the guarantors before entering into a surety bond.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on $40 Million Bad Bet

Court Rules in part in Favor of Defendant Who Defaulted

Pre-Existing Condition or Waiting Period Exclusion

In common use allowing a default to be entered against a defendant is tantamount to admitting that the allegations of the complaint are true. However, courts have discretion to review the facts and rule contrary to the implied admissions if justice requires.

HCC Life Insurance Company asked the District Court for the District of Colorado to enter judgment against Patrick McGoldrick, requesting an order declaring that its Short Term Major Medical Insurance Policy issued to Defendant excludes coverage for metastatic melanoma in his right leg.  In HCC Life Insurance Company v. Patrick Mcgoldrick, Slip Copy, 2015 WL 5834765 (D.Colo., 10/07/2015) the court ruled on the request for default judgment.

PROCEDURAL BACKGROUND

On May 20, 2015, Plaintiff filed a Complaint for Declaratory Judgment, seeking an order from this Court declaring that Plaintiff has no duty to provide payment for Defendant’s treatment related to the diagnosis of metastatic melanoma. Defendant was properly served but filed no answer or other response.  Upon the insurer’s Motion for Entry of Default filed June 12, 2015, the Clerk of the Court entered default against Defendant.

LEGAL STANDARD

Default judgment may be entered against a party who fails to appear or otherwise defend a lawsuit. Default judgment must normally be viewed as available only when the adversary process has been halted because of an essentially unresponsive party. In that instance, the diligent party must be protected lest he be faced with interminable delay and continued uncertainty as to his rights. The default judgment remedy serves as such a protection. Even after entry of default, however, it remains for the court to consider whether the unchallenged facts constitute a legitimate basis for the entry of a judgment.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ANALYSIS

On or about June 23, 2014, Defendant submitted an application to Plaintiff for a Short Term Major Medical Insurance Policy. The application asked Defendant if “Within the last 5 years has any applicant been diagnosed, treated, or taken medication for or experienced signs or symptoms of any of the following: cancer or tumor. Defendant answered “no” to that question.

Thereafter, Plaintiff issued Defendant a Short Term Major Medical Insurance Policy, for a six month term, from June 24, 2014 to December 23, 2014, with liability policy limits of $2,000,000 (the “Policy”). On June 27, 2014, within three days of the effective date of the Policy, Defendant met with his primary care provider, Joshua Crider, P.A. with Banner Health, to evaluate a skin lesion on his right leg. The “skin lesion began one year” before his appointment; Defendant had suffered throbbing right inner thigh pain for the prior three months; Defendant had been wrapping the lesion on a daily basis because it would bleed; In January 2014, the lesion had been the size of quarter but was now much larger; Defendant had a swollen lymph node in his right groin and a gland in his right hip that had been swelling for the previous three months; and  Mr. Crider diagnosed Defendant with “leg melanoma” and associated lymphadenopathy.

Exclusions, paragraph 1 of the Policy excludes “pre-existing conditions” from coverage. The exclusion provides, in relevant part: “Charges resulting directly or indirectly from a condition for which a Covered Person received medical treatment, diagnosis, care or advice within the twelve (12) month period immediately preceding such person’s Effective Date are excluded from coverage hereunder.”

Plaintiff denied Defendant’s claim based on the pre-existing condition and waiting period exclusions under the Policy.

Conclusions of Law and Analysis

The Policy states that it is to be governed by the laws of Missouri. The general rules for interpretation of contracts apply to insurance contracts

First, based on the clear and unambiguous language, the waiting period exclusion that provided: ““If coverage was purchased within 3 days of the Covered Person’s Effective Date, then in respect to Sickness, Covered Persons will only be entitled to receive benefits for Sicknesses that begin, by occurrence of symptoms and/or receipt of treatment, at least 72 hours following the Covered Person’s Effective Date of coverage under the policy”  (emphasis added) applies.

Specifically, the Policy was purchased June 23, 2014 within 3 days of the effective date June 24, 2014 Defendant’s “sickness” did not begin “by occurrence of symptoms and/or receipt of treatment, at least 72 hours following” the effective date of June 24, 2014. Instead, his sickness was present during, and began well before, the waiting period. Defendant noticed problems with his “skin lesion” at least a year before June 24, 2014; noticed his lesion had grown since January 2014 and was aware since then that he should see a doctor but put it off; had been wrapping his lesion because it would bleed; and noticed swelling in his right groin area in March/April 2014. As such, Defendant’s symptoms of metastatic melanoma were present during the Policy’s waiting period; therefore, coverage is precluded for all medical claims incurred as a result of treatment related to the diagnosis of metastatic melanoma.

The Court’s conclusion, however, is to the contrary as to the pre-existing condition exclusion. Under that exclusion, coverage is excluded for “[c]harges resulting directly or indirectly from a condition” for which Defendant “received medical treatment, diagnosis, care or advice within the twelve (12) month period immediately preceding” the effective date, June 24, 2014. Plaintiff provides no such evidence. Instead, the record shows that, during the relevant time period, Defendant was aware that he had a medical issue but he did not seek – or receive – medical treatment, diagnosis, care or advice. Accordingly, the pre-existing condition exclusion does not preclude coverage for the claim at issue.

In summary, Plaintiff’s Motion based on the pre-existing condition exclusion is denied, but its Motion based on the waiting period exclusion is granted.

ZALMA OPINION

The court gave McGoldrick a pyhric victory. No coverage because the pre-existing condition exclusion required actual treatment of the disease to be pre-existing so the exclusion – poorly written – did not apply but since the waiting period exclusion applied because it included in its provision the existence of symptoms or treatment which should have been in the pre-existing exclusion. Insurance requires fortuity. McGoldrick was sick before he bought the policy and he knew it and tried to defraud his insurer by buying insurance before going to see his doctor for treatment.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Court Rules in part in Favor of Defendant Who Defaulted

McCarran-Ferguson Act Prohibits RICO Action Against Insurer

Lack of Privity Prevents Adjuster From Being Sued For Bad Faith

Plaintiff The William Powell Company (“Powell”), an Ohio corporation, has manufactured industrial valves since at least 1846. It attempted to make a RICO action into a bad faith case because the state of Ohio has no tort of bad faith and because of a convoluted conversion of insurance obligations of the insurers and mergers in the 22 year period for which coverage was sought.

FACTS

During the period from 1955 to 1977, Powell purchased a series of primary and excess product and general liability insurance policies from General Accident Fire & Life Assurance Corporation (“General Accident”). According to the complaint, these insurance policies required General Accident to defend and indemnify Powell against damages resulting from accidents resulting in bodily injury. Powell alleges that these policies cumulatively provide coverage for up to $60 million in claims, not including the costs of defense. Powell estimates that, including defense costs, the policies have a value of as much as $180 million.

Beginning in 2001, numerous individual plaintiffs began to sue Powell for asbestos-related injuries that allegedly were caused by asbestos in Powell valves. Powell claims to have been sued by asbestos plaintiffs in 37 states and Canada. As a result of these lawsuits, Powell began to piece together its insurance coverages. Powell learned that, through a series of corporate mergers and asset sales, the policies it purchased from General Accident were eventually assumed by Defendant OneBeacon Insurance Company (“OneBeacon”). OneBeacon is alleged to be a Pennsylvania corporation with its principal place of business in Boston, Massachusetts.

OneBeacon, in turn entered into a reinsurance agreement with Defendant National Indemnity Company (“NICO”). NICO is alleged to be a Nebraska corporation that is wholly-owned by Berkshire Hathaway, Inc. This was not a typical reinsurance agreement according to the complaint, however. Instead of prospectively agreeing to indemnify OneBeacon against claims, the complaint alleges that NICO purchased OneBeacon’s claims reserves for $2.5 billion and then agreed to reimburse OneBeacon for claims and defense costs up to $2.5 billion.

NICO also acquired responsibility for handling and adjusting all of OneBeacon’s claims. NICO, however, delegated its claims handling responsibilities to Ken Randall America (“Ken Randall”) and then to Cavell America (“Cavell”). In 2006, NICO delegated claims handling to Defendant Resolute Management, Inc., a Delaware corporation (“Resolute”). Resolute is also wholly-owned by Berkshire Hathaway.

The complaint alleges that NICO and Resolute combined to form a racketeering enterprise for the purpose of depriving Powell of its insurance coverage and to profit at Powell’s expense. Additionally, NICO allegedly sets limits on the amount of claims payments Resolute can make based on its own financial goals rather than on the value of policyholders’ claims. Stated another way, the complaint alleges that NICO does not want to pay out the claims reserves it bought from OneBeacon and uses Resolute to hinder, delay, and frustrate payment of legitimate claims from policyholders. Among other things, Powell alleges that:

  1. Resolute began to delay payments to local defense counsel and to fund settlements;
  2. Resolute attempted to curtail local defense counsel’s activities and changed Powell’s national coordinating counsel without consulting Powell;
  3. Resolute began increasing the rates and amounts of settlements in order to curtail, reduce, and exhaust Powell’s policy limits;
  4. Resolute disputed the terms and limits of Powell’s coverages under the policies;
  5. Resolute rejected numerous suggestions from Powell for improving the defense of its cases in order not to reduce the float;
  6. Resolute limited local defense counsel’s ability to investigate exposure dates;
  7. Resolute failed to timely notify Powell of coverage decisions;
  8. Resolute unilaterally made decisions that impaired Powell’s defense;
  9. Resolute unilaterally authorized settlements;
  10. Resolute failed to keep Powell apprised of settlement developments; and
  11. Resolute refused to fund settlements and to pay the invoices of local defense counsel.

Powell alleges that NICO and Resolute carried out this racketeering enterprise through predicate acts of wire fraud involving material misrepresentations and omissions. Powell also alleges that NICO, Resolute, and OneBeacon have breached their duty to process its claims in good faith. Powell further alleges that OneBeacon breached the various insurance agreements and that, by their conduct, NICO and Resolute tortiously interfered with Powell’s insurance contracts.

OneBeacon, NICO and Resolute have each filed motions to dismiss Powell’s complaint, or in the alternative, to stay this case pending the resolution certain state court matters involving OneBeacon and Powell.  Defendants also argue that Powell’s complaint fails to state claims for relief and assert a number of different grounds to support dismissal of the complaint. In The William Powell Co. v. National Indemnity Co., et al., Additional Party, Names: Resolute Management, Inc., Slip Copy, 2015 WL 5729381 (S.D.Ohio, 9/30/2015) the District Court for the Southern District of Ohio was asked to eliminate from the suit those entities not in privity to the insurance contract.

ANALYSIS

Count I of the complaint alleges that NICO and Resolute conducted the affairs of an enterprise through a pattern of racketeering activity in violation of RICO. Specifically, Powell alleges that NICO and Resolute committed predicate acts of wire fraud in violation of 18 U.S.C. § 1343 in depriving or attempting to deprive it of the value of its insurance policies. NICO and Resolute advance a number of reasons why the complaint fails to state a claim for a RICO violation. Their principal argument, however, is that the McCarran-Ferguson Act preempts Powell’s RICO claim because it would interfere with state insurance laws.

The McCarran-Ferguson Act embodies the concept of “reverse preemption” in the field of insurance in which a state law relating to insurance will preempt and take precedence over a conflicting federal law that does not itself relate to insurance. Riverview Health Inst. LLC v. Medical Mut. of Ohio, 601 F.3d 505, 513-14 (6th Cir. 2010).

Determining whether the McCarran-Ferguson Act reverse preempts a federal statute is a three-step process. First, the court must determine whether the federal statute at issue relates specifically to the business of insurance. If it does, then the McCarran -Ferguson Act does not apply. Second, the court must determine whether the state law at issue was enacted for the purpose of regulating the business of insurance. If the state law was not enacted for the purpose of regulating the business of insurance, then reverse preemption does not apply. Third, the court must determine whether application of the federal statute would invalidate, supersede or impair the state statute. If application of the federal statute would not invalidate, supersede or impair the state statute, then reverse preemption does not apply.

In support of its reverse preemption argument, NICO and Resolute point out that: 1) RICO does not specifically relate to the business of insurance; 2) Ohio has enacted a complex statutory and administrative scheme to regulate unfair insurance practices, including unfair claims handling; and 3) because Ohio does not provide a private cause of action to insureds for unfair insurance practices, a statute like RICO, which permits recovery of treble damages against the defendant in the event of a violation, would invalidate, impair or supersede Ohio’s ability to regulate the business of insurance.

Ohio law does not provide a private cause of action to insureds against insurance companies or their claims administrators for committing unfair insurance practices.
Ohio courts have specifically noted that a bad faith claim arises out of the contractual relationship between the insurer and the insured and have consistently rejected bad faith claims where the parties are not in privity with each other.

The absence of a state law claim indicates that allowing Powell’s RICO cause of action to proceed would impair or impede state insurance law. No other state statute would provide a basis for a state suit against NICO and Resolute to redress the alleged wrongful claims handling practices, nor has Powell identified an alternative statute. Since state law does not provide any cause of action, state awards of punitive damages are not available to Powell. For the same reason, an award of treble damages under RICO would exceed the damages available to Powell under state law -none. These factors all indicate that RICO would impair, invalidate or supersede Ohio’s insurance regulatory scheme. Third, as indicated by NICO and Resolute, the State of Ohio has taken the position that a RICO claim to redress alleged unfair and deceptive claims handling practices would upset and impair its regulatory scheme and impede its ability to detect insurance fraud. Fourth and finally, there is no suggestion in the record that insurance companies in Ohio rely on federal RICO to combat insurance fraud.

Here, all of the factors discussed above strongly indicate that Powell’s RICO claim would impair, invalidate or supersede state insurance law. Therefore, Powell’s RICO claim is reverse preempted by the McCarran-Ferguson Act. Accordingly, NICO and Resolute are entitled to dismissal of Powell’s RICO claim against them.

BAD FAITH

Powell claims that NICO and Resolute handled its insurance claims in bad faith. Ohio does not provide a claim  based on the bad faith handling of insurance claims where the parties are not in privity with each other.

TORTIOUS INTERFERENCE WITH CONTRACT

Finally, Powell alleges that by their actions in denying coverage of claims, impairing its ability to defend against claims, and failing to pay settlements and costs, NICO and Resolute caused OneBeacon to breach its obligations under the various insurance policies and thereby tortiously interfered with its insurance contracts with OneBeacon. Tortious interference with contract occurs when the defendant intentionally and improperly causes or induces a third person not to perform his obligations to the plaintiff under the contract

An agent can be liable for tortiously interfering with the principal’s contract only if he acted and benefitted from the alleged interference solely in his individual capacity.

Since the complaint indicates that NICO and Resolute’s alleged wrongful acts were within the scope of their agency with OneBeacon, it is immaterial, in the Court’s opinion, that Powell also alleges that they allegedly were motivated solely by their own self-interest to cause OneBeacon to breach the insurance agreements.

ZALMA OPINION

RICO is a federal statute to defeat racketeering not bad faith insurance claims handling. Since insurance is special and by statute the regulation of insurance is limited to the states, this action failed.  The McCarran-Ferguson Act protected the insurers and lack of privity protected the insurance adjusters.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on McCarran-Ferguson Act Prohibits RICO Action Against Insurer

Insured Must Rebuild to Collect Holdback

Actual Cash Value Limit Unless Insured Actually Replaces

Plaintiff Robert Lytle challenges the trial court’s dismissal of his second amended complaint alleging breach of contract and seeking costs and penalties against defendant Country Mutual Insurance Company (Country Mutual). The trial court found that there was no genuine issue of material fact and the clear and unambiguous terms of the insurance policy established that Lytle was not entitled to replacement costs because he never made any repairs or replacements. In Lytle v. Country Mut. Ins. Co.,— N.E.3d —-, 2015 IL App (1st) 142169, 2015 WL 5734914 (Ill.App. 1 Dist., 9/30/2015) the Illinois Court of Appeal was asked to resolve the dispute.

BACKGROUND

In February 2011, plaintiff Lytle purchased a homeowner’s insurance policy from defendant Country Mutual to insure his home in Elmhurst, Illinois. The home was built around 1903. On June 21, 2011, Lytle discovered damage to his home as a result of a severe storm and shortly thereafter made a claim to Country Mutual for insurance proceeds.

The policy contained a depreciation holdback provision, which provided that the insurer would not pay more than actual cash value until the actual repair or replacement was complete. Furthermore, the insured could choose to accept actual cash value instead of replacement cost. If the insured elected to accept actual cash value, he would have one year from the date of the loss to repair or replace the damaged property and request the difference between the actual cash value and the replacement cost.

Lytle hired an insurance adjuster to represent him in the claims process. Country Mutual informed Lytle’s adjuster that Country Mutual’s adjuster did not have authority to make any verbal agreements or commitments on behalf of Country Mutual, all agreements must be in writing, and Country Mutual would not waive any of the policy requirements concerning the insured’s duties.

Country Mutual issued to Lytle an actual cash value payment of $42,911.84. Country Mutual sent Lytle a letter advising him that his claim remained open; Country Mutual was waiting—in accordance with the depreciation holdback provision of the policy—for the work to be completed; and Lytle’s one-year date to replace or repair the damaged property and request the difference between actual cash value and replacement cost would expire on a date specified in the letter. Two months later Country Mutual sent Lytle another letter containing the same information.

Lytle’s adjuster negotiated with Country Mutual to increase the amount of the actual cash value payment to include damage to the foundation. The parties reached an agreement on this matter and Country Mutual issued Lytle a supplemental actual cash value payment of $16,024.70.

On June 11, 2012, Country Mutual wrote Lytle, informing him that it could not grant an extension on his claim and his one year period in which to complete the repairs would expire on June 21, 2012.

Country Mutual denied Lytle’s request for additional payment of the depreciation holdback, and Lytle filed suit. In his second amended complaint, Lytle sought damages, alleging Country Mutual breached the insurance contract by failing to pay the replacement costs and additional living expenses.

Country Mutual moved for summary judgment and argued that there was no genuine issue of material fact to be determined because Country Mutual paid Lytle his actual cash value payment; the policy provided that Lytle had one year to complete the property repairs and request the difference between the actual cash value paid and the replacement costs necessary to repair the storm damage; and Lytle did not complete any repairs or replacements within the one year period.

On June 11, 2014, the trial court held a hearing on Country Mutual’s motion and granted summary judgment in favor of Country Mutual. The court found that Lytle’s request for an appraisal related solely to a dispute over coverage, which was not subject to the appraisal provision of the policy. The court also found that Lytle had negotiated a settlement of the actual cash value payment, failed to timely complete repairs or replacements, and did not incur any building code upgrade costs. Lytle timely appealed.

ANALYSIS

A reviewing court’s function in reviewing a trial court’s entry of summary judgment is to ensure that no genuine issue of material fact was raised and to determine whether the judgment was correctly entered as a matter of law.

After a detailed review of the policy wording the court found no ambiguity in this contract language, and has construed similar contract language and found the policy clear and unambiguous. Saathoff v. Country Mutual Insurance Co., 379 Ill.App.3d 398, 404 (2008); Higginbotham v. American Family Insurance Co., 143 Ill.App.3d 398, 400 (1986); National Tea Co. v. Commerce & Industry Insurance Co., 119 Ill.App.3d 195, 201 (1983). Therefore, the trial court correctly interpreted the clear language of the insurance policy as providing for replacement cost coverage only if actual repairs were completed.
The Replacement Cost provision of the policy has two components: the Actual Cash Value, which is the value of the property at the time of loss, or an agreed or appraised value; and the Depreciation Holdback, which is the cost of repairs that exceed the Actual Cash Value. If the insured repairs or replaces the damaged property, and if the actual cost of repairs exceeds the actual cash value, then the insurer is obligated to reimburse the insured for the difference.

Here, it is undisputed that Lytle has been paid the actual cash value of the damaged property at the time of the loss and has not repaired or replaced the property. Moreover, it is undisputed that the policy contains a standard depreciation holdback loss settlement provision that states Country Mutual will not pay more than actual cash value until the actual repair or replacement is complete. Accordingly, Lytle is not entitled to reimbursement for the depreciation holdback because he did not incur that pecuniary loss.

Lytle also contends Country Mutual violated the policy by failing to comply with his demand for an appraisal. Lytle argues that he sought an appraisal over a disputed amount of a covered loss.

Contrary to Lytle’s assertion on appeal, he presents this court with a coverage dispute rather than a dispute over the amount of a loss. Specifically, Lytle disputes whether certain costs associated with complying with building ordinances would be covered under his policy. Consequently, Lytle was not entitled to an appraisal on the issue of insurance coverage or contract interpretation. According to the record, the trial court determined that the issue raised in Lytle’s appraisal request was not subject to the appraisal provision. The insurance policy at issue provides coverage only for incurred costs, and the equitable principles of waiver and estoppel may not be used to create or extend coverage where none exists.

ZALMA OPINION

The insured and the public adjuster obtained the full actual cash value loss with little difficulty. Because of problems with the local government the insured was unable to rebuild.  He attempted to overcome the twelve month requirement by demanding appraisal to resolve coverage issues but that didn’t work because appraisal is limited to the amount of loss, a fact that was not disputed. Since the insured did not comply with the condition he could not collect the hold back.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insured Must Rebuild to Collect Holdback

Lie to Your Insurer at Your Risk

Material Misrepresentation Voids Coverage

Ernest Warren Farr, Jr. (Warren) and Debbie Holmes (Debbie) entered into an insurance contract with American National Property and Casualty Company (ANPAC) to insure a pontoon boat and trailer. Debbie and Warren later submitted a claim for insurance coverage after the boat and trailer were allegedly stolen. ANPAC denied coverage for the loss and rescinded the policy after discovering that Warren and Debbie were not the owners of the boat and had made misrepresentations on the insurance application.

Warren and Debbie, along with the boat’s owner, Jo Ann Farr, brought a complaint against ANPAC for breach of the insurance contract, alleging that ANPAC had acted in bad faith and should be ordered to cover the loss. The trial court subsequently granted summary judgment for ANPAC. Warren and Debbie appealed.

In Farr v. American National Property and Casualty Company, Not Reported in S.W.3d, 2015 Ark. App. 534, 2015 WL 5770088 (Ark.App. 9/30/2015) the Arkansas court of appeal was asked to resolve the dispute.

FACTS

Jo Ann Farr, who is Warren Farr’s mother, purchased the pontoon boat and trailer in 2007. In Debbie’s deposition, she explained that although Jo Ann was the named purchaser and titled owner, the boat essentially belonged to her [Debbie] and Warren and that they were making the payments. Debbie said that both she and Warren had bankruptcies on their credit reports, and that Jo Ann, who had better credit, signed for the boat so they could get a lower interest rate.

On July 23, 2010, Debbie submitted a watercraft insurance application with ANPAC, seeking insurance coverage on the boat and trailer for herself and Warren. One of the questions on the application asked, “Have you or any member of your household ever been convicted of a felony or drug possession?” The application stated, “If yes, do not bind.” The answer given on the application was “no,” when in fact Warren had a prior felony conviction for attempted murder. The application further asked, “Is the applicant the original owner of this watercraft?” The answer given to that question on the application was “yes.”  Just below the signature was a statement warning that a misrepresentation on the application would allow the insurer to void the policy.

After the application was submitted, ANPAC issued a watercraft policy naming Warren and Debbie as the insureds.  The policy also contained the following provision: “Concealment or Fraud. This entire policy is void if an insured person has intentionally concealed or misrepresented any material fact or circumstances relating to this insurance, or acted fraudulently or made false statements relating to this insurance.”

Warren and Debbie made a claim for coverage under the policy, claiming that the boat and trailer were stolen on July 24, 2011. After ANPAC denied coverage, Warren and Debbie filed a breach-of-contract action against ANPAC on March 20, 2013, alleging that ANPAC had breached the insurance contract and had also acted in bad faith. On June 16, 2014, ANPAC filed a motion for summary judgment asserting that Debbie had made material misrepresentations in the insurance application.

On July 28, 2014, the trial court entered an order granting ANPAC’s motion for summary judgment and dismissing Warren and Debbie’s complaint with prejudice. The trial court subsequently denied appellants’ motion for reconsideration.

DISCUSSION

The court noted that summary judgment may be granted only when there are no genuine issues of material fact to be litigated, and the moving party is entitled to judgment as a matter of law. Once the moving party has established a prima facie entitlement to summary judgment, the opposing party must meet proof with proof and demonstrate the existence of a material issue of fact.

Warren and Debbie claim that summary judgment was improper under ANPAC’s theory that Debbie had made a material misrepresentation on the insurance application. They rely on Neill v. Nationwide Mutual Fire Insurance Company, 355 Ark. 474, 139 S.W.3d 484 (2003), a case in which the supreme court reversed a summary judgment in favor of the insurance company because, although there had been a misrepresentation made on the insurance application, and the insured signed the application, a material fact remained as to whether the insurance agent had misstated the insured’s response or failed to ask all the questions on the application.

Warren and Debbie argued that even had there been a misrepresentation on the application, ANPAC failed to show that the misrepresentation was material or that it would not have issued the policy had it known the true facts. Citing National Old Line Insurance Company v. People, 256 Ark. 137, 506 S.W.2d 128 (1974), they asserted that it was ANPAC’s burden to show a causal connection between the misrepresentation and the eventual loss, and that in this case the fact that Warren was a convicted felon had no relationship to the boat being stolen.

Warren and Debbie failed to inform the court that National Old Line Insurance Company, supra, cited by them was later overruled by our supreme court in Southern Farm Bureau Life Insurance Company v. Cowger, 295 Ark. 250, 748 S.W.2d 332 (1988). In Southern Farm Bureau, the supreme court held that an insurer may defend on the ground that a misrepresentation caused issuance of the policy, though the fact misrepresented was not necessarily related to the loss sustained. Therefore, contrary to appellants’ argument herein, ANPAC did not have to show a causal connection between the misrepresentation and the eventual loss.

In the absence of a statutory provision to the contrary, Arkansas follows the general common-law rule that a material misrepresentation made on an application for an insurance policy and relied on by the insurance company will void the policy. The materiality of the misrepresentation goes to whether or not the insurer, with knowledge of the true facts, would have accepted the risk and issued the policy.

In this case the insurance application, signed by Debbie, falsely contained a “no” answer to whether any member of her household had ever been convicted of a felony. Next to that question the application contains the instruction, “If Yes, do not bind.”  From the language in the application providing that coverage should not be bound if the answer was “yes,” the court of appeal concluded that ANPAC established that it would not have accepted the risk and issued the policy had it known about Warren’s prior felony.

With respect to appellants’ claim that the insurance agent never asked Debbie the question during the application process, the court of appeal concluded that Debbie’s deposition does not raise a factual question on that issue or lend support to that claim. In Debbie’s deposition she was asked if she remembered the agent asking the question about prior felony convictions, and she responded, “I don’t recall.” She did not deny that she was asked the question. Debbie proceeded to testify that, despite being given the opportunity to do so, she did not read the application line by line before signing it, stating that “I don’t think anybody does that.”

In Neill, supra, the supreme court stated the general rule that, if a person signs a document, she is bound under the law to know the contents of the document. One who signs a contract, after an opportunity to examine it, cannot be heard to say that she did not know what it contained.

Debbie signed the application containing the material misrepresentation, and there is no proof in the record to support Debbie and Warren’s claim that her misstatement was the result of fraud, negligence, or mistake by ANPAC’s agent. The material misrepresentation, relied upon by the insurance company in issuing the policy, voided the policy and relieved ANPAC from coverage. Therefore, ANPAC was entitled to judgment as a matter of law with respect to appellants’ breach-of-contract claim.

ZALMA OPINION

It is not nice to lie to your insurance company. It is totally wrong to lie to an insurer or defraud a lender. Debbie and Warren seemed to have no trouble defrauding both the lender, by buying the vessel in mother’s name because they did not have a good credit rating, and defrauding the insurer about the ownership of the vessel and the fact that Warren had a felony conviction, both of which would have resulted in a refusal of insurance. Fraud in the inception of an insurance policy allows, even requires, an insurer to rescind the policy.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Lie to Your Insurer at Your Risk