Dumb and Dumber

Refusal to Defend Risks Accepted Is Expensive

The Fifth Circuit Court of Appeal was asked to determine whether Illinois Union Insurance Company (“ILU”) has a duty to defend Louisiana Generating LLC (“LaGen”) in an underlying suit filed against it by the Environmental Protection Agency (“EPA”) and the Louisiana Department of Environmental Quality (“LDEQ”) for alleged Clean Air Act (“CAA”) and state environmental law violations. In Louisiana Generating L.L.C.; Nrg Energy Incorporated v. Illinois Union Insurance Company, No. 12-30651 (5th Cir. 05/15/2013) the district court had held that under the insurance policy at issue, there is a duty to defend and the Fifth Circuit affirmed.

FACTUAL BACKGROUND

The underlying suit in this duty to defend case between LaGen and ILU revolves around Big Cajun II (“BCII”), a coal-fired electric steam generating plant owned by LaGen in Louisiana. In February 2005 and December 2006 the EPA sent LaGen Notices of Violation (“NOVs”) alleging that certain major modifications performed without a permit at BCII in 1998 and 1999 caused net emissions increases in violation of the CAA. In January 2009, NRG Energy, LaGen’s parent, purchased a Custom Premises Pollution Liability Insurance Policy (“the policy”) from ILU to cover a large number of its facilities, including BCII. The effective date of the policy is January 22, 2009.

On February 18, 2009, one month after the issuance of the policy, the EPA filed the underlying suit over the modifications made to BCII, asserting violations of the CAA and Louisiana environmental laws. LDEQ intervened in the suit, asserting essentially identical allegations and claims. The suit alleged that the previous owner of BCII did work on the plant that increased certain emissions which under applicable law would be considered “major modifications” and would have required a Prevention of Significant Deterioration of Air Quality permit (“PSD permit”) before being completed.

LaGen sought coverage from ILU under the policy for legal fees associated with the underlying EPA suit, and ILU denied that the EPA suit was covered by the policy.

The district court bifurcated the trial between the duty to defend and the duty to indemnify. The district court held that “ILU failed to prove that there was no possibility the claims in the underlying EPA suit would be covered and thus had a duty to defend.” (Emphasis added)

DISCUSSION

The only issue decided by the district court on summary judgment was the duty to defend. Thus, the only question on appeal concerns whether the district court correctly held that ILU has a duty to defend LaGen in the underlying suit filed by the EPA and LDEQ.

The policy contains a choice of law clause specifying that New York law governs the interpretation of the policy.

Coverage for Claims and Remediation Costs

In New York, whether there is a duty to defend is determined by comparing the allegations in the underlying complaint to the terms of the policy. An insurance policy must be read as a whole in order to determine its purpose and effect and the apparent intent of the parties.

THE POLICY

The policy states that it provides coverage for “Claims, remediation costs, and associated legal defense expenses . . . as a result of a pollution condition” at a covered location.  “Claim” in turn is defined as “the assertion of a legal right, including but not limited to a government action(s), suits or other actions alleging responsibility or liability on the part of the insured for. . . property damage, or remediation costs as a result of pollution conditions to which this insurance applies.” “Government action” is defined as “action taken or liability imposed by any federal [or] state . . . government agency or body acting under the authority of environmental laws.” The policy covers pollution conditions, which it defines in relevant part as “the discharge, . . . dispersal, release, escape, migration, or seepage of any . . . gaseous or thermal irritant, contaminant, or pollutant . . . on, in, into, or upon. . . the atmosphere. . . .” “Property damage” is defined to include, inter alia, “[n]atural resource damages,” which in turn is expressly defined as including “injury to . . . air.” “Remediation costs” is defined as “reasonable expenses incurred to investigate, quantify, monitor, mitigate, abate, remove, dispose, treat, neutralize, or immobilize pollution conditions to the extent required by environmental law.”

DISCUSSION

Reading all of these provisions together and giving them their plain meaning, the underlying EPA suit includes allegations and prayers for relief that could potentially result in covered remediation costs. Government agencies acting under the authority of environmental laws allege that LaGen violated those laws, resulting in increased emissions of pollutants into the atmosphere, and seek to require LaGen to mitigate and remediate those emissions. The EPA complaint clearly alleges a covered “pollution condition” at BCII when it asserts that “significant amounts of NOx and SO2 pollution each year have been, and still are being, released [from BCII] into the atmosphere.”  The language providing coverage for remediation costs potentially covers the multiple prayers for relief in the EPA complaint which seek to require LaGen to mitigate, offset and remediate the alleged past pollution. The requests for mitigation, offsetting and remediation suggest a reasonable possibility of coverage under the policy. Because part of the suit is “potentially within the protection purchased, the insurer is obligated to defend.”

In addition to and distinct from installation of equipment and application for permits, part of what the EPA complaint seeks is remediation of past pollution, and under the clear definitions in the policy, costs associated with that remediation could be covered by the policy. At oral argument, counsel for ILU conceded that if LaGen engaged in voluntary action to remediate past pollution, those costs would be covered by the terms of the policy.

COVERAGE FOR INJUNCTIVE RELIEF

The Fines and Penalties provision excludes coverage for “Payment of criminal fines, criminal penalties, punitive, exemplary or injunctive relief.”   ILU cannot show that its interpretation of the exclusion is the only possible reasonable construction, as it must do to negate coverage. Reading the policy as a whole, including construing the exclusion narrowly, LaGen’s interpretation of the Fines and Penalties exclusion as applying only to criminal and punitive fines and penalties is a reasonable reading of the exclusion. Conversely, under ILU’s interpretation, the policy would illogically provide coverage for “remediation costs” but would exclude coverage if that remediation is required by a court order.

The policy expressly provides that it covers remediation costs to mitigate pollution conditions to the extent required by judicial and administrative orders.

THE TIMING OF THE SUIT

Lastly, ILU argues that it has no duty to defend because the claims were “first made” when the EPA first issued the NOVs with regard to BCII, which was before the effective date of the policy, rather than when the EPA filed suit.

Always, when the terms of the policy are clear and unambiguous, they should be given their plain meaning. The policy language with regard to this issue is clear. The policy provides coverage for claims or remediation costs as a result of pollution conditions “provided the claim is first made, or the insured first discovers such pollution condition during the policy period . . . .” The policy further states that, “Any pollution conditions specifically referenced, or identified in documents listed, on the Schedule of Known Conditions Endorsement are deemed to be first discovered during the policy period.”

It is not disputed that the NOVs concerning the pollution condition at BCII were identified on the Schedule of Known Conditions Endorsement. It is difficult to determine what the purpose of listing the NOVs relating to BCII on the endorsement would be if not to include claims and remediation costs relating to that known pollution condition within the policy’s coverage. The “pollution condition” at BCII identified in the NOVs was “deemed (by the policy wording) to be first discovered during the policy period” and potential remediation costs associated with that pollution condition are covered by the policy.

The Fifth Circuit held that there is a duty to defend because the EPA’s and LDEQ’s claims may potentially result in covered remediation costs. New York law provides that if any claim in an action is potentially covered, the insurer must defend the entire suit.

ZALMA OPINION

Dumb and dumber. The insurer accepted coverage for a known pollution event and although it had been going on for several years agreed – by accepting the Schedule of Known Conditions – accepted responsibility for the loss. This is simply incompetent underwriting unless the insurer obtained sufficient premium to honor the risk. That it probably did not is honored by the attempt to refuse coverage for defense.

An insurer told that there is an ongoing loss and that the ongoing loss is potentially covered would invariably exclude coverage for that problem. The insured obtained coverage for a suit it knew was coming and for claims that had already been made. The insurer took the risk with full knowledge that it existed. They added to their error by then refusing to defend the insured.

Had the fact been concealed the insurer would have rescinded under New York law without difficulty. It could not rescind because the insured disclosed the fact and the insurer accepted the risk.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Stacking Prohibited

Anti-Stacking Provision Enforced

An insured person sought to “stack,”  or combine, the uninsured/underinsured motorist coverage (UM/UIM coverage) for each insured vehicle, when the policy failed to specify any particular amount of UM/UIM coverage afforded. The Fourth Circuit was called upon to resolve the inquiry whether an insured may stack coverages or not in Ronnie Steve Dooley v. Hartford Accident and Indemnity, No. 12-1882 (4th Cir. 05/16/2013) and the effect of stating no specific policy limit for UM/UIM coverages.

On appeal, Dooley contended the failure to state an amount of insurance and that the omission from the policy’s terms renders ambiguous the policy language prohibiting stacking and that, therefore, the policy should be construed against Hartford to allow the stacking of UM/UIM coverage.

Virginia Code § 38.2-2206(A) mandates that UM/UIM coverage “shall equal” the general liability coverage. This provision, by operation of law, provided Dooley an equal amount of UM/UIM coverage under the Hartford policy.

FACTS

Dooley first obtained an automobile insurance policy from Hartford in 2003 and paid two separate premiums for coverage of two vehicles. Included in the “Declarations” section of the policy, under a heading entitled “Coverages and Limits of Liability,” were subsections listing separate entries for “Liability” and “Uninsured Motorists.” These entries provided policy limits of $100,000 per person for each covered vehicle, for both liability and UM/UIM coverage. In 2004, Dooley added a third vehicle to the policy, and continued to pay separate premiums for each vehicle for liability and UM/UIM coverage. Dooley renewed the policy annually for three additional years without requesting any changes to his coverage.

Dooley later renewed his policy in November 2008 (the policy or the 2008 policy). The 2008 policy was in effect when Dooley was injured in an automobile accident while driving a vehicle insured under the policy. The accident occurred when a vehicle driven by Wilmer Phillips struck Dooley’s vehicle. As a result of the accident, Dooley sustained serious bodily injury, causing him to incur medical and related expenses that exceeded the liability coverage provided under Phillips’ automobile insurance policy. Therefore, Dooley contended that Phillips was an underinsured motorist and sought payment from Hartford based on the UM/UIM coverage provided in the 2008 policy.

In contrast to the declarations sections of the earlier policies issued by Hartford, which showed UM/UIM coverage of $100,000 per person for each covered vehicle, the declarations section of the 2008 policy did not contain any reference to an amount of UM/UIM coverage. However, that declarations section provided general liability coverage of $100,000 per person for each covered vehicle.

Under the heading “Limit of Liability,” the UM/UIM endorsement addressed the maximum UM/UIM coverage available (the anti-stacking provision). The anti-stacking provision stated, in relevant part, that “[t]he limit of [ ] Liability shown in the Declarations for each person for [UM/UIM] Coverage is [Hartford’s] maximum limit of liability for all damages . . . arising out of bodily injury sustained by any one person in any one accident,” “regardless of the number of” insured parties, claims made, vehicles, or premiums “shown in the Declarations.” Thus, the UM/UIM endorsement did not state the amount of UM/UIM coverage available but simply referred the reader to the “[d]eclarations” section of the policy, which likewise did not contain any specified amount of such coverage.

Dooley argued that the district court erred in determining that he was not entitled to stack the UM/UIM coverage provided under the 2008 policy for the three insured vehicles. According to Dooley, because the anti-stacking provision refers to the limits of liability “shown in the [d]eclarations for each person for [UM/UIM] Coverage” and the declarations page omitted any such limits, the anti-stacking provision is ambiguous.

DISCUSSION

When a disputed policy term is unambiguous, we apply its plain meaning as written. In contrast, if a disputed policy term is ambiguous, such that it is capable of more than one meaning, we construe the policy language in favor of coverage and against the insurer. This construction rightfully places the burden on the insurer, the customary drafter of an insurance policy, to articulate clearly both the coverage afforded and any exclusions from that coverage.

In addition to these basic principles, the court was guided by decisions from the Supreme Court of Virginia addressing an insured party’s ability to stack UM/UIM coverage. In 1972, the Supreme Court of Virginia established the rule in Virginia that “stacking of [UM/UIM] coverage will be permitted unless clear and unambiguous language exists on the face of the policy to prevent such multiple coverage. Goodville Mut. Cas. Co. v. Borror, 275 S.E.2d 625, 627 (Va. 1981) (interpreting Cunningham v. Ins. Co. of N. Am., 189 S.E.2d 832 (Va. 1972) and Lipscombe v. Sec. Ins. Co., 189 S.E.2d 320 (Va. 1972)).”

In the present case, the anti-stacking provision establishes the liability for UM/UIM coverage as the amount “shown in the [d]eclarations for each person for [UM/UIM] Coverage.” Like the provisions in both Goodville and Williams, the anti-stacking provision before us unambiguously states that these limits for “each person” are the maximum UM/UIM coverage afforded “regardless of” the number of vehicles covered by the policy or premiums paid.

These UM/UIM coverage limits, when considered along with the anti-stacking provision, mandate the conclusion that UM/UIM coverage for each of the three insured vehicles cannot be stacked. This conclusion is the only reasonable interpretation of the policy that gives effect to each of the relevant provisions.

Accordingly the anti-stacking provision in Dooley’s policy unambiguously prevents the stacking of UM/UIM coverage.

ZALMA OPINION

Automobile insurance is specific to each automobile. Some courts, including the courts of Virginia, have allowed people who have more than one vehicle with UM/UIM coverage to combine the coverages from each vehicle even though only one vehicle was involved in an accident. As a result of the decisions allowing stacking of coverages insurers incorporated anti-stacking coverages in their policies. This case shows how people, who did not buy sufficient UM/UIM coverages and are injured attempt to convolute the language of the policy to make anti-stacking language into language allowing stacking. The attempt failed.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Rescission Allows Insurer to be Made Whole

Chutzpah!

Fraud Perpetrators Seek to Profit from Rescission

When a party lies on an application for insurance the insurer is usually entitled to rescind the policy and conclude it never existed. Equity requires that the parties to the contract be placed in the same position they would have been had no insurance contract existed. It is up to the court of equity to make all parties whole.

The First Circuit Court of Appeal was asked to resolve an  appeal from a grant of summary judgment in favor of plaintiff PHL Variable Insurance Company (“PHL”) in its equitable action for rescission of a life insurance policy and special damages incident to the rescission of that policy. In PHL Variable Insurance Company v. The P. Bowie 2008 Irrevocable Trust, By and Through Its Trustee, Louis E. Baldi, No. 12-2243 (1st Cir. 05/13/2013) the First Circuit was asked to reverse the decision of the trial court that found that the defendant, the Trust, by and through its trustee, Louis E. Baldi, had made false representations to induce PHL to issue the policy, and that this fraud caused PHL damages that would not be fully compensated by rescission alone.

The trial court, to make all parties whole, allowed PHL to retain the policy premium paid by the Trust in order to offset PHL’s losses and to return the parties to the status quo ante.

FACTS

Richard Rainone, an insurance broker, submitted an application from Peter Bowie to PHL for a life insurance policy on Bowie’s life. Bowie’s application represented that he was a self-employed real estate investor with a net worth of $7.5 million and an earned income of $250,000 per year. He sought to take out a $5 million policy.

PHL then began its underwriting investigation, which included a third-party inspection by a vendor, Examination Management Services, Inc. (“EMSI”). EMSI contacted Bowie who told the EMSI inspector that his earned income was $250,000 per year and that his net worth was $7.35 million. He also stated that a trust would be the beneficiary of the policy. Based on the available information, PHL offered Bowie a $5 million policy.

Rainone submitted a revised application that listed the Trust as the owner and sole beneficiary of the proposed policy. Baldi, an attorney, acted for the Trust. The second application repeated the same information about Bowie’s employment, net worth, and income. The application also answered “no” to all of the following questions:

1.    Will any of the first year or subsequent premiums for the policy be borrowed by the proposed owner or proposed insured or by any other individual, trust, partnership, corporation or similar related entity?

2.    Will the owner, now or in the future pay premiums funded by an individual and/or entity other than the proposed insured?

3.    Is the policy being purchased in connection with any formal or informal program under which the proposed owner or proposed insured have been advised of the opportunity to transfer the policy to a third party within five years of its issuance?

4.    Does the proposed insured or proposed owner have any understanding or agreement providing for a party, other than the owner, to obtain any legal or equitable right, title or interest in the policy or entity owning the policy?

Attorney Baldi (on behalf of the Trust), the broker Rainone, and Bowie all signed the application. All three individuals signed a separate Statement of Client Intent, which also attested that the premium payments would not be borrowed and would be paid from Bowie’s current income and/or his own cash and equivalents. The Statement represented that the purpose of the policy was estate planning and that there was no intent to transfer the policy.

PHL approved a $5 million policy (“the Policy”) shortly thereafter on Bowie’s life, pursuant to the application. Thereafter Bowie and Baldi signed a Policy Acceptance Form. Baldi wrote a check from his client account to PHL for the Policy premium, in the amount of $192,000. PHL paid Rainone a commission of $172,365.

Almost all of the representations made to PHL were patently untrue.  In fact, Bowie was not a wealthy real estate investor, but was, rather, a retired city employee, used car salesman, and blackjack dealer. He could not afford to pay the Policy premium on his own. Instead, the plan to pay the premium had originated with brokers Rainone and Vianello, who began negotiating with Imperial Premium Finance, LLC (“Imperial”) even before filling out an application. Imperial is a company whose business model consists of lending money to pay for life insurance policy premiums and, when borrowers default on those loans, taking possession of the policies as collateral. This arrangement allows Imperial to attempt to avoid the longstanding legal prohibition on holding a life insurance policy on a life in which the owner has no insurable interest.

The Trust, by and through Baldi, was the mechanism for accomplishing this insurance fraud. Before being deposed in this lawsuit, Baldi had never met or even spoken to Bowie. Twelve days after Baldi and Bowie had executed the Policy Acceptance Form – Baldi, on behalf of the Trust, entered a loan agreement with Imperial. The agreement provided that Imperial would loan $189,000 to the Trust, at a floating interest rate starting at more than 12 percent, for the express purpose of paying premiums on the Policy. In addition, Imperial charged a $19,400 origination fee and a $48,164.83 “lender protection insurance charge.” The loan was set to mature quickly. The terms of the loan virtually dictated that it could not be paid back.

Rainone, the broker, signed an agreement with Imperial to pay the company a percentage of his commission from the Bowie Policy, in the amount of $67,025.

Early in 2010, PHL attempted to contact the Trust, Bowie, and Rainone regarding the information in the application. It received no response; meanwhile, its own investigation indicated that the information had been falsified. PHL filed suit for rescission. It also sought to retain the premium paid by the Trust as an “offset” against the damages it had suffered in connection with the Policy.

During discovery the Trust, recognizing that its fraud had been discovered and would be proved, sent a letter to PHL stating that the Trust “agree[d] to rescind the Policy” and “confirm[ing] the rescission of said Policy.” The Trust demanded immediate return of the premiums, as purportedly required by Rhode Island law. PHL refused to fall for the ploy, discovery continued and both parties filed cross-motions for summary judgment.

TRIAL COURT DECISION

The trial court issued a Memorandum and Order granting PHL’s motion and denying the Trust’s motion. The trial court found that the Trust had engaged in fraudulent conduct.  The court found that Baldi, on behalf of the Trust, became aware shortly after signing the Policy documents that the statements in those documents regarding the premium payor were false, and furthermore that Baldi’s conduct before he actually became so aware showed a reckless disregard for the truth. It also found that Baldi’s dealings with Imperial, Vianello, and PHL showed that Baldi intended PHL to continue relying on the false representations. The court thus ordered that PHL was entitled to retain the $192,000 premium payment as special damages.

DISCUSSION

Rhode Island, like other states, generally requires that on rescission the premium must be returned to the insured so that the parties are both made whole. The Trust argued that a party who seeks rescission of a contract – even when that contract was procured by fraud which imposes losses – is always required to return the entire consideration received under the contract to the other party, under all circumstances.

PHL “fully and unconditionally tender[ed] the Policy’s premiums to the Court’s registry.” Thus, where there is a “tender back” requirement, PHL undoubtedly fulfilled it.

Rhode Island courts have held that a trial court sitting in equity has discretion to determine the appropriateness of, and to formulate, equitable relief, and that this discretion should be guided by basic principles of equity and justice.

A basic principle of contract rescission is that it seeks to create a situation the same as if no contract ever had existed. It is a principle of equity that parties should not gain advantage from their own fraud. A court of equity, when its jurisdiction has been invoked for any equitable purpose, will proceed to determine any other equities existing between the parties which are connected with the main subject of the suit and grant all relief necessary to an entire adjustment of the litigated matters.

The First Circuit concluded that the trial court was warranted in refusing to reward the Trust for its “unclean hands.”  The court could reasonably view the record as demonstrating that the Trust did not pay the premium from its own funds; indeed, it had no funds. The payment was funded by the loan from Imperial meant to perpetrate the fraud. If PHL was ordered to refund all or part of the premium to the Trust, the Trust would be enriched with money that it never had in the first place and its fraud would have succeeded.

Baldi, Bowie, Rainone, and Imperial were part of a common fraudulent scheme that sought to obtain for Imperial a life insurance contract that Imperial could not have purchased on its own. The misrepresentations by all of these parties, working in concert, led PHL to issue a policy on false pretenses and to incur costs associated with that policy. The judgment was affirmed.

ZALMA OPINION

This case describes a convoluted fraudulent scheme to profit from a life insurance policy involving material misrepresentations, concealment of material fact, and kickbacks. Nothing about the policy application process was true except the name of the person whose life was being insured.

The fraud was blatant and obvious. PHL must be commended for discovering the fraud before the person whose life it insured died. PHL appropriately sought rescission. It was met with the unmitigated chutzpah of the fraud perpetrators, who had no assets, but were willing to attempt to cause a court to order the return of the premium it did not pay. By so doing it added a fraud on the court to the fraud it had attempted against PHL. The trial court and the First Circuit properly refused to allow them to profit from their fraud.

What the court failed to do in its opinion is report the parties defendant, who it concluded were involved in a fraud, to the U.S. Attorney for prosecution for insurance fraud, mail fraud and wire fraud. Hopefully the U.S. attorney has read the opinion and is considering criminal prosecution against the perpetrators.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Fraud Is Ubiquitous

Zalma’s Insurance Fraud Letter – May 15, 2013

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

  1. Why an innocent spouse cannot collect if his co-insured spouse criminally burns down their house in Indiana;
  2. Insurance executive jailed for insurance fraud on customers and clients.
  3. Fraud is ubiquitous – even in Slovakia;
  4. More of the never ending story of Katrina fraud, the Rigsby sisters and “Dickie” Scruggs;
  5. Murder and Old Lace, the third chapter of a new serialized fictional story of insurance fraud;
  6. A report from the California Conference of Arson Investigators about the search for a “so-called” contractor who took advantage of wild-fire victims; and
  7. A little medical humor.

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

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seem to be shrinking in 2013.

The last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

  • Pro-Rata Required – May 14, 2013
  • Cooperate With Insurer – May 13, 2013
  • Administrative Remedies Required – May 10, 2013
  • Duty to Read Policy  – May 9, 2013
  • No Double Recovery –  May 7, 2013
  • When You Win – Stop Complaining – May 7, 2013
  • Deceit Voids Insurance – May 6, 2013
  • Zalma on Arson-for-Profit – May 3, 2013
  • Promises Must Be Kept –  May 3, 2013
  • DAMAGES LIMITED –  May 2, 2013
  • Scruggs Still Guilty for Bribing Judge – May 1, 2013
  • Sudden & Accidental – April 30, 2013
  • New E-Book From Barry Zalma – April 29, 2013
  • Mortgagee Bound by Exclusion – April 29, 2013
  • When Damage Is Just “Marring” – April 26, 2013
  • Where’s Waldo’s Domicile? – April 25, 2013
  • What a Difference 12 Hours Make – April 24, 2013
  • Poor Policy Drafting  – April 23, 2013
  • No Good Deed Goes Unpunished – April 22, 2013
  • Incomplete Structure Is Vacant – April 19, 2013

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

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

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

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

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

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Pro-Rata Required

One Occurrence Per Act of Abuse

A Brooklyn, New York Catholic Priest abused a young girl over a six year period of time. She sued the Diocese for negligently hiring and supervising the priest. After her action was settled by the Diocese and some of its insurers the Diocese sought addition contribution from one of its insurers who had refused to pay because of a self-insured-retention (SIR) that it claimed applied to each act of abuse thus eliminating a need to contribute. The Diocese disagreed and appealed to New York’s highest court, the New York Court of Appeals in Roman Catholic Diocese of Brooklyn, &C v. National Union Fire Insurance Company of Pittsburgh, Pa, No. 69 (N.Y. 05/07/2013).

This appeal involved the apportionment of liability for a settlement between the Roman Catholic Diocese of Brooklyn (the Diocese), and a minor plaintiff in an underlying civil action charging sexual molestation by a priest.

FACTS

Jeanne M. N.-L., individually and as mother and natural guardian of Alexandra L., a minor under the age of 18 years, sued the Diocese and one of its priests. The complaint alleged that the priest sexually abused Alexandra on several occasions from August 10, 1996 through May 2002, and that the molestation took place in several locations including the rectory, office and other areas of a church in Queens, New York; the priest’s vehicle; the plaintiff’s home; and a home in Amityville, New York.

In August 2007, the Diocese settled the action for $2 million and “additional consideration.” The appeal before the Court of Appeals involved a dispute between the Diocese and defendant National Union Insurance Company of Pittsburgh, PA (National Union), one of its insurance carriers, regarding the Diocese’s demand for reimbursement for the settlement.

National Union provided primary insurance to the Diocese, and issued three consecutive one-year commercial general liability policies starting in 1996. Non-party Illinois National Insurance Company provided primary coverage for the next three years. Defendant Westchester Fire Insurance Company, who settled with the Diocese and is not a party on this appeal, provided excess umbrella coverage for all seven years under consecutive annual policies. The National Union policies provide coverage for damages resulting in bodily injury during the policy period, and include a liability limitation of $750,000 and a $250,000 self-insured retention (SIR) applicable to each occurrence. The parties, thus, agreed that for each occurrence resulting in bodily injury within the policy period, National Union would be liable for covered damages after the first $250,000 (in excess of the SIR), and its liability would cap at $750,000.

When the Diocese sought coverage under the National Union policies, National Union responded by letter dated July 14, 2004, disclaiming coverage based on two exclusionary provisions referring to sexual abuse, and also asserted that the “policies have $750,000 policy limits over a $250,000 self-insured retention,” and coverage is applicable only if the “bodily injury” occurred during the policy period.

In January 2009, the Diocese sought a declaratory judgment that National Union was required to indemnify the Diocese for the $2 million settlement and certain defense fees and costs, up to the liability limits of the National Union policies.

National Union moved for partial summary judgment, seeking an order that the incidents of sexual abuse in the underlying action constituted a separate occurrence in each of the seven implicated policy periods, and required the exhaustion of a separate $250,000 SIR for each occurrence covered under a policy from which the Diocese sought coverage. National Union also sought a ruling requiring that the $2 million settlement be paid on a pro rata basis across each of the seven policies. In opposition, the Diocese argued that the sexual abuse constituted a single occurrence requiring the exhaustion of only one SIR, and that allocation of liability should be pursuant to a joint and several allocation method, under which the entire settlement amount could be paid for with National Union’s policies.

TRIAL COURT DECISION

The trial court denied National Union’s motion for partial summary judgment and granted the cross-motion of the Diocese, concluding that National Union, in contravention of the requirements of New York Insurance Law failed to timely disclaim coverage. The trial court further determined that the incidents of sexual abuse constituted a single occurrence, but observed that the language of the policies required the exhaustion of the SIR for each implicated policy.

THE APPEALS

The Appellate Division reversed the order of trial court, declaring that the alleged acts of sexual abuse constituted multiple occurrences, and that the settlement amount should be allocated on a pro rata basis over the seven policy periods, requiring the concomitant satisfaction of the SIR attendant to each implicated policy.

DISCUSSION  

New York statutes require that:  “If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”

Failure to raise a ground for disclaimer “as soon as is reasonably possible” precludes an insurer from later asserting it as a defense. In Zappone v Home Ins. Co. (55 NY2d 131 [1982]), we previously recognized a narrow exception to the timeliness requirement of the statute, holding that a notice of disclaimer is not required in the event there “is no insurance at all and, therefore, no obligation to disclaim or deny”.

The defenses at issue do not relate to an argument of exclusion or disclaimer, but rather, focus on the extent of alleged liability under the various policies. Put simply, they are not subject to the notice requirements because they do not bar coverage or implicate policy exclusions. Therefore, National Union did not have to give notice of the SIR requirement because the SIR is not a basis for disclaimer or denial of coverage.

Prior to this decision New York’s highest court had not decided whether the several acts of sexual abuse constitute multiple occurrences in the context of claims based on numerous incidents of sexual abuse of a minor by a priest, which spanned several years and several policy periods.

The National Union policies at issue on this appeal define an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” They define “bodily injury” to mean “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time,” and limit liability to bodily injury that “occurs during the policy period”.

Nothing in the policies reveal an intent to aggregate the incidents of sexual abuse into a single occurrence. The incidents of sexual abuse within the underlying action constituted multiple occurrences because they spanned a six-year period and transpired in multiple locations. The sexual abuse lack temporal and spatial closeness to join the incidents into a single occurrence. There was no way to connect an instance of sexual abuse that took place in the rectory of the church in 1995 with one that occurred in 2002 in the priest’s automobile. Each incident involved a distinct act of sexual abuse perpetrated in unique locations and interspersed over an extended period of time.

The Court of Appeals concluded, therefore, that the Diocese must exhaust the SIR for each occurrence that transpires within an implicated policy from which it seeks coverage. The policies provide that the SIR “shall apply separately to each occurrence,” and only to “occurrences covered under [the] policy.” To permit the Diocese to exhaust a single SIR and then receive coverage from up to seven different policies would conflict with the plain language of the policies, and produce an outcome not intended by the parties.

A pro rata allocation is consistent with the language of the policies at issue in this action. Plainly, the policy’s coverage is limited only to injury that occurs within the finite one-year coverage period of the policy. To that end, assuming that the minor plaintiff suffered “bodily injury” in each policy year, it would be consistent to allocate liability across all implicated policies, rather than holding a single insurer liable for harm suffered in years covered by other successive policies. A joint and several allocation is not applicable in this case as the Diocese cannot precisely identify the sexual abuse incidents to particular policy periods. The minor plaintiff in the underlying action could only give a broad time-frame in which the sexual abuse was perpetrated and conceded in her complaint that she was “unable in good faith . . . to state the exact date (s), time (s), [and] place (s) of each and every assault” Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period. The Court of Appeals, therefore, allowed the insurers to assert one SIR for each year and prorated the payments for the share of the $2,000,000 settlement over each policy year.

ZALMA OPINION

A policy containing an SIR requires the insured to incur damages in excess of the SIR for each occurrence. Although the court found that each act of abuse was a single occurrence, because the child abused could not specify when each act occurred, the court performed a Solomon-like decision and concluded there was a single occurrence during each policy period even though she could have been abused six times in one year and only once in the next.

Solomon was a king with absolute power. A court does not have absolute power but must, as did the New York Court of Appeal, be fair to all involved because the litigants in the underlying case failed to determine what happened and when but settled the dispute without trial.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

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Cooperate With Insurer

Refusal or Failure to Cooperate is Fatal to Claim

Almost every first-party policy of insurance contains a provision that requires the insured to cooperate in the investigation of the insurer, to produce documents required to be produced and to appear for and testify at an examination under oath (“EUO”). Failure to cooperate, produce documents and appear for EUO can be fatal to a claim. In Chicago Title Insurance Company v. Bristol, No. (AC 34040) (Conn.App. 05/07/2013) the Connecticut Court of Appeal was resolved a dispute regarding the effect of a failure to cooperate.

The defendant Bristol Heights Associates, LLC (“Bristol”), appealed from the judgment of the trial court rendered in favor of Chicago Title Insurance Company (“Chicago”), in connection with the underlying civil action in which the Chicago sought a declaratory judgment to determine its obligations under a title insurance policy (policy) issued to Bristol.

FACTS

On May 25, 1994, Lew J. Volpicella purchased the property involved in the underlying action and received a quitclaim deed from PB Real Estate, Inc. (PB Real Estate). At the time of the purchase, the property was a single parcel of land. Formerly, the property had been subdivided into 147 lots. The subdivision expired on March 3, 1993. The city of Bristol (city) never sent a bill to Volpicella for taxes due on the October 1, 1993 grand list. The payments due from Volpicella for the July, 1994 and January, 1995 installments of that tax went unpaid. On May 31, 1995, the city recorded tax liens for the October 1, 1993 grand list under PB Real Estate; the liens were filed individually against the 147 lots even though the property was a single parcel as of March 3, 1993. The city gave notice of the liens to PB Real Estate, but not to Volpicella. Volpicella paid the taxes on the property for the grand lists after 1993, and no overdue balance was reflected on any of the bills that he received. The city failed to apply any of Volpicella’s subsequent tax payments to the oldest, past due balance that it claimed was due from the 1993 grand list.

Volpicella entered into an agreement with Bristol in which he became a member of Bristol and conveyed the property to Bristol. Volpicella conveyed the property by way of a warranty deed dated April 2, 2003, which was subsequently recorded on May 8, 2003. The deed contained no exception for the tax liens on the 1993 grand list. Volpicella was given an unsecured promissory note for $800,000 as the consideration for the conveyance. At the time of the transfer of the property, Bristol purchased from the Chicago the policy, which insured title to the property. Bristol’s attorney, Richard P. Kuzmak, served as Chicago’s issuing agent with respect to the policy. When Kuzmak performed a title search on the property, he did not locate the city’s tax liens against the property because they were filed against the subdivided lots owned by PB Real Estate, not Volpicella.

On August 16, 2005, Bristol received a demand from the city for payment of the 1993 taxes. nBristol never notified Volpicella that it was asserting any claim against his warranty deed, and it did not request that he pay the tax liens. On September 1, 2005, Kuzmak wrote a letter to one of the Chicago’s attorneys, Phillip Fanning, regarding the receipt of the tax lien, in which he requested a meeting. In a meeting on October 27, 2005, Kuzmak requested that Fanning and Chicago not do anything about the liens because the money Bristol owed Volpicella under the promissory note exceeded the amount of the tax lien and because the validity of the tax liens was in question.

On March 8, 2006, Bristol paid the tax liens on the property in full. As of that date, the city had not initiated a foreclosure action or referred the matter to outside counsel for collection. At trial, it was stipulated that Bristol did not notify Chicago or obtain its consent prior to paying the liens.

Chicago sought a declaratory judgment  The trial court rendered judgment in favor of Chicago as to count three regarding Bristol’s voluntary payment, count four regarding Bristol’s breach of the duty to cooperate under section 5 of the conditions and stipulations in the policy and Bristol’s counterclaim.

DISCUSSION

Bristol raises several claims related to the court’s finding that it breached the policy by failing to cooperate with Chicago’s coverage investigation, thereby prejudicing Chicago.

Bristol argued that section 5 of the conditions and stipulations in the policy only permitted Chicago to request information related to the proof of loss or damage in light of the title of the section and, likewise, only required Bristol to comply with a request of the same nature. Bristol further argued that Chicago’s requests went beyond the scope of section 5 because they were made in order to obtain information that would vitiate coverage and find defenses to coverage through various policy exclusions. Chicago countered that the plain language of section 5 authorized Chicago to request information and documents to further its coverage investigation and that its requests were, therefore, authorized under this section.

The court of appeal concluded that the plain language of section 5 permitted Chicago to request information necessary to further its coverage investigation and required Bristol to cooperate with such requests. Section 5 entitled Chicago to require Bristol to submit to examination under oath and produce various records and documentation which reasonably pertain to the loss or damage at issue in a claim that is being investigated. Moreover, it specifically states that the failure of Bristol to submit to examination under oath or produce other reasonably requested information shall terminate any liability of Chicago under the policy as to that claim.

The court of appeal also agreed with Chicago, and most jurisdictions that have discussed the issue, that it was authorized under section 5 to investigate whether Bristol’s tax lien claim was entitled to coverage. After a careful review of the record the court of appeal also found no support in the record for Bristol’s suggestion that Chicago’s request went beyond the scope of the policy.

Generally when an insured fails to comply with the insurance policy provisions requiring an examination under oath and the production of documents, the breach generally results in the forfeiture of coverage, thereby relieving the insurer of its liability to pay, and provides the insurer an absolute defense to an action on the policy. The condition of cooperation with an insurer is not broken by a failure of the insured in an immaterial or unsubstantial matter. Lack of prejudice to the insurer from such failure is a test which usually determines that a failure is of that nature.

The trial court did not err in finding that Bristol breached the policy and prejudiced Chicago by failing to cooperate with its requests. Chicago’s requests were reasonable under the terms of the policy and Bristol was required to comply with the requests. Bristol has offered no excuse for its failure to cooperate.

At trial, the parties even stipulated that Bristol did not cooperate with Chicago’s coverage investigation before paying the tax liens, and the trial court found that Bristol continued to refuse to cooperate after paying the liens.

Because the plain language of section 5 requires Bristol to submit to examination under oath and produce various records and documentation which reasonably pertain to the loss or damage, the trial court was correct when it found that Bristol’s refusal to do so was a breach of the policy.

Bristol’s failure to cooperate was not immaterial or unsubstantial. The trial court found that the breach resulted in prejudice to Chicago’s ability to determine whether coverage applied and to prevent loss or damage to Bristol.  The trial court also found that the eventual submission to examination and production of certain documents was so long after the payment of the taxes by Bristol that it prejudiced Chicago’s ability to investigate and defend the claim.

ZALMA OPINION

Bristol learned that the Chicago policy contained a material condition precedent to obtain the benefits of the policy and that the refusal to promptly provide documents or appear for EUO before paying the taxes that it wanted the insurer to pay. By so doing it breached the condition and lost its right to the benefits of the policy.

The right to an EUO has been the law of the U.S. since, at least, the U.S. Supreme Court ruled in Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 97, 28 L.Ed. 76, 82, 3 S.Ct. 507. People who are insured should recognize that there is an obligation to appear for EUO and that refusal to appear is fatal to the claim.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

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Administrative Remedies Required

Don’t Rush To Sue

Everyone who believes they have been wronged wish to seek damages from a court. Courts, however, have jurisdiction limited by statutes. Workers’ Compensation benefits are a creature of statute and set forth administrative remedies that must be met before an injured worker can seek the review of a state court. No one dealing with a system like workers’ compensation should consider suit in state or federal courts until they have exhausted all administrative remedies provided by the statutes because the court may refuse to hear the case.

In Garry W. Thomas and Sherry Thomas v. American Home Assurance Company, Chartis Claims, Inc., F/K/A Aig, No. 05-11-01722-CV (Tex.App. Dist.5 05/03/2013) a Texas appellate court was asked to review the dismissal of a suit because of lack of jurisdiction. Garry W. Thomas and Sherry Thomas (collectively “Thomas”) appealed the trial court’s order that granted American Home Assurance Company, Chartis Claims, Inc., f/k/a AIG Domestic Claims, Inc., The Insurance Company of the State of Pennsylvania, and Christopher Edward Mutch’s (the “insurers”) motion to dismiss the Thomas’ common law and statutory bad faith claims. Their suit  concerned the initial denial of workers’ compensation coverage and delay in approval for payment of Garry Thomas’s knee replacement surgery. Thomas’ case was dismissed for failure to exhaust administrative remedies.

FACTUAL BACKGROUND

In June 2002, Garry Thomas reported sustaining an injury to his left knee while working for Vought Aircraft Industries, Inc. At the time of the incident, American Home provided workers’ compensation insurance coverage to Vought Aircraft’s employees. Chartis Claims conducted an investigation into Garry Thomas’s claim on behalf of American Home and determined that he had sustained a compensable injury to his knee.

On February 4, 2005, Dr. Saunders sent a request for preauthorization to perform a left total knee replacement on Garry Thomas to Health Direct, Inc., which is the medical preauthorization department for Chartis Claims. On February 10, 2005, Health Direct responded, denying the request.

Garry Thomas did not request reconsideration of this decision. Dr. Saunders sent a second request to Health Direct for preauthorization to perform a left total knee replacement on Garry Thomas which he later withdrew.

Although the insurers accepted responsibility for a left knee strain and meniscal tear they denied the need for a total knee replacement as this procedure is needed for degenerative changes not related to a work-related injury.  Garry Thomas did not request a benefit review conference.  The Texas Workers’ Compensation Commission sent Garry Thomas a letter stating that it had received his request for a benefit review conference, but it could not be processed and a conference would not be scheduled due to “insufficient documentary evidence.” The letter requested that Garry Thomas provide the Division of Workers’ Compensation with medical documentary evidence that supports his need for a total left knee replacement and shows it is directly related to his injury. There is nothing in the record on appeal showing that Garry Thomas provided the requested documents or that he had a benefit review conference.

On November 11, 2008, Dr. Saunders sent his sixth request to Health Direct for preauthorization. On November 12, 2008, Health Direct again responded that the “treatment has been recommended as medically necessary.” Health Direct also noted, “Compensability/Dispute Issue:  Carrier has accepted a left knee injury.” Garry Thomas had a total left knee replacement on January 5, 2009 and the surgery was paid for by American Home.

After the surgery was completed Garry Thomas sued the insurers for fraud, breach of contract, specific performance, violations of the Texas Deceptive Trade Practices Act and the Texas Insurance Code, and breach of the common law duty of good faith and fair dealing. Sherry Thomas brought derivative claims for mental anguish, pain and suffering, loss of consortium, and damage to her financial and credit standing and reputation. The Thomases’ claims were premised on the delay in approving Garry Thomas’s workers’ compensation claim. The insurers filed a motion to dismiss that was based on lack of subject matter jurisdiction.

ANALYSIS

Under the exclusive jurisdiction doctrine, the Legislature grants an administrative agency the sole authority to make the initial determination in a dispute. If an agency has exclusive jurisdiction, courts have no subject matter jurisdiction over the dispute until the party has exhausted all of the administrative remedies within the agency.

The Texas Workers’ Compensation Act provides that the recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance for a work-related injury. The Act vests the power to award compensation benefits solely to the Texas Department of Insurance, Workers’ Compensation Division, subject to judicial review. The law sets up a four step process to resolve disputes:

  1. The parties participate in a benefit review conference before a hearing officer designed to mediate and resolve disputed issues by agreement of the parties.
  2. A party may seek a contested case hearing with the Texas Department of Insurance, Division of Workers’ Compensation, to decide any issues not resolved by agreement or through the benefit review conference. In the alternative, if issues remain unresolved after a benefit review conference, the parties, by agreement, may elect to engage in arbitration.
  3. The party who loses at the contested case hearing may seek review by an administrative appeals panel.
  4. A party may seek judicial review of issues regarding final decisions of disputes adjudicated by the Division of Workers’ Compensation.

A claimant is not required to continue through every step because the provisions of the Texas Workers’ Compensation Act contemplate that disputes may be resolved at any level. The Thomas’ petition did not state whether their claims were related to the denial of preauthorization based on medical necessity, the denial of compensability of the injury, or both.

The Thomases do not contend, and the record did not show, that Garry Thomas sought reconsideration, a medical dispute resolution by an independent review organization, or a contested case hearing of Health Direct’s February 10, 2005 denial of Dr. Saunders’s first request for preauthorization. The court noted that four subsequent requests for preauthorization were approved. The fact that Health Direct ultimately approved Dr. Saunders’s third, fourth, fifth, and sixth requests for preauthorization does not constitute any type of determination by the Division of Workers’ Compensation that Health Direct’s denial of Dr. Saunders’s first request for preauthorization was improper.

Because Garry Thomas’s first request for preauthorization was denied he could have sought administrative review of the denial of his request for preauthorization. In fact, the record on appeal does not show that Garry Thomas pursued any of the administrative remedies available to him for disputing the denial of his first request for preauthorization, including a request for reconsideration and a request for review of the denial of a request for reconsideration by an independent review organization.

CONCLUSION

The appellate court concluded that trial court did not err when it granted the insurers motion to dismiss.

ZALMA OPINION

The tort of bad faith is a temptation for parties and their lawyers because there is a potential for a windfall of tort and punitive damages not available to an injured worker who falls within the workers’ compensation system. However, before succumbing to that temptation it is necessary to exhaust the administrative remedies. The Thomas’ attempted to side-step the administrative remedies and go directly to litigation after receiving Mr. Thomas’ new knee.

What kept Thomas from the ability to obtain tort remedies was his failure to seek the administrative remedies available to him. Rather, he had his doctor send request after request for permission to replace the knee until the insurer finally gave in and agreed. He could have resolved the dispute quicker if, after the first request was denied, he demanded the administrative review. He did not.

Workers agree to submit injuries to the workers’ compensation system to avoid the need to prove cause of injury or the negligence of a third party and limit themselves to the statutory remedies. The Thomas’ tried to avoid the system and the courts of Texas properly refused to allow him to seek damages outside the system.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Duty to Read Policy

Montana Questions Obligation of Insured to Read Application

Usually an insured is held to the statements of facts in an application signed by the insured. In Montana an exception was created to this usual requirement over the dissent of two justices.

FACTS

Brenda Bailey and J. Stanley Bailey, Jr. (the Baileys) appeal from an order granting summary judgment to State Farm and Mark Olson (Olson) on the Baileys’ claims that State Farm and Olson negligently failed to secure underinsured motorist (UIM) coverage for the Baileys. The Montana Supreme Court was asked to resolve the dispute in Brenda Bailey and J. Stanley Bailey, Jr v. State Farm Mutual Automobile Insurance, 2013 MT 119 (Mont. 05/02/2013).

On October 19, 2006, a drunk driver crossed the highway center line and collided head-on with the Baileys’ vehicle. The Baileys sustained very serious injuries in the accident. Stan was flown to Harborview Medical Center in Seattle and remained a patient there for five months. Brenda spent a significant amount of time hospitalized in Kalispell and Cut Bank. Brenda remains wheelchair bound as a result of her injuries. The Baileys incurred medical expenses in excess of $1,000,000.

The Baileys had moved from Oregon to East Glacier, Montana, in March 1998. The Baileys had been State Farm customers for many years. On April 3, 1998, the Baileys went to the Mark Olson State Farm Agency in Cut Bank, Montana, to transfer their Oregon State Farm policy to Montana. Insurance agent Nola Peterson Softich (Softich) assisted the Baileys. The Baileys specifically recalled presenting their Oregon State Farm insurance cards to Softich and requesting that the same coverage they carried in Oregon be transferred to Montana. The Baileys also maintain that they requested full coverage.

Softich completed a computerized insurance application for each of the Baileys’ two vehicles. Each application listed twelve types of coverage and displayed a “Yes” or “No” next to each coverage to indicate whether that coverage was selected. The State Farm policies sold to the Baileys in Montana contained liability coverage limits of $250,000 per person and $500,000 per occurrence for bodily injury, $100,000 for property damage liability, $5,000 in medical payments coverage, and uninsured motorist (UM) coverage limits of $100,000 per person and $300,000 per occurrence. On both applications, Softich entered a “No” next to the UIM coverage. After Softich filled out the applications, Stan signed both applications.

Stan testified in his deposition that he typically did not read any insurance documents because he relied on his agent to provide him with the important information. Brenda recalled receiving insurance cards from State Farm, but did not recall reviewing any policies or other information from State Farm. State Farm and Olson maintained that the Baileys received new insurance cards and renewal notices listing the various coverages twice every year.

It is undisputed that the Baileys’ State Farm automobile insurance policy obtained in Montana did not match their previous policy from Oregon. The Baileys’ Oregon policies provided the following coverages: (1) bodily injury liability, $300,000 per person/$500,000 per occurrence; (2) property damage, $100,000; (3) personal injury protection (analogous to medical payments coverage) $100,000; (4) UM, $300,000 per person/$500,000 per occurrence; and (5) UIM, $300,000 per person/$500,000 per occurrence.  In May 2005, seven years after the initial application, Stan called an employee of Olson, Jeannie Fetters (Fetters), on the telephone to discuss his State Farm policy. During their conversation, Fetters reviewed his policy and mentioned to Stan that he did not have UIM coverage.  Fetters testified that Stan told her that he was not interested and he only wanted to make the requested changes.

Following the automobile accident that occurred on October 19, 2006, the Baileys claimed they learned for the first time that they had only $5,000 in medical payments coverage and did not have any UIM coverage. In fact, the Baileys testified that they were unaware what UIM coverage was until after the accident. The drunk driver who caused the accident carried the statutory minimum automobile liability insurance limits. The Baileys’ medical expenses and other damages far exceeded the liability coverage of the drunk driver.

The Baileys sued State Farm and Olson alleging that Olson was negligent in failing to obtain the appropriate insurance coverages. The trial court granted summary judgment to State Farm and Olson.  The Baileys appealed.

DISCUSSION

Under Montana law, it is well established that an insurance agent owes an absolute duty to obtain the insurance coverage which an insured directs the agent to procure. If an insurance agent is instructed to procure specific insurance and fails to do so, he is liable for damages suffered due to the absence of such insurance.

While it is generally presumed that a person who executes a written contract knows its contents and assents to them, an insured does not have an absolute duty to read an insurance policy.  Instead, the extent of an insured’s obligation to read the policy depends upon what is reasonable under the facts and circumstances of each case. Once an insured informs an insurance agent of his insurance needs and the agent’s conduct permits a reasonable inference that the agent is highly skilled in this area, an insured is justified in relying on an insurance agent to obtain the coverage that the agent has represented he will obtain.

It is undisputed that the Baileys’ Montana State Farm policy that they obtained through Olson did not contain the same coverages and limits as their Oregon policy. The Montana policy contained very high liability and UM limits, but very low medical payment coverage and no UIM protection.

Negligence actions typically involve questions of fact and ordinarily are not susceptible to summary judgment. Questions of fact can be determined as a matter of law only when reasonable minds cannot differ. Drawing all reasonable inferences in favor of the Baileys, the Supreme Court concluded that reasonable minds could differ concerning whether State Farm and Olson acted negligently when placing the Baileys’ coverage.

Two Justices dissented

The dissenters contended that the Supreme Court majority cites the principle that an insured does not have an absolute duty to read an insurance policy. On the basis of this principle, the Court apparently excuses any obligation on the part of the Baileys to read or be accountable for the signed applications and statements made therein. However, Montana courts have only applied the “no read” principle to cases where an insurer made changes within the body of a policy and the insured was not otherwise notified of the change.

To further rebut the evidence of this 2005 event, the Court again cites Stan’s abiding belief that he had the same coverage as he had in Oregon. The Court’s reliance on Stan’s Oregon coverage pales when it is recalled that the Baileys made that request seven years earlier in 1998, thereafter signed contrary application forms, paid contrary premiums, and received contrary coverage notices until 2005, when Stan called to change their coverages. The dissenters stated a concern that without expressly so holding, the majority’s ruling will generate additional confusion in the law regarding the scope of an insurance agent’s duty to the insured.

ZALMA OPINION

The dissenters in this case have taken a more reasonable interpretation. Although their injuries were severe and reasonable people would like the Bailey’s to have the assistance of insurance to pay the massive medical bills they incurred, it is not proper for a court to shift the burden from those who made the decision not to purchase UIM coverage to those who carried out the stated desires of the Baileys.

When the application was signed the Baileys’ specifically refused to purchase UIM coverage. They signed an application that stated they had read and understood the application. The court, regardless, accepted as true the testimony that the application was false and that Bailey never read the application. By so holding the Supreme Court made the application a nullity although the insurer relied upon the statements made in the application in deciding to insure the Baileys. Would they ignore the statement on the application that stated an insured was licensed to drive when in fact his license was revoked because of a drunk driving conviction because he did not read the application before he signed it? I think not. I can only hope that the Supreme Court reconsiders its position or that, on trial, the court finds that the application was knowingly signed and was the representation of the insured.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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No Double Recovery

UIM Reduced by Tort Recovery

The plaintiff, Michelle Guarino, administratrix of the estate of Georgette Dufresne, appeals from the summary judgment rendered in favor of the defendant, Allstate Property and Casualty Insurance Company. She claims that the court improperly found that the defendant was entitled to judgment as a matter of law because the plaintiff was barred from recovering under the underinsured motorist policy issued by the defendant, as she had already recovered from the two tortfeasors an amount in excess of the policy limit. The Connecticut Court of Appeal was called upon to resolve the dispute in Michelle Guarino, Administratrix (Estate of Georgette Dufresne v. Allstate Property and Casualty Insurance Company, No. (AC 33540) (Conn.App. 05/14/2013) to determine if it was proper for Allstate to refuse to pay UIM benefits because the plaintiff has recovered more than Allstate’s limits from the tortfeasors.

FACTS

On June 27, 2007, the plaintiff’s decedent, Georgette Dufresne, was driving along Hidden Lake Road in Haddam and approached a stop sign at the intersection with Route 81. Dufresne did not stop at this intersection because two large motor vehicles or trailers, owned by Anton Paving, LLC (Anton), and Lombardi Tire and Auto Repair, LLC (Lombardi), respectively, obstructed the view of the stop sign placed there. While proceeding through the intersection, Dufresne’s car collided with that of Alexander Sokolow. As a result of the collision, Dufresne sustained severe bodily injuries that resulted in her death.

On July 8, 2009, the plaintiff settled all of her claims against Anton in return for a payment of $20,000. She signed a release, as a component of the settlement, which stated in relevant part: “It is understood and agreed that this settlement is in full compromise of a doubtful claim . . . and that neither this release, nor the payment pursuant thereto shall be construed as an admission of liability, such being denied.” Thereafter, on June 20, 2010, the plaintiff settled all of her claims against Lombardi in return for a payment of $225,000 and signed a release similar to that signed as part of her settlement with Anton.

THE POLICY

At the time of the collision, Dufresne carried automobile insurance issued by the defendant that included coverage for bodily injuries caused by underinsured motorists. Dufresne’s policy contained a coverage limit of $100,000 per person per accident, with a total limit of $300,000 of coverage for any one accident. The portion of that policy dealing with the coverage limits on under-insured motorists states in relevant part:

“Limits of Liability”

The coverage limit shown on the declarations page for:

“1. ‘[E]ach person’ is the maximum that we will pay for damages arising out of bodily injury to one person in any one motor vehicle accident, including damages sustained by anyone else as a result of that bodily injury.

“2. ‘[E]ach accident’ is the maximum that we will pay for damages arising out of bodily injury to two or more persons in any one motor vehicle accident. This limit is subject to the limit for ‘each person.’ “

“The limits of this coverage will be reduced by:

“1. [A]ll amounts paid by or on behalf of the owner or operator of the uninsured auto or underinsured auto or anyone else responsible. This includes all sums paid under the bodily injury liability coverage of this or any other policy. (Emphasis added)

ANALYSIS

Allstate, on June 28, 2010, filed a motion for summary judgment, on the ground that the plaintiff was not entitled to recover any damages from the defendant because she had already recovered from the tortfeasors, Anton and Lombardi, $245,000, which was in excess of Dufresne’s $100,000 policy limit for underinsured motorist coverage. The court granted the defendant’s motion and rendered judgment in its favor on May 25, 2011.

Dufresne’s policy contains a provision that reduces the $100,000 limit of coverage for each person in each accident by “all amounts paid by or on behalf of the owner or operator . . . of the underinsured auto or anyone else responsible.”

The Connecticut Supreme Court’s holding in Buell v. American Universal Ins. Co., 224 Conn. 766, 621 A.2d 262 (1993), is dispositive of this issue. In Buell the plaintiff, Debra Buell, sustained injuries when the car that she was operating was struck by a second vehicle as a result of another collision between the second vehicle and a third vehicle. An arbitration panel found that the operator of the third vehicle, but not the operator of the second vehicle, was responsible for Buell’s injuries. Because the operator of the third vehicle was underinsured, Buell sought underinsured motorist benefits under a liability insurance policy that she had purchased from the defendant, American Universal Insurance Company (American Universal). The Supreme Court of Connecticut held that an insurer may limit its liability by deducting amounts paid by or on behalf of any party responsible for the injury, and allows an insurer to deduct a settlement payment from the damages owed to its insured. The Supreme Court based its conclusion on the dual legislative intent of providing a certain minimum level of protection to underinsured motorists and of preventing double recovery on the part of the insured. It further observed that to hold otherwise would provide the insured a windfall by permitting duplicate payments for the same injury.

Because the court determined that the defendant’s reduction in Dufresne’s policy limit by the amount paid to her estate in settlement of her claims was a proper reduction under the terms of the policy and relevant regulation, there exists no genuine issue of material fact regarding the defendant’s obligation to the plaintiff under the terms of the insurance contract.

ZALMA OPINION

In Connecticut the injured person can only recover under an uninsured or underinsured motorist policy up to the limit of liability of the policy and if the other motorist pays up to or more than the policy’s limit the insured gets nothing.

This case teaches that one should never purchase UM/UIM coverage for limits less than the amount of general liability coverage carried. In this case the plaintiff did not buy sufficient limits and must settle for the amounts accepted from the tortfeasors.

ZALMA-INS-CONSULT.gif© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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When You Win – Stop Complaining

No Good Deed Goes Unpunished

In a prior lawsuit, Edmond and Rhonda Bisland sued Richard Simmons and Lindig Construction and Trucking, Inc. (“Lindig”) for injuries that Edmond sustained in a car accident. At the time of the accident, Financial Indemnity Company (“Financial”) was the insurer for Lindig. The Bislands initiated a lawsuit against Financial arguing, among other claims, that Financial breached the terms of its insurance policy by failing to timely pay on the judgment they had obtained against Lindig.

After a trial, the jury found in favor of Financial. Subsequent to the jury rendering its decision, the Bislands moved for judgment notwithstanding the verdict and argued that Financial breached its policy and that they were entitled to damages as third-party beneficiaries to the policy. After considering the Bislands’ assertions, the district court granted the motion for judgment notwithstanding the verdict. Financial appealed and in Edmond L. Bisland Iii and Rhonda T. Bisland v. Financial Indemnity Company, Or Properly Unitrin County, No. 03-11-00228-CV (Tex.App. Dist.3 05/02/2013) the Texas Court of Appeal resolved the dispute.

BACKGROUND

In 2004, Simmons worked for Lindig. While driving one of Lindig’s trucks, Simmons rear-ended a car driven by Edmond Bisland.  As a result of the accident, Edmond sustained significant injuries, including injuries to his spine. Consequently, Edmond and his wife, Rhonda Bisland, filed suit against Simmons and Lindig.

Prior Suit

Before trial in the prior suit, Simmons and Lindig “stipulated to negligence and vicarious liability,” and a trial was held regarding damages.  At the conclusion of the trial, the jury awarded a total of $2,557,000 and also awarded prejudgment and post-judgment interest on the award. The award exceeded the limits for the insurance policy covering Lindig and Simmons.

After the appeal in the prior suit was filed, Simmons entered into an agreement with the Bislands under which he agreed to assign to them any claims that he had against Financial. In exchange, the Bislands agreed to not enforce the prior judgment against Simmons and to release him from all liability under that judgment. Similarly, Lindig entered into an agreement with Financial under which Lindig agreed to waive any potential claims against Financial in exchange for Financial agreeing to fully cover the costs of the prior judgment against Lindig and Simmons even if those damages exceeded the policy limits.

Subsequent to Simmons and Lindig entering their respective agreements, the appeal in the prior suit became final, and this Court affirmed the district court’s judgment. Sometime after this Court issued its opinion, Financial paid the Bislands the value of the judgment as well as the accrued interest, which totaled $3,185,548.65.

Current Suit For More

A few days after the trial court issued its judgment in the prior suit, the Bislands initiated a new suit against Financial. In their final amended petition in the current suit, the Bislands asserted that Financial breached the terms of the insurance policy covering Lindig and Simmons. In particular, the Bislands urged that Financial had a duty under the insurance policy to pay judgments against its insureds when those judgments become final, and the Bislands insisted that Financial breached that duty by failing to pay on the judgment in the prior suit when the judgment became final against Simmons.

After a trial in the current suit, the jury found in favor of Financial on all of the issues presented in the jury charge. In addition, the jury concluded that the Bislands should not be awarded any attorney’s fees.

Shortly after the jury rendered its verdict, the Bislands filed a motion for judgment notwithstanding the verdict. After considering the Bislands’ motion for judgment notwithstanding the verdict, the district court granted the motion and determined that the Bislands were entitled to the requested award of $134,489.14; prejudgment interest on that amount starting “on December 11, 2009, and ending on the day preceding the date of this Final Judgment”; costs of suit; and “post-judgment interest on the combined sum” of the three awards listed above “beginning on the date of this Final Judgment and ending on date paid.”

DISCUSSION

The Texas Rules of Civil Procedure allow that during a trial, a court may render judgment notwithstanding the verdict if a directed verdict would have been proper, and the trial court may disregard any jury finding on a question that has no support in the evidence.

The Bislands assert that Financial had an obligation to pay them when the prior judgment became final as to Simmons. The Bislands claimed that the trial court in the prior suit held Lindig and Simmons “jointly and severally” liable for the damages that the Bislands sustained. In addition, the Bislands urge that the trial court’s “plenary power to alter the” prior judgment expired in February 2008, which was a few months after the prior judgment was rendered.  The Bislands also contended that Financial breached its obligation under the insurance policy by failing to pay the Bislands when the prior judgment became final and that Financial’s breach continued until after the prior appeal was final “when Financial paid the Underlying Judgment for Lindig and Simmons.”

Recognizing that the value of the prior judgment exceeded the limits of Lindig’s insurance policy, the Bislands claimed that Financial was only obligated to pay the policy limits at the time that the prior judgment became final as well as post-judgment interest on the policy limits until the judgment was paid. Specifically, the Bislands argue that Financial was obligated to pay $1,449,233.06. Accounting for the fact that Financial did ultimately pay the full amount of the prior judgment as well as post-judgment interest on that amount, the Bislands concede that Financial was entitled to a credit of $1,449,233.06.

Even assuming that the Bislands were in the correct procedural posture to bring a third-party-beneficiary claim against Financial, a person who sues for performance of a contractual obligation, whether as a party to the contract or as a third party beneficiary, must prove that all contractual conditions have been satisfied.

Any right to enforce the policy would have been extinguished when Financial paid the full value of the prior judgment and accompanying interest, including the value of the policy limits that the Bislands insist that they were entitled to when the trial court’s judgment in the prior case became final. In other words, once Financial complied with the terms of the insurance policy and fulfilled its obligation to pay, the Bislands’ ability to enforce the agreement and compel Financial to pay was exhausted.

Although the Bislands attempt to morph Financial’s alleged failure to timely pay into a new and independent cause of action, the amount requested for that claim as well as the credits that the Bislands afforded to Financial for paying the prior judgment demonstrate that the relief that the Bislands were seeking in the current suit was the time value for the delay in payment; however, as discussed previously, the Bislands were compensated for the delay in payment when Financial paid post-judgment interest on the damages awarded by the prior judgment, and the Bislands have not asserted that the amount paid as post-judgment interest was somehow deficient.

Since the appellate court overruled all of the Bislands’ issues on appeal and determined that the district court erred by granting the Bislands’ motion for judgment notwithstanding the verdict, the judgment was reversed and the trial court was ordered to render judgment in favor of Financial in accordance with the jury’s verdict.

ZALMA OPINION

This is an example of greed going too far. It is an expenditure of time and lawyers fees to gain more money from an insurer who agreed to, and did, pay a judgment in excess of its policy limits by a factor of three only to be sued for more.

Had Financial done what the Bislands’ claimed they should – paid its limits promptly after verdict in the first case they would have recovered $2 million less than they did. They took the $3.1 million and then sued the insurer who they knew only owed $1 million and then added insult to the injury by demanding interest and fees.

Insurance should only pay what it promises to pay. The only logical reason for agreeing to pay the full judgment, even in excess of its limits, was the fear that the insurer would be held to have breached the covenant of good faith and fair dealing and potential punitive damages. The plaintiffs should have thanked Financial for agreeing to pay the full judgment plus interest rather than sue for more.

ZALMA-INS-CONSULT.gif© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Deceit Voids Insurance

Rescission if Florida For an Innocent Misrepresentation

An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. When the insured lies, whether intentionally or innocently, an insurer has the right to rescind. However, different states apply the reasons for rescission differently.

In Florida, the issue of whether an innocent misrepresentation is sufficient to allow rescission, was presented in Universal Property and v. Jamon A. Johnson and Chaka Johnson, No. 1D12-0891 (Fla.App. 04/30/2013). Universal Property and Casualty Insurance Company (Universal) sought reversal of a final judgment entered in favor of Jamon A. and Chaka Johnson who prevailed in a breach of contract suit after Universal denied their insurance claim following the discovery of a false statement on the application for insurance.

FACTS

On March 13, 2008, an accidental fire destroyed the Johnsons’ home. They were insured by Universal and, after the fire, the Johnsons filed a claim with Universal. An investigation ensued and the claim was denied following Universal’s determination that the Johnsons had falsely answered one of the questions on their insurance application. Specifically, the Johnsons had answered “no” to the question: “Have you been convicted of a felony in the last ten years.” In fact, Mrs. Johnson had been convicted of five felonies in July 1998. These felony convictions stemmed from arrests that occurred in October 1995 and September 1997. The initial arrest led to the sentence and a withholding of adjudication. During her probationary period, however, Mrs. Johnson was arrested again; her probation was revoked, she was resentenced, and an adjudication of guilt entered as to all offenses in 1998. This adjudication occurred eight and a half years prior to the application for insurance.

Following denial of their claim, the Johnsons brought suit seeking damages for breach of contract. Universal filed a counterclaim seeking a declaratory judgment that it was permitted to rescind the insurance contract. A Florida statute provides:

“(1) Any statement or description made by or on behalf of an insured or annuitant in an application for an insurance policy or annuity contract, or in negotiations for a policy or contract, is a representation and is not a warranty. A misrepresentation, omission, concealment of fact, or incorrect statement may prevent recovery under the contract or policy only if any of the following apply:

“(a) The misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer.

“(b) If the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith would not have issued the policy or contract, would not have issued it at the same premium rate, would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss.”

Prior to trial, the Johnsons moved for summary judgment arguing that Universal could not rely on the statute because it had adopted, by virtue of the language in the insurance contract, a more stringent standard for rescission on the ground of misrepresentation than the statute provides.

The trial court entered a partial summary judgment ruling that, under Universal’s policy language, Universal would be required to prove at trial that the misrepresentation at issue was intentional and that Universal was entitled to rescind the contract based only upon the commission of an intentional misrepresentation which was material to the acceptance of the risk. The trial court held that the insurance policy, and not the statute was controlling.

At trial, the Johnsons testified that the misrepresentation was unintentional, as they were confused as to when the convictions were actually entered. After the trial court denied Universal’s motion for a directed verdict made at the conclusion of the Johnson’s case in chief, the jury returned a verdict on which it found that the Johnsons did not knowingly and intentionally [make] a misrepresentation, omission, concealment of fact or an intentionally incorrect statement in their application for insurance which was material to the acceptance of the risk or to the hazard assumed by Universal.

The jury further found that, if the true facts had been known to Universal Property & Casualty Insurance Company, it in good faith, pursuant to a policy requirement or other requirement, would not have issued the policy or contract, would not have issued it at the same premium rate, would not have issued a policy or contract in as large amount, or would not have provided coverage with respect to the hazard resulting in the loss.

This second finding mirrors the language of the statute quoted above. Universal’s subsequent motions for a judgment notwithstanding the verdict and for a new trial were denied. Thereafter, a final judgment entered in favor of the Johnsons. They were awarded $463,158.89 in total damages, including attorney’s fees, costs and interest.

The Policy

The insurance policy provision at issue here provides in pertinent part:

SECTIONS I AND II – CONDITIONS

2. Concealment or Fraud. The entire policy will be void if, whether before or after a loss, an “insured” has:

a. Intentionally concealed or misrepresented any material fact or circumstance;

b. Engaged in fraudulent conduct; or

c. Made false statements;

relating to this insurance.

Analysis

Insurance contracts are construed according to their plain meaning and, if a policy provision is clear and unambiguous, it should be enforced according to its terms. When a contract of insurance is subject to multiple interpretations, the policy language should be construed liberally in favor of the insured and strictly against the insurer as author of the contract.  The general rule in Florida is that a misstatement in, or omission from, an application for insurance need not be intentional before recovery may be denied.

This case law relating to insurance policies is consistent with the general principle in contract law that, to obtain rescission of a contract, based upon misrepresentation, it is not necessary that the party making the misrepresentation should have known that it was false. The Florida Court of Appeal concluded that innocent misrepresentation is sufficient because, though the misrepresentation may have been made innocently, it would be unjust and inequitable to permit a person who has made false representations, even innocently, to retain the fruits of a bargain induced by such misrepresentation.

Insurance contracts, like other contracts, should receive a construction that is reasonable, practical, sensible, and just. Under the policy here and under the Florida statute a misrepresentation need not be fraudulently or knowingly made but need only affect the insurer’s risk or be a fact which, if known, would have caused the insurer not to issue the policy or not to issue it in so large an amount. The intention of the parties must be determined from an examination of the entire contract and not from separate phrases or paragraphs.

Other jurisdictions have interpreted differently contract provisions similar to the one at issue in the case before the Florida Court of Appeal. Regardless, pursuant to the statute the legislature mandated that any misrepresentation, innocent or intentional, will void an insurance contract if the misrepresentation is material either to the acceptance of the risk or to the hazard assumed by the insurer or if the true facts had been known to the insurer, the insurer in good faith would not have issued the policy.

Because neither the contract nor Florida statutory law requires that a misrepresentation be intentionally made for the contract to be voided, the trial court erred in granting summary judgment requiring that Universal was required to prove an intent to deceive. Further, given the jury’s finding as to the materiality of this misrepresentation, the contract of insurance is void.

ZALMA OPINION

Insurance is a contract of the utmost good faith. Both the insured and the insurer are obligated to treat each other fairly so as not to prevent the other from receiving the benefits of the contract. When an insured obtains a policy under false pretenses, as did the Johnsons, the court must conclude the policy never existed because had the truth been known the policy would never have been issued.

An insurer should be in a position to rely upon the truth of the matters stated in an application for insurance in making its decision to insure or not insure a risk. Universal asked the insured if they had ever been convicted of a crime. Mrs. Johnson had been convicted of several felonies. The jury believed she had forgotten and did not intend to deceive the insurer. The jury also found that the insurer was deceived. As a result of the misrepresentation – whether intentional or innocent – the insurer was deceived and the policy was void.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

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Zalma on Arson-for-Profit

Barry Zalma discusses the challenges insurers face when they suspect “Arson for Profit.”

Noted fraud and claims expert Barry Zalma discusses the challenges insurers face when they suspect “Arson for Profit.” Arson for profit is an intentional fire set to real or personal property with the intent to obtain insurance proceeds by fraud.

Insurers face several challenges when faced with potential ‘arson for profit.’ According to Mr. Zalma, arson fire is an insured peril; there is no exclusion for arson, only for fraud. Often, the fire destroys physical evidence, and arsonists are seldom observed setting a fire.

Insurers can prove a fire was intentionally set by establishing a motive and if the insured had the opportunity to set the fire.  The insurer needs to collect evidence to prove fraud including accelerants like gasoline or alcohol; photographs from the day of the fire; financial records of the insured, etc. Suspicious fires require a detailed investigation by professional ‘cause and origin’ investigators, private investigators, forensic accountants, and insurance coverage lawyers.

Barry is the author of Zalma on Insurance Fraud-2013 and Zalma’s Insurance Fraud Letter.   Recently, WRIN.tv spoke with insurance attorney Barry Zalma about “Staged Accidents” and Crash for Cash-type schemes.

For more of Barry Zalma’s commentary on insurance fraud, visit WRIN.tv’s On Demand Library

 

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Promises Must Be Kept

Insurer Must Defend Criminal Indictment

When an insurer makes the unusual promise to provide defense to an insured for criminal indictments it should fulfill that commitment regardless of what it believed, after receiving a claim, was prohibited by statute. The statute existed before the policy was issued and if the insurer wished to avoid such a defense it should have rewritten its policy.

California Insurance Code section 533.5, subdivision (b), precludes insurers from providing a defense for certain kinds of claims. The statute provides: “No policy of insurance shall provide, or be construed to provide, any duty to defend . . . any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” California’s unfair competition law under Business and Professions Code sections 17200 and 17500 “in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.”

In Bodell v. Walbrook Ins. Co. (9th Cir. 1997) 119 F.3d 1411 (Bodell), the Ninth Circuit held that section 533.5, subdivision (b), applies to criminal actions brought by the four listed state and local agencies but does not apply to criminal actions brought by federal prosecutors. The dissenting judge in Bodell and the trial court in this case concluded that section 533.5, subdivision (b), applies to any criminal action, including federal criminal actions.

The California Court of Appeal was called upon to decide whether the insurer in Mt. Hawley Insurance Company v. Richard R. Lopez, Jr, No. B234082 (Cal.App. Dist.2 05/01/2013) which had agreed to provide its insureds with a defense in “a criminal proceeding . . . commenced by the return of an indictment” “even if the allegations are groundless, false or fraudulent,” could avoid its contractual duty to defend an insured against federal criminal charges by relying on section 533.5, subdivision (b).

FACTUAL BACKGROUND

The Indictment

On January 6, 2010 the United States Attorney for the Central District of California filed a grand jury indictment charging Dr. Richard Lopez with criminal conspiracy, false statements and concealment, and falsification of records. The indictment alleged that Lopez, who was the medical director of the St. Vincent’s Medical Center Comprehensive Liver Disease Center, conspired with another doctor and other hospital employees in the liver transplant program to transplant a liver into the wrong patient.

According to the indictment, Lopez diverted a liver designated for one patient to a different patient who was further down the list of patients waiting for a liver transplant, in violation of regulations promulgated by the United States Department of Health and Human Services under the National Organ Transplant Act, and then covered up his diversion.

The Policy

Daughters of Charity Health Systems, Inc. (DCHS), which owns St.Vincent’s, purchased a “Not For Profit Organization and Executive Liability Policy” pursuant to which Mt. Hawley agreed to “pay on behalf of the Insureds, Loss which the Insureds are legally obligated to pay as a result of Claims . . . against the Insured for Wrongful Acts . . . .”  An endorsement defined “claim” to include “a criminal proceeding against any Insured commenced by the return of an indictment” or “a formal civil, criminal, administrative or regulatory investigation against any Insured . . . .” The policy’s definition of “insured” can include employees of St. Vincent’s like Lopez.

The Action

On March 3, 2010 Lopez tendered the defense to the charges to Mt. Hawley. On April 1, 2010 Mt. Hawley, through its attorneys, sent a letter to Lopez declining to defend or indemnify Lopez, and on the same date filed an action for declaratory relief. Mt. Hawley sought a declaration that it did not owe Lopez a duty to defend or indemnify in connection with the indictment because of the statute regardless of its promise to defend criminal indictments. Lopez filed a cross-complaint against Mt. Hawley for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.

The Ruling

The trial court found that “section 533.5 unambiguously bars coverage for criminal actions and proceedings” and that “the plain language of section 533.5 bars Mt. Hawley’s duty to defend or indemnify Dr. Lopez against the Indictment.”  The trial court entered judgment in favor of Mt. Hawley and against Lopez.

DISCUSSION

No California court has addressed the issue raised by this appeal of whether section 533.5, subdivision (b), precludes an insurer from providing a defense in all criminal actions, including federal criminal actions.

After an extensive review of the legislative history of the original 1988 statute and the 1990 and 1991 amendments the court of appeal concluded that it was clear that the purpose of the statute, the circumstances of its enactment, and the Legislature’s goal in enacting the statute, were to preclude insurers from providing a defense in civil and criminal assertions of California’s unfair competition and false advertising laws (“UCL” and “FAL”) brought by the Attorney General, district attorneys, city attorneys, and (later) county counsel. The court of appeal noted that at no time did the Legislature ever express intent that section 533.5, subdivision (b) should apply to criminal actions brought by public entities other than the four enumerated state and local agencies.

Section 533.5, subdivision (b), precludes an insurer from defending “any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [the UCL or the FAL] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel.”

Although it is not necessary to do so, the court of appeal confirmed its interpretation of section 533.5, subdivision (b), by applying “reason, practicality, and common sense to the language” of the statute. Outside the special area of UCL and FAL actions brought by state and local prosecuting agencies, there is no public policy in California against insurers contracting to provide a defense to insureds facing criminal charges, as opposed to indemnification for those convicted of criminal charges.

The court of appeal concluded that Section 533, a similar but much older statute (enacted in 1935) that prohibits indemnification “for a loss caused by the wilful act of the insured,” does not extinguish an insurer’s duty to defend an insured accused of those wilful actions.  The strong public policy of discouraging certain types of conduct by barring insurance coverage for criminal or intentional conduct that public policy applies to indemnification not defense.

The interpretation of section 533.5 allows insurers to contract to provide a defense to certain kinds of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes.

The interpretation that insurers may pay for defense costs in federal and some state criminal actions is also consistent with the principle that insureds charged with crimes begin with a presumption of innocence. The law punishes individuals convicted of crimes, not those accused of crimes.

Breach of the implied covenant of good faith and fair dealing

The trial court granted Mt. Hawley’s motion for summary adjudication on Lopez’s second cause of action for breach of the implied covenant of good faith and fair dealing on the ground that section 533.5 precluded a duty to defend.

Assuming the reasonableness of Mt. Hawley’s position is a defense to Lopez’s claim that Mt. Hawley refused to provide Lopez with a defense in bad faith, material factual issues precluded Mt. Hawley from prevailing on this claim on summary adjudication.

Lopez also alleged and presented evidence that Mt. Hawley refused to provide Lopez with a defense based on an exclusion, the medical incident exclusion, that according to Lopez was not part of the policy. A jury could reasonably infer from this evidence that Mt. Hawley’s conduct toward its insured Lopez was unreasonable and without proper cause.

DISPOSITION

The June 21, 2011 order granting Mt. Hawley’s motion for summary judgment was reversed. The October 18, 2010 order overruling Lopez’s demurrer to Mt. Hawley’s first amended complaint is affirmed. The judgment was reversed. Lopez’s request for judicial notice of the Judgment of Discharge in his federal criminal case is granted. Lopez is to recover his costs on appeal.

ZALMA OPINION

Mt. Hawley promised to defend criminal actions for which, one can assume, they charged  a serious premium. Then, when an insured was criminally charged, they refused to defend by strictly applying a statute that they felt prevented them from defending the insured.

Although the trial court agreed with Mt. Hawley, the court of appeal concluded there was no genuine dispute between Mt. Hawley and Dr. Lopez and sent the case back to the trial court to have a trial the cross-complaint for bad faith.

This case teaches that when an insurer makes a promise to defend criminal activity it should not attempt to avoid that defense. If it believed the statute prohibited coverage it should have defended under a reservation of rights to recover everything paid and then filed its declaratory relief action. Mt. Hawley took a serious chance that it, and the trial court, would be upheld. It lost and is now exposed to punitive damages.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

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DAMAGES LIMITED

Only Incurred Damages Allowed

The Old Rule of Thumb To Calculate General Damages

When I was a young adjuster, back in the 1960’s, adjusters and plaintiffs’ lawyers negotiated settlements for pain and suffering – general damages – by multiplying the amount of special damages – medical bills, loss of earnings – times two or three. The rule of thumb worked well for cases with small, three or four figure special damages and less well when the special damages were more than five figures. To profit from the rule of thumb plaintiffs would inflate the amount of special damages by working with doctors who would bill one amount and accept a lower amount.

Medical billing in California, and many other states, bears little resemblance to the amounts the physicians and hospitals are willing to accept. Recently I reviewed a case with almost $2 million in medical bills where the hospital and doctors agreed to accept as full payment for the services rendered slightly more than $300,000. If the rule of thumb was applied the amount of general damages would have been extremely different depending on which general damages number is used.

The California Court of Appeal in John Corenbaum v. Dwight Eric Lampkin, No. B236227, (Cal.App. Dist.2 04/30/2013) was asked by the parties and dozens of Amici to consider the impact and implications of the California Supreme Court’s opinion in Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541 (Howell) concerning proof of medical damages. As in Howell, the medical providers who treated plaintiffs accepted, pursuant to prior agreements, less than the full amount of their medical billings as payment in full for their services. The court of appeal needed to determine the admissibility in evidence of the full amount of an injured plaintiff’s medical billings not only with respect to damages for past medical expenses, but also with respect to future medical expenses and non-economic damages.

FACTUAL BACKGROUND

John Corenbaum and Charles Carter (Carter) suffered injuries when a vehicle driven by Dwight Eric Lampkin collided with a taxicab in which they were passengers. Lampkin was convicted of fleeing the scene of an injury accident, but was not found guilty on another count for driving under the influence. Corenbaum, Carter and Daniella Carter then filed two civil actions against Lampkin, which were later consolidated. After a trial, the jury found that Corenbaum and Carter, respectively, suffered approximately $1.8 million and $1.4 million in compensatory damages, and that Daniella Carter suffered $75,000 in damages for loss of consortium. The jury also awarded Corenbaum and Carter $20,000 each in punitive damages. Lampkin appealed the separate judgments entered in favor of Corenbaum and Carter.

Lampkin contends the trial court erred by admitting (1) evidence of the full amounts billed for plaintiffs’ medical care, rather than the amounts actually paid and accepted as full payment by plaintiffs’ medical providers, and (2) evidence of his prior arrest for driving under the influence.

The police interviewed Lampkin that morning and arrested him. A jury found him guilty of fleeing the scene of an injury accident (Veh. Code, § 20001, subd. (a)), a felony, and fleeing the scene of an accident causing property damage (id., § 20002, subd. (b)), a misdemeanor, in January 2009. Another count for driving under the influence (Veh. Code, § 23153, subd. (a)) apparently was dismissed because the People exceeded the statutory time to bring the case to trial. He was sentenced to three years’ imprisonment and ordered to pay $271,335 in restitution fines (Pen. Code, § 1202.4, subd. (f)).

Plaintiffs filed a motion in limine before trial to exclude any evidence of the payment of plaintiffs’ medical bills by a collateral source. On the same day, Lampkin filed a “Request for Court to Hold a Post-Verdict Hearing on Reduction of Plaintiffs’ Medical Expenses to the Amount Incurred,” requesting a post-verdict hearing “in the event that the jury verdict includes damages for past medical expenses in an amount exceeding the amount paid for those medical services.”

In accordance with the trial court’s in limine rulings, the jury heard evidence of the full amounts billed for Corenbaum’s and Carter’s past medical care and heard no evidence of the lesser amounts accepted by their medical providers as full payment pursuant to prior agreements with Lampkin’s private insurers. The jury returned a special verdict on June 3, 2011, finding that Lampkin’s negligence was a substantial factor in causing harm to each of the three plaintiffs. It found that Corenbaum and Carter had suffered past and future economic and non-economic damages totaling $1,834,602 and $1,392,141.87, respectively, and that Daniella Carter had suffered $75,000 in damages for loss of consortium. It also found that Corenbaum and Carter, respectively, bore 10 percent and 20 percent of the responsibility for their own injuries. The jury also found that Lampkin had acted with malice.

The trial court entered a separate judgment against Lampkin for each plaintiff, awarding Corenbaum and Carter, respectively, $1,537,985.97 and $1,108,362.08 in compensatory and punitive damages, and awarding Daniella Carter $60,000 in compensatory damages.

DISCUSSION

The California Supreme Court in Howell, supra, 52 Cal.4th 541, held that an injured plaintiff whose medical expenses are paid by private insurance can recover damages for past medical expenses in an amount no greater than the amount that the plaintiff’s medical providers, pursuant to prior agreement, accepted as full payment or, to the extent that payment is still owing, the amount that the medical providers had agreed to accept as full payment for the services provided. The plaintiff’s pecuniary loss is limited to the amount paid or incurred for past medical services, so the plaintiff cannot recover damages in excess of that amount. Howell also held that limiting a plaintiff’s recovery in this manner does not contravene the collateral source rule

To be recoverable in damages, a plaintiff’s medical expenses must be both incurred and reasonable. Howell noted that there can be significant disparities between the amounts charged by medical providers and the costs of providing services, that prices for providing a particular service can “vary tremendously . . . from hospital to hospital in California,” and that there can be significant disparities between the amounts charged to insured and uninsured patients.

Evidence of the full amount billed, in contrast, is not relevant to the amount of damages for past medical expenses if the plaintiff never incurred liability for that amount.

Evidence of the Full Amount Billed Is Not Relevant to the Amount of Past Medical Expenses

The court of appeal was called upon to decide an issue not treated by the Supreme Court in Howell and was persuaded that evidence of the full amount billed for a plaintiff’s medical care is not relevant to the determination of a plaintiff’s damages for past medical expenses, and therefore is inadmissible for that purpose.  It also noted that evidence of the amount accepted by medical providers as full payment does not violate the collateral source rule and is admissible provided that the source of the payment is not disclosed to the jury and the evidence satisfies the other rules of evidence.

Evidence of the Full Amount Billed For Past Medical Services Is Not Relevant to the Determination of Damages for Future Medical Expenses

An injured plaintiff is entitled to recover the reasonable value of medical services that are reasonably certain to be necessary in the future. A medical provider’s billed price for particular services is not necessarily representative of either the cost of providing those services or their market value.

As a result the full amount billed for past medical services is not relevant to a determination of the reasonable value of future medical services.

Evidence of the Full Amount Billed For Past Medical Services Cannot Support an Expert Opinion on the Reasonable Value of Future Medical Services

The conclusion that the full amount billed by medical providers for past medical services is not relevant to the value of the services provided also has implications for expert opinion testimony that may be offered on remand as to the reasonable value of medical services to be provided in the future. Because the full amount billed for past medical services provided to plaintiffs is not relevant to the value of those services, evidence of the full amount billed for past medical services provided to plaintiffs therefore cannot support an expert opinion on the reasonable value of future medical services.

For an expert to base an opinion as to the reasonable value of future medical services, in whole or in part, on the full amount billed for past medical services provided to a plaintiff would lead to the introduction of evidence concerning the circumstances by which a lower price was negotiated with that plaintiff’s health insurer, thus violating the evidentiary aspect of the collateral source rule. Any expert who testifies, in this case on remand, or any other, with respect to the reasonable value of the future medical services that a plaintiff is reasonably likely to require may not rely on the full amounts billed for plaintiffs’ past medical expenses.

Evidence of the Full Amount Billed Is Not Relevant to the Amount of Non-economic Damages

Non-economic damages compensate an injured plaintiff for non-pecuniary injuries, including pain and suffering. Pain and suffering is a unitary concept that encompasses physical pain and various forms of mental anguish and emotional distress. Such injuries are subjective, and the determination of the amount of damages by the trier of fact is equally subjective. There is no fixed standard to determine the amount of non-economic damages. Instead, the determination is committed to the discretion of the trier of fact.  This is no easy task. The jury is asked to evaluate in terms of money a detriment for which monetary compensation cannot be ascertained with any demonstrable accuracy. Translating pain and anguish into dollars can, at best, be only an arbitrary allowance, and not a process of measurement, and consequently the judge can, in his instructions, give the jury no standard to go by; he can only tell them to allow such amount as in their discretion they may consider reasonable.  The chief reliance for reaching reasonable results in attempting to value suffering in terms of money must be the restraint and common sense of the jury.

Regardless of the multipliers of special damages often used by lawyers to determine the amount of general damages lawyers cannot use the full amount billed for the purpose of providing plaintiff’s counsel an argumentative construct to assist a jury in its difficult task of determining the amount of non-economic damages. The full amount billed is inadmissible for the purpose of proving non-economic damages.

DISPOSITION

The judgments in favor of Corenbaum and Carter are reversed as to the awards of compensatory damages against Lampkin, and the matter is remanded with directions to conduct a new trial limited to determining the amounts of compensatory damages in favor of Corenbaum and Carter in accordance with the views expressed herein.

ZALMA OPINION

This, like the Howell case, is an extremely important decision for liability insurers and the plaintiffs’ bar. The old rule of thumb discussed above can still be used but it must be based on actual expenses incurred not on the fictional amounts billed. The plaintiff may not multiply a billing for $25 aspirin tablet when the provider accepted $0.05 as full payment for the same aspirin.

By allowing the full amount billed to be entered into evidence deceives the jury into believing that the plaintiffs have incurred damages that were not incurred. If done intentionally to deceive it would be fraud. The Howell decision and this one has seriously cut into the profits made by the plaintiffs bar which is probably why the briefing included multiple Amicus Curiae.

The case will probably make its way to the Supreme Court who, I hope, will affirm it since it complies with its holding in Howell.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

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Scruggs Still Guilty for Bribing Judge

Zalma’s Insurance Fraud Letter May 1, 2013

Scruggs Still Guilty for Bribing Judge

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

1.    Why famous tobacco and asbestos lawyer Richard F. “Dickie” Scruggs may be on his way back to jail after the Fifth Circuit affirms his conviction for bribing a judge;
2.    Why State Farm sued an arson-for-profit ring;
3.    Murder and Old Lace, the second chapter of a new serialized fictional story of insurance fraud; and
4.    A report on a stupid fraud against the Social Security Administration Disability Program.

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

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

The last 20posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

1.    Sudden & Accidental
2.    New E-Book From Barry Zalma
3.    Mortgagee Bound by Exclusion
4.    When Damage Is Just “Marring”
5.    Where’s Waldo’s Domicile?
6.    What a Difference 12 Hours Make
7.    Poor Policy Drafting April 23, 2013
8.    No Good Deed Goes Unpunished
9.    Incomplete Structure Is Vacant
10.    Health Insurance Fraud
11.    Negligence Per Se
12.    Untimely Notice
13.    Sometimes Insurance Fraud Loses
14.    Don’t Change The Risk
15.    Fraud Must Occur on Premises
16.    Evidence of Mailing Sufficient
17.    “Crash for Cash”
18.    Medicare Fraud Ignored
19.    To Stack or Not to Stack
20.    Family Exclusion

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

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

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

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

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

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Sudden & Accidental

Gradual Is Never Sudden

Insurance policies are the least read of all contracts. Although every state has a law requiring that policies be easy to read and that the provisions of the policy be conspicuous, plain, and clear, neither the state nor the insurance company can compel the insured to read the policy. Regardless, if conspicuous, plain and clear, the policy can be enforced whether the insured read the policy or not.

After the trial court granted judgment in favor of their insurer Leroy and Terrie Brown appealed. The trial court concluded that the Browns’ claim for water damage caused by a broken pipe in their house was not covered under their Mid-Century policy and that Mid-Century was entitled to summary judgment. In Leroy Brown et al v. Mid-Century Insurance Company, No. B238357 (Cal.App. Dist.2 04/02/2013) the California Court of Appeal resolved the dispute.

FACTUAL BACKGROUND

On or about February 18, 2009 the Browns began observing condensation on the windows of their three-story, split-level home and on the drywall around the windows. There was moisture from the windowsills running down the walls and mildew on some of the windows and walls. When they cleaned the condensation off the windows, it returned the next day. About a week later, the Browns began noticing mold forming around the inside of their windows and on the walls in the living room and kitchen, “developing everywhere simultaneously.” Every room that had a window had mold or mildew.

A month later Leroy Brown’s brother, Robert Brown, crawled under the house and observed moisture. After his brother came out of the crawl space, Leroy Brown shut off the water to the house, told his wife about the problem, and then either he or his wife called the insurance agent.

The Browns hired a plumber to find and fix the leak. The plumber told Mr. Brown that “from experience, it seemed like . . . he had a hot water leak. And because his home was on slab, it probably was underneath the cement.”

The plumber began drilling with a jackhammer and searching for the hot and cold water manifolds, with the water system still off. When he located the hot water manifold, he “got the pipe exposed and [saw] the leak.” With the water turned on “very low,” Mr. Brown went back into the house and observed “water coming from an open hole in the pipe,” which “was just a drip out at that point, just enough to show me where the water was coming out.”

The Policy

Mid-Century had issued the Browns a “Farmers Next Generation Homeowners Policy” providing them with first party property damage coverage for structural damage in the amount of $404,000, with a $1,000 deductible. The policy included an “extension of coverage” that provided “limited” water damage coverage “for direct physical loss or damage to covered property from direct contact with water, but only if the water results from . . . [¶] (4) a sudden and accidental discharge, eruption, overflow or release of water . . .” The policy described what was not included in the limited water damage coverage: “A sudden and accidental discharge, eruption, overflow or release of water does not include a constant or repeating gradual, intermittent or slow release of water, or the infiltration or presence of water over a period of time. We do not cover any water, or the presence of water, over a period of time from any constant or repeating gradual, intermittent or slow discharge, seepage, leakage, trickle, collecting infiltration, or overflow of water from any source . . . whether known or unknown to any insured.”

The Investigation

On March 27, 2009 Mid-Century denied the Browns’ claim. The Browns sued, alleging causes of action for breach of written contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, unfair competition, and declaratory relief.

The Motion for Summary Judgment

Mid-Century filed a motion for summary judgment or in the alternative for summary adjudication on the Browns’ claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and for punitive damages. Mid-Century argued that it did not breach the policy or act in bad faith because the water damage in the Browns’ home was caused by a long-term, gradual, incremental discharge or release of water, and not by a sudden and accidental discharge or release of water. Mid-Century also argued that its interpretation of the policy was reasonable and that it did not engage in any conduct that could justify a claim for punitive damages.

Mid-Century’s plumbing expert gave his opinion that “the hole in the section of copper pipe” he inspected “had formed as a result of ordinary wear and tear to the pipe which corroded because it had been defectively embedded into concrete without the required protective sleeve. The Brown’s plumbing expert concluded that the pipe “failed suddenly, and ultimately a spray or stream … and that hot water would have continued to spray and stream (not drip) out the holes until the water line was shut off.”

The Ruling

The trial court granted Mid-Century’s motion for summary judgment, finding that none of the evidence submitted by the Browns created a dispute of fact as to the cause of the leak.  The trial court also noted that the Browns did not dispute that the pipe leaked over a period of one to two months, and that the leak was caused by corrosion which wore away at the pipe.

DISCUSSION

The Browns conceded that they had the burden (1) of proving their water damage is covered under their policy with Mid-Century, and (2) to present facts showing a ‘sudden release’ of water, causing damage to their home. The Browns did not argue that Mid-Century failed to meet its initial burden on summary judgment to show that the damage was not caused by a sudden discharge of water. They did not dispute that the evidence Mid-Century presented regarding the gradual deterioration of the pipe, the small size of the hole, and the existence of the effects of the water for at least a month or two, satisfied Mid-Century’s initial burden on summary judgment. The Browns contended that in response to Mid-Century’s showing they presented admissible evidence supporting the finding of a triable issue on this fact.

The Browns’ primary argument on appeal is that their expert’s report created a triable issue of fact by stating in his declaration in opposition to Mid-Century’s motion for summary judgment that “the pipe burst suddenly – in a ‘nano-second,’ spraying water in the crawlspace.” This testimony, however, does not change the fact that the release of water, even if it commenced with a nanosecond “breach in the wall of the pipe” and resulted in a “mist, stream and spray,” was constant or intermittent, and occurred over a period of “a month or two” (according to the Browns) or five months (according to Mid-Century).

Sudden has a temporal element and does not mean a gradual or continuous discharge. One cannot reasonably call ‘sudden’ a process that occurs slowly and incrementally over a relatively long time, no matter how unexpected or unintended the process.  Whatever ‘sudden’ means it does not mean gradual.

The policy is conspicuous, plain, and clear

California jurisprudence respecting conspicuousness, consistent with the inherent logic of that concept, refers to how a coverage-limiting provision actually has been positioned and printed within the policy at issue. A coverage limitation is conspicuous when it is positioned and printed in a manner that will attract the reader’s attention.

The provision of the Browns’ policy extending coverage for damage resulting from a sudden and accidental discharge of water, to the extent it is a “coverage-limiting provision,” is printed in readable and adequately-spaced print, organized in a helpful outline format, and positioned where it should be in the section listing extensions of coverage. Moreover, the section describing the types of uninsured loss and damage lists water damage as the first uncovered damage, and specifically refers to the prior section of the policy containing the extensions of coverage.

Breach of the Implied Covenant of Good Faith and Fair Dealing

The Browns allege that Mid-Century breached the implied covenant of good faith and fair dealing. Because the policy did not cover the Browns’ claims, however, the Browns do not have a claim for breach of the implied covenant of good faith and fair dealing. Without coverage there can be no liability for bad faith on the part of the insurer.

ZALMA OPINION

Unlike the man in the song, this Leroy Brown was not the “baddest man in the whole damn town” but decided to resolve his problem with a suit in the courts of California. Unfortunately, for Mr. and Mrs. Brown, their suit failed because the water leak that caused damage to their home occurred over a long period of time and was excluded by a conspicuous, plain and clear provision of the policy.

Since there was no coverage for the loss there can be no breach of the covenant of good faith and fair dealing. The policy provided limited coverage and Mid-Century properly applied the exclusion based upon a thorough investigation and supported by expert advice.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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New E-Book From Barry Zalma

Zalma on Insurance Fraud – 2013

The Complete Authority on Insurance Fraud in the United States

© 2013
Barry Zalma, Esq., CFE

Barry Zalma has totally rewritten his seminal E-Book on insurance fraud that is now over 1100 pages and is available for download for only $125.00.

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. Estimates of the extent of insurance fraud in the United States range from $87 billion to $300 billion every year.

No one really knows the extent of insurance fraud because most frauds succeed without the insurer even suspecting that it is being defrauded. Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. No one will ever place an exact number on the amount lost to insurance fraud but everyone who has looked at the issue knows – in their heart and gut – that the number is enormous. When insurers and governments exert serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-insurers drops logarithmically.

Zalma on Insurance Fraud – 2013 is an essential tool for everyone involved in the effort against insurance fraud whether prosecutors, insurance defense lawyers, insurance coverage lawyers, insurance adjusters, fraud investigators, and criminal investigators.

If you have any problem uploading the text after purchase write to me at zalma@zalma.com and I will immediately forward a pdf copy of the E-Book to you.

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Mortgagee Bound by Exclusion

Mortgage Clause Does Not Expand Coverage

American Family Mutual Insurance Company refused to pay because its businessowners policy does not cover loss or damage caused by water damage, vandalism or theft if the property is vacant for more than sixty days. Waterstone Bank, SSB (the Bank) argued that the policy’s mortgageholder clause entitled it to indemnity under the policy’s mortgage clause because American Family’s denial under the vacancy provision was based on an act of the property owner/named insured, namely, the act of leaving the property vacant. The circuit court entered judgment in favor of American Family, and the Bank appealed. The Wisconsin Court of Appeal was called upon to resolve the dispute in Waterstone Bank, Ssb , P/K/A Wauwatosa Savings Bank v. American Family Mutual Insurance Company, No. 2012AP912 (Wis.App. 04/24/2013).

BACKGROUND

The material undisputed facts are as follows:

  • In March of 2006, Paul Bachowski obtained a mortgage loan in the amount of $420,000 from the Bank to purchase two properties in the city of Milwaukee.
  • In 2008, Bachowski obtained insurance coverage from American Family for the two properties with a total limit of $412,000.
  • That same year, Bachowski became aware of damage to both properties, resulting from vandalism, water damage, and theft.
  • A year later, Bachowski made a claim to American Family for his losses on the properties.
  • American Family responded by reserving its right to deny coverage under certain policy provisions, including the vacancy provision,  and eventually denied the claim.

THE POLICY

The policy provided, in part:

8. Vacancy

a. Description Of Terms

* * *
b. Vacancy Provisions

If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:

(1) We will not pay for any loss or damage caused by any of the following even if they are Covered Causes of Loss:

(a) Vandalism;

(b) Sprinkler leakage, unless you have protected the system against freezing;

(c) Building glass breakage;

(d) Water damage;

(e) Theft; or

(f) Attempted theft.

While the coverage question was pending, the Bank filed a complaint seeking to recover under the policy’s mortgageholder clause.

ARGUMENT

The Bank moved for a declaratory judgment, and American Family countered with its own motion for a declaratory judgment. The Bank argued that the named insured’s act of (or failure to comply with the policy terms by) leaving the properties vacant entitled the Bank to loss payment under the mortgageholder clause. American Family responded that the Bank could not receive payment through the mortgageholder clause because the vacancy provision does not cover the loss or damage in the first place. The circuit court granted summary judgment to American Family, and the Bank appeals.

DISCUSSION

The Wisconsin Court of Appeal was required to review the grant of summary judgment pursuant to the insurance contract. Summary judgment is only granted when there is no genuine issue of material fact and as a matter of law the moving party is entitled to judgment. The facts were undisputed. Since the interpretation of an insurance contract is a matter of law the court of appeal can review the decision as if it was presented to it first.

The court of appeal recognized that there are two types of mortgageholder clauses, “simple” and “standard.” Under a “simple” clause, the bank is merely an appointee of the insurance fund.  A “standard” mortgageholder clause, on the other hand, binds the mortgageholder to the same policy terms as the named insured, but amounts to an independently enforceable contract which shall not be invalidated by any act or neglect of the mortgagor or owner either before or after the attachment or issuance of the mortgage clause.

The parties agreed that the mortgageholder clause at issue is a standard clause and it is undisputed that the named insured is not entitled to loss payment under the vacancy provision. The Bank argues, however, that the named insured’s act of (or failure to comply with the policy terms by) leaving the property vacant for more than sixty days entitles the Bank to coverage under the mortgageholder clause.

The standard mortgageholder provision protects the mortgageholder when the property owner’s act or failure to comply violates a policy obligation or prohibition.

Rather than creating coverage for an excluded risk in the first instance, the mortgageholder clause operates to maintain coverage for the mortgageholder when the property owner’s acts violate a duty or obligation associated with the insurance contract resulting in violation of or invalidation of the policy. Even if a fraudulent insurance application invalidates the insurer’s liability to the named insured a mortgagee is still entitled to recover under a policy. The clause also protects a lender against an insurer’s defenses based on the owner’s arson, fraud and false swearing which amount to material breaches of contract.

The standard provision does not create coverage where the risk was never assumed. The policy’s initial grant of coverage defines the mortgageholder’s potential recovery. The exclusion to a policy was not a condition the violation of which would work a forfeiture or void the coverage.

The “state of noncoverage” existed by the terms of the policy, not by an act or neglect of the owner in breaching or violating any term, provision or condition of the insurance policy. The terms of the policy apply to the mortgageholder, just as they do to the named insured.

A distinction which is rather important to grasp is that the policy terms are themselves not nullified by a standard mortgage clause. It is, rather, that a new contract containing those provisions is made with the mortgagee personally; and the mortgagee is not bound by the mortgagor’s contract which, while it may be identical in language, may be breached by the mortgagor’s act. In other words, the indemnity of the mortgagee is not placed at the whim of the debtor, and is subject only to breaches of which the mortgagee is, himself, guilty.

In this case the noncoverage existed by the terms of the vacancy provision and not by any breach or violation by the property owner. Vacancy is not prohibited by the policy. Quite the opposite: the vacancy provision specifically accounts for the possibility that the buildings might become vacant, but excludes loss or damage caused by various perils, including water damage, vandalism and theft, if the vacancy continues for more than sixty days.

As defined in the policy, a building is vacant when less than thirty-one percent of the total space is rented and used. The denial of coverage is based on the condition of the building, and not because of any breach or violation of a policy obligation or prohibition by the property owner.

In conclusion, the loss or damage sustained by reason of vandalism, water damage, or theft was not a covered risk, and the vacancy clause is not a term or condition, the violation of which by the property owner’s acts would forfeit or void the policy. The particular loss was not covered in the first place, and the mortgageholder clause does not create coverage for a risk never assumed.  The damages cam as a result of risks that were never assumed.

ZALMA OPINION

A standard mortgage clause creates a separate policy between the insurer and the mortgagee identical in terms to the policy issued to the named insured. If the named insured breaches a material condition, commits fraud, or otherwise makes the policy void as to the named insured, coverage is still available to the mortgagee. However, if the policy never assumed the risk of loss the mortgagee cannot recover even if the exclusion was due to an action by the named insured.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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When Damage Is Just “Marring”

Ejusdem Generis & Clear Exclusion

Benjamin Ergas dropped a hammer on his tile floor, causing it to chip. He filed a claim for the damage with his homeowner’s insurance company which denied coverage, because it claimed that the damage constituted “marring” which was excluded from coverage. After the homeowner filed suit, the trial court entered summary judgment, agreeing with the insurance company that the damage was not covered by the policy.

The Florida Court of Appeal in Benjamin Ergas and Beth Ergas v. Universal Property and Casualty Insurance Company, No. 4D11-3803 (Fla.App. 04/24/2013) reviewed the case to determine whether coverage applied for the damage. It concluded that Benjamin and Beth Ergas were insured under a homeowner’s insurance policy with Universal, that Mr. Ergas dropped a hammer on the tile floor in the home and chipped, and that the chip was about the size of the hammer head, which appears from the pictures in the record to be the size of a quarter. The Ergases then filed a claim to recover for this damage under their homeowner’s policy. The insurer denied the claim on grounds that the policy excluded coverage as follows:

“We insure against risk of direct loss to property… We do not insure, however, for loss: . . . 2. Caused by: . . . (e) Any of the following: (1) Wear and tear, marring, deterioration . . . .”

The Ergases opposed the motion for summary judgment, arguing that the term “marring” was ambiguous because the policy did not define the term. As any ambiguity should be interpreted in their favor, and that it should be given a construction that gave them the greatest amount of coverage. They also argued that, under the doctrine of ejusdem generis, the term should be read in context. As it was found in the policy between the terms “wear and tear” and “deterioration” it suggests that marring was intended to refer to damage which was caused over time. Since the damage from the dropped hammer was sudden, they argued it came within coverage.

ANALYSIS

The insurance policy in this case was an “all risk” policy. An all risk policy covers all fortuitous losses but it does not cover all conceivable losses.

The appellate court started its analysis with the guiding principle that insurance contracts are construed in accordance with the plain language of the policy as bargained for by the parties. If the policy language is susceptible to two reasonable interpretations, one providing coverage and the other excluding coverage, the policy is considered ambiguous. Nevertheless, insurance contracts must be read in light of the skill and experience of ordinary people, and be given their everyday meaning as understood by the man on the street.

The policy in question covers losses to the premises. The definition of “mar,” the verb from which “marring” is taken, has multiple meanings. In its motion for summary judgment, the insureds quoted two definitions: “the common, plain and ordinary meaning of the term ‘marring’ includes ‘to injure, spoil, damage, ruin, detract from’ (the Universal Dictionary of the English Language, 1939), or to ‘detract from the perfection or wholeness of’ (Miriam-Webster Online Dictionary, 2009) . . . .”

Other definitions include: “1. To inflict damage, especially disfiguring damage, on; 2. To impair the soundness, perfection, or integrity of; spoil.” The American Heritage Dictionary of the English Language Online, (4th ed. 2000) (emphasis added). Appearing at www.thefreedictionary.com. Another definition is: “(tr): to cause harm to; spoil or impair; n. a disfiguring mark; blemish.” Collins English Dictionary – Complete and Unabridged Online; www.thefreedictionary.com. (emphasis added) Universal also quotes Black’s Law Dictionary (revised edition) for its definition of “mar”: “to make defective; to do serious injury to; to damage greatly; to impair, spoil, ruin; to do physical injury to, especially by cutting off or defacing a part; to mutilate; mangle, disfigure, deface.” (Emphasis added).

The principle of ejusdem generis means “of the same kind or class.” Black’s Law Dictionary 556 (8th ed. 2004) defines it as:

“A canon of construction that when a general word or phrase follows a list of specifics, the general word or phrase will be interpreted to include only items of the same type as those listed.”

It refers to an item of the same type as those in the list. As pointed out by Universal, there are no general terms or general words which require the application of the principle of ejusdem generis in the present contract. Rather, three specific causes are listed in the exclusion: “wear and tear, marring, and deterioration.” Each of these causes does not require interpretation by reference to the other because they stand alone as a separate and clear exclusion from coverage. The appellate court, therefore, concluded that principle of ejusdem generis does not apply and affirmed the final summary judgment entered by the trial court.

ZALMA OPINION

Mr. Ergas found a way, from his accident with a hammer, to get a new tile floor for his home. He made claim to his insurer assuming they would not take the chance of being sued for such a small claim. He assumed incorrectly. The insurer read the wording of the policy, applied that wording to the facts of the loss and denied the claim. Adding insult to the injury of the claim for a chipped tile Ergas sued.

The Florida Court of Appeal disposed of the insured’s argument by applying the words of the policy as it was written and refused to rewrite the policy.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Where’s Waldo’s Domicile?

No Fault Insurance Requires Domicile

An auto accident occurred July 29, 2009, on I-196 in Allegan County. Plaintiffs, Gerardo Tienda and Sylvia Gomez, were passengers in a Ford Expedition owned by Tienda’s uncle, Lorenzo. When the accident occurred, Lorenzo was also riding in the vehicle and Heriberto Fernandez Castro was driving. Lorenzo was insured with a policy issued in North Carolina.

Integon National Insurance Company, appealed the trial court’s order denying its motion for summary disposition and granting summary disposition in favor of intervening defendant Titan Insurance Company. The Michigan Court of Appeal was faced with an issue of first impression that it decided in Gerardo Lorenzo Tienda and Silvia Lopez Gomez v. Integon National Insurance Company, A/K/A Gmac Insurance Company, No. 306050 (Mich.App. 04/23/2013) to decide which insurer, Integon or Titan, is responsible for personal protection insurance (PIP) benefits arising out of a Michigan automobile accident because of a decision where the insured, Salvador Lorenzo, resided at the time of the accident.

Lorenzo, an itinerant agricultural worker, did not have a “permanent” residence in any state. He lived, worked, and resided in three different states where he picked fruit on a seasonal basis. At the time of the accident, Lorenzo lived and worked in Michigan, had all of his possessions with him in Michigan, and had no other residence or place he looked to or could be regarded as his home.

FACTS

Tienda, Gomez, Lorenzo, and Castro are migrant farm workers who travel from state-to-state to harvest fruit. From October 2008 until May 2009, the four worked in Florida where they picked strawberries and then pulled the strawberry plants after the harvest. From May 2009 until early July, the four lived together on or near a farm in North Carolina where they harvested blueberries. Around July 4, 2009, Lorenzo drove Tienda, Gomez, and Castro in his Expedition to Michigan, they rented an apartment together in Grand Rapids, and drove together each day to a farm in Allegan County to harvest blueberries. Plaintiffs and Lorenzo testified that, before the accident, they travelled to the same states and performed the same work for many years. It appears the accident occurred after work one day when the four were returning to their Grand Rapids apartment.

Before the accident, on June 22, 2009, Integon issued a North Carolina auto insurance policy to Lorenzo. When he applied for the policy, Lorenzo had a driver’s license issued by the state of Michigan.  Integon denied Lorenzo’s claim for benefits under its North Carolina insurance policy because, among other reasons, it maintains that Lorenzo, at the time of the accident, was a Michigan resident, he did not insure the vehicle with Michigan no-fault insurance, and he misrepresented the primary garaging location of the vehicle as his address in North Carolina, when he knew he planned to take the Expedition to Michigan.

DISCUSSION

The appellate court considered whether the trial court erred when it ruled that Lorenzo’s residency is not relevant for purposes of Integon’s obligation to pay plaintiffs’ benefits. While Lorenzo bought a North Carolina auto insurance policy from Integon, Integon also sells auto insurance in Michigan. The only conditions of carrier liability imposed under the Michigan no fault statute are:

  1. certification of the carrier in Michigan,
  2. existence of an automobile liability policy between the non-resident and the certified carrier, and
  3. a sufficient causal relationship between the non-resident’s injuries and his or her ownership, operation, maintenance or use of a motor vehicle as a motor vehicle.

Determination of Domicile

Generally, the determination of domicile is a question of fact.  For purposes of the no-fault act in Michigan, the terms “domicile” and “residence” are legally synonymous. Ordinarily one’s residence and domicile (if they do not always mean the same thing) are in fact the same, and where they so concur they are that place which we all mean when we speak of one’s home. Domicile is determined by:

  1.     the subjective or declared intent of the person of remaining, either permanently or for an indefinite or unlimited length of time, in the place he contends is his “domicile” or “household”;
  2. the formality or informality of the relationship between the person and the members of the household;
  3. whether the place where the person lives is in the same house, within the same curtilage or upon the same premises;
  4. the existence of another place of lodging by the person alleging “residence” or “domicile” in the household.

While Lorenzo picked fruit on a seasonal basis, he maintained no other residence when he lived in Michigan, and he took all of his worldly belongings with him when he traveled to each of three states to work. Domicile is acquired by the combination of residence and the intention to reside in a given place, and can be acquired in no other way. The residence which goes to constitute domicile need not be long in point of time. If the intention of permanently residing in a place exists, a residence in pursuit of that intention, however short, will establish a domicile.

If the intention of permanently residing in a place exists, a residence in pursuit of that intention, however short, will establish a domicile

Lorenzo purchased the North Carolina auto policy while living in housing reserved for migrant workers on or near a farm in North Carolina, and he gave that address when he filled out his application. At the same time, he held, for several years, a driver’s license issued by the state of Michigan. With regard to Lorenzo’s intent, when he moved to Grand Rapids in early July 2009, Lorenzo had no intent to remain in Michigan permanently, but intended to make Grand Rapids his home until October. Thereafter, Lorenzo planned to continue, and did continue, to travel the same circuit between Michigan, Florida, and North Carolina, as he had done for several years. With the regularity of the blueberry and grape harvest seasons, plaintiff stayed in Michigan, and intended to do so for the foreseeable future. No evidence showed that Lorenzo had any other place of lodging, nor any other location at which he kept any belongings or had a room maintained for him.

The court of appeal noted that the duration of time Lorenzo lived in Florida is of little consequence when he lived in temporary migrant housing there, he fully intended to leave in May, he had no documents linking him to Florida, and maintained no room or possessions there when he left.

The court of appeal concluded that under these unique facts when the accident occurred on July 29, 2009, Lorenzo was a resident of Michigan as a matter of law. Accordingly, the trial court erred when it ruled that Lorenzo was a resident of Florida and it erred in denying Integon’s motion for summary disposition and granting summary disposition to Titan. Because Lorenzo was a Michigan resident when the accident occurred, Titan is the priority insurer responsible for the payment of no-fault benefits to plaintiffs. The court also vacated the trial court’s order in which it awarded plaintiffs costs and fees for Integon’s failure to pay plaintiffs’ no-fault benefits.

ZALMA OPINION

Lorenzo was an honorable person who purchased insurance to protect himself and those who might be injured by the operation of his vehicle. Although he neither read, wrote or spoke English he understood his obligation as a resident of the United States and licensed driver to insure. Two insurers argued over which insurer was responsible to pay for injuries under the Michigan PIP law.

Domicile for an itinerant farm worker like Lorenzo is where he hangs his hat at the time. Although he moves from Michigan to North Carolina to Florida every year as the crops he picks ripen, his residence and domicile is that place where he lives and works at the time he lives and works there. At the time of the accident he was domiciled in Michigan. If the accident happened a few months earlier his domicile is in Florida or North Carolina. For PIP coverage in Michigan to apply he needed to be domiciled in Michigan and the court appropriately found which insurer was required to pay.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

Posted in Zalma on Insurance | 1 Comment

What a Difference 12 Hours Make

Renew Your Policy Promptly

By tradition and state law insurance policies provide coverage to those insured from 12:01 a.m. standard time on the first day of coverage and expire at 12:01 a.m. standard time on the last day of the policy. This has been the case for more than a century. Therefore, if an insured wishes to continue coverage in effect, the insured must pay for a renewal before expiration after receiving notice from the insurer.

After an intoxicated driver struck and injured several children, the driver’s insurer brought a declaratory action seeking a ruling that it had no duty to defend or indemnify the driver. In granting summary judgment for the insurer, the circuit court held that coverage had expired twelve hours before the accident. The insured claimed that the policy wording, found in every policy issued in the U.S. for, at least, a century was ambiguous and that the policy should continue until midnight on the last day of coverage.

The South Dakota Supreme Court was called upon to resolve the dispute in Alpha Property and Casualty Insurance Company v. Keri Ihle, As Guardian Ad Litem of A.B., A Minor; Maria Gakin As Guardian Ad Litem of M.G, No. 2013 S.D. 34 (S.D. 04/17/2013).

Background

At noon on September 23, 2007, Tamara Bradford, while intoxicated, ran into and seriously injured four children. The children had been riding their bikes or standing alongside the road.

Bradford later pleaded guilty to two counts of vehicular battery. Her insurer, Alpha Property and Casualty Insurance Company, contested a duty to defend her in any negligence suit brought on the children’s behalf because the policy expired 12 hours before the incident.

Six months before the incident, Bradford applied for an automobile insurance policy with a stated effective date of March 23, 2007 at 12:01 a.m. and an expiration date of September 23, 2007 at 12:01 a.m. The total premium for the six-month policy was $907, with a down payment of $157.47, and the remainder to be paid in monthly installments. She remitted her initial payment and coverage began at 11:49 a.m. on March 23, 2007.

Alpha issued Bradford an insurance policy on March 25, 2007, effective March 23, 2007, to continue “until cancelled or terminated in accordance with the financial responsibility laws and regulations of this State.”

The policy contract stated that it “applies only to accidents and losses during the policy period shown in the Declarations . . . .” The Declarations provided a “Policy Period From 3/23/2007 to 09/23/2007 12:01 a.m.” The policy further stated that a “failure to pay the required continuation of renewal premium as we require means that you have declined our offer” to renew.

On June 25, 2007, Alpha sent Bradford a notice of cancellation informing her that her June payment was past due. She was directed to postmark or deliver a payment by July 16, 2007, for insurance coverage to continue. Bradford made the required payment. Then, on July 24, 2007, Alpha mailed Bradford another notice of cancellation because her July premium was past due. Alpha directed Bradford to postmark or deliver a payment by August 14, 2007, for coverage to continue. Bradford did not timely remit payment.

On August 21, 2007, Alpha sent Bradford a notice of the amount due on her cancelled policy. She did not remit payment. At the end of August, however, Bradford went to Alpha’s office, paid the past due premium, and reinstated her insurance coverage. On September 5, 2007, Alpha sent Bradford an invoice and notice of an option for renewal. The invoice and notice provided in clear and unambiguous language:

“If payment of at least $358.03 is postmarked on or before 09/22/07, coverage will continue without interruption. If payment is not made, your policy will expire and coverage will cease at 12:01 a.m. on 09/23/07.” (Emphasis added)

Bradford did not make the required payment on or before September 22, 2007 and, according to Alpha, Bradford’s policy expired almost twelve hours before the September 23 accident. On Monday, September 24, 2007, the day after the accident, Bradford’s mother, Carolyn Willoughby, contacted Alpha and asked if she could make Bradford’s premium payment. It is undisputed that no payment was made because Willoughby was told that even with a payment the accident would not be covered.

Declaratory Judgment Suit

Alpha sought a declaratory judgment against Bradford and the guardians ad litem for the injured children (hereinafter Bradford) that it not be required to defend or indemnify Bradford for the accident. At a hearing on Alpha’s motion for summary judgment, Bradford argued, among other things, that Willoughby’s call to Alpha on September 24 should be considered Bradford’s attempt to make a timely premium payment. Bradford further asserted that the insurance policy was ambiguous in that it did not clearly provide that Bradford’s coverage existed for only one minute of September 23 and not the entire day.

Trial Court Decision

In a memorandum decision, the trial court ruled for Alpha. It found that Bradford waived her argument that Willoughby’s call to Alpha should be considered a timely attempt to tender payment. It further declared that the insurance contract unambiguously provided that coverage ended at 12:01 a.m. on September 23, 2007. Bradford appealed on the grounds that genuine issues of material fact remain on whether coverage expired, that the insurance contract is ambiguous, and that Bradford intended to timely renew her policy within the time allowed by South Dakota law.

Analysis and Decision

Bradford argued that because the policy did not incorporate the policy expiration date listed in her application, the terms of her insurance policy are in dispute, and she reasonably expected that in return for her initial premium payment on March 23, 2007, she would receive coverage the entire day of September 23, 2007, the last day of the policy period. She turns to the doctrine of reasonable expectations, whereby courts honor an insured’s reasonable expectations of insurance coverage despite the terms of the insurance contract. Bradford contends, nonetheless, that coverage should be found here because the policy is ambiguous: the policy language does not explicitly state the time and date of expiration.

Bradford maintains that her mother tried to remit a premium payment on September 24, 2007 to timely renew her insurance policy. Bradford argues that because her policy was set to expire on Sunday, September 23, 2007, she had until the next business day to remit payment to renew her insurance policy. Here, Bradford was required to act on or before September 22, 2007, which was a Saturday. On September 5, 2007, Alpha sent Bradford an invoice and offer to renew her policy. It informed her that:

“[t]o renew your policy, please forward your payment of at least $358.03 by 09/22/2007.” The offer and invoice further provided, “If payment of at least $358.03 is postmarked on or before 09/22/2007, coverage will continue without interruption.” However, “[i]f payment is not made, your policy will expire and coverage will cease at 12:01 a.m. on 09/23/2007.”

Bradford was not required to act on Sunday, September 23, but rather on Saturday, September 22. By failing to accept the offer from Alpha to renew her insurance policy, Bradford’s coverage expired on September 23, 2007 at 12:01 a.m., under the express and unambiguous terms of the insurance contract. It is immaterial that Willoughby called on September 24, 2007 to attempt to renew Bradford’s insurance policy. Coverage expired when Bradford failed to pay at least $358.03 on or before September 22, 2007. The judgment of the trial court was affirmed.

ZALMA OPINION

This case teaches multiple lessons for those insured and their insurers. It is axiomatic that to maintain a policy of insurance the person insured must pay the premium. Bradford knew this because her policy was cancelled twice for failure to pay the premium due only to have it reinstated when she paid the premium late and was able to report no losses during the period the policy was not in effect. As a result she, and the children she injured, lost the ability to use the assets of the insurer.

The insurer gave a lesson to all of its brother insurers by giving appropriate notice to Brandford advising her that if payment is not received at a specific time and place coverage would expire and the failure would be considered a refusal of the offer to renew.

Everyone would like to only pay for insurance after the event rather than pay every year without a loss. Insurance is a risk spreading device and cannot work as insurance if it allowed insurance to come into effect retroactively after a loss. If that were the case every policy sold would have a claim and the risk would not be spread.

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© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

 

Posted in Zalma on Insurance | Leave a comment

Poor Policy Drafting

Beware Defending Under a Reservation of Rights

The tort of bad faith has created – by the potential of a suit for bad faith alone – difficult decisions for insurers who believe the policy provides no coverage. Rather than denying a claim outright the fear of a bad faith suit causes an insurer to defend its insured under a reservation of rights to claim there is no coverage at all. Providing a defense under a reservation of rights, however, can cause problems for the insurer it did not anticipate. For example, in Employers Mutual Casualty Company v. David Donnelly and Kathy Donnelly, Husband and Wife, No. 38623 (Idaho 04/19/2013) the Idaho Supreme Court actually read the policy as written and compelled the insurer to pay part of a claim it did not intend to insure.

Employers Mutual Casualty Company (EMC) sued David and Kathy Donnelly (Donnellys), and Rimar Construction, Inc. (RCI) for declaratory judgment to establish that under its policy of insurance with RCI, EMC had no duty or responsibility to pay damages claimed by the Donnellys in litigation between the Donnellys and RCI. The declaratory judgment action was stayed until a verdict was reached in the underlying action. In the underlying action, the Donnellys were awarded $128,611.55 in damages and $296,933.89 in costs and attorney fees against RCI.

After the district court entered summary judgment in the declaratory action, finding that there was no insurance coverage for the damages the Donnellys incurred, but that there was coverage for costs and attorney fees awarded in the underlying action. On appeal, EMC argued that the district court erred in its determination that it had a duty to pay attorney fees and costs when there were no damages awarded to the plaintiff subject to the policy coverage.

FACTUAL BACKGROUND

This case arose from a dispute between the Donnellys and RCI regarding a construction contract. At all applicable times, RCI was covered under a Commercial General Liability Policy (Insurance Policy) issued by EMC.

A jury trial on the Underlying Action commenced on June 23, 2008. In a special verdict rendered on July 9, 2008, the jury found that RCI breached the implied warranty of workmanship with the Donnellys resulting in $126,611.55 in damages. The jury also found that RCI violated two provisions of the Idaho Consumer Protection Act (ICPA) entitling the Donnellys to $2,000 in damages.

After the Underlying Action concluded, a settlement agreement was reached between EMC and RCI regarding the declaratory action and the underlying litigation on August 17, 2009 leaving only the Donnellys in the action.

The district court ruled that as contract-based damages there was no insurance coverage for the underlying $128,611.55 in compensatory damages the Donnellys incurred, but there was coverage for the award of $296,933.89 in costs and attorney fees.

ANALYSIS

In its Order, the district court held that the insurance policy: “plainly states that with respect to any suit pursued against an insured which it defends, EMC will pay all costs taxed against that insured. The language appears to be unambiguous, and thus, it must be given its plain meaning. EMC has never set forth any specific language in its policy that ties its promise to pay costs on a finding that there is coverage. Because EMC defended its insured, RCI, in the underlying litigation, EMC is responsible to the Donnellys for the $296,933.89 in fees and costs taxed against RCI in that lawsuit, as well as any interest on that judgment which has accrued.”

On appeal, EMC argued that the plain language of the applicable policy indicates that EMC had no duty to pay costs and fees with respect to non-covered claims. Contrary to the argument, language in the policy does not indicate that payment of costs is conditioned upon a final determination that the policy covers the insured’s conduct.

The language of the policy says that the Company will pay all costs taxed against the insured in any suit defended by the Company. The question of whether the suit involved applicable injury can be answered by an analysis of a September 7, 2007 reservation of rights letter from EMC to RCI. In the letter EMC states that bodily injury and loss of use were alleged by the Donnellys, “[t]herefore EMC will be providing a defense.” The letter expressly reserves “EMC’s rights to deny or restrict coverage according to the terms of the policy with EMC.”

It is generally recognized that coverage defenses may be properly preserved by a reservation of rights agreement. “Preservation,” however, implies the continuation, the saving of something that existed. It is not a destruction of the insured’s rights nor a creation of new rights for the Company. It preserves that to which the parties had originally agreed.

In the Amended Judgment, the district court interpreted the special jury verdict to conclude that RCI breached its implied warranty of workmanship with the Donnellys, but that there were no damages for negligence.  The district court noted that “EMC’s Commercial General Liability insurance policy does not act as a performance bond; and it does not provide for payment of damages resulting from a breach of contract. In fact, such damages are excluded from coverage.”

The key determination for whether an implied warranty of workmanship – and therefore the insurance policy – covers the damages is whether the duty is based upon a contractual promise or if the duty can be maintained without the contract. In the special verdict, the jury found: there was a contract involving the remodeling project between RCI and the Donnellys; RCI did not substantially perform under the contract; a breach of contract caused damage to the Donnellys; and that RCI breached “the implied warranty of workmanship with regard to the manner in which it constructed the Donnelly remodel project.” Based on the jury’s verdict, the breach of implied warranty of workmanship occurred with regard to RCI’s performance under the remodeling contract with the Donnellys. There is no duty beyond the contractual promise between RCI and the Donnellys. Since the insurance policy contains an express exclusion for contractual damages, the Supreme Court held that the district court correctly found the awarded damages to be outside the scope of the insurance policy.

In its Order disallowing costs and fees, the district court held that the Donnellys were not entitled to attorney fees in the declaratory action. In so holding, the district court correctly concluded that since there was no commercial relationship directly between the Donnellys and EMC they had no right against EMC.

EMC’s duty to defend RCI obligates it to pay for the attorney fees taxed against RCI in the Underlying Action because, in this case, the policy language clearly stated that EMC “will pay, with respect to . . . any ‘suit’ against an insured we defend . . . all costs taxed against the insured in the ‘suit'” (emphasis added) applies to EMC’s obligation to RCI, not to the Donnellys in their capacity as a judgment creditor.

Although the Donnellys are owed attorney fees, they are not – in the absence of an assignment from RCI – owed attorney fees directly from EMC. Therefore, they are not the party entitled to an amount justly due in the context of Idaho statutes

CONCLUSION

The Supreme Court concluded that:

  1. The district court did not err when it determined that EMC is required to pay costs and attorney fees taxed against RCI in the underlying action.
  2. The district court did not err when it determined that the awarded damages are excluded from coverage under the applicable insurance policy.
  3. The district court did not err when it declined to award attorney fees to the Donnellys since the Donnellys are not entitled to any sums under the policy.

ZALMA OPINION

As the concurring opinion stated:

“If EMC does not want to be obligated to pay all costs assessed against its insured in lawsuits that EMC defends, then it simply has to change the wording of its policy. It is certainly free to draft a policy that provides it will pay all costs taxed against the insured in a suit that EMC defends only if the insured is found legally obligated to pay damages to which the insurance applies. It could also have limited its obligation to the payment of costs assessed against its insured on causes of action or theories of liability upon which its insured is found legally obligated to pay damages to which the insurance applies.”

The court correctly refused to rewrite EMC’s policy to say what it now wishes it should have said.

It is incumbent on every insurer to read and understand the policy it delivers to an insured. When EMC accepted the defense under a reservation of rights, because of the wording of its policy, it agreed to pay any costs and fees assessed against its insured. I am sure the underwriters at EMC are currently following the advice of the concurring opinion and rewriting all of its policies to avoid paying fees again.

© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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No Good Deed Goes Unpunished

Right to Enforce Deal With Foreign Corporation

Asbestos exposure has resulted in thousand of lawsuits and hundreds of cases dealing with insurance. Insurance companies have learned that the litigation is difficult and often never ending. For that reason they often enter into settlements with the insured to limit the exposure faced by the insurer. When the insurer, later attempts to enforce the settlement agreement, more litigation occurs.

The Texas Court of Appeal was asked whether the trial court erred by granting a special appearance filed by appellee Grupo Mexico, S.A.B. de C.V. (“Grupo”) in a lawsuit brought by appellants Mt. McKinley Insurance Company (“Mt. McKinley”) and Everest Reinsurance Company (“Everest”). In Mt. Mckinley Insurance Company v. Grupo Mexico, S.A.B. De C.V, No. NUMBER 13-12-00347-CV (Tex.App. Dist.13 04/18/2013), by two issues, appellants argue (1) that the trial court erred by granting the special appearance, and (2) in the alternative, that the trial court erred by denying Mt. McKinley’s motion for continuance.

BACKGROUND

In 1999, Grupo, an international mining concern based in Mexico City, acquired Asarco, Inc. (“Asarco”) in a leveraged buyout. Grupo formed a wholly-owned subsidiary, Americas Mining Corporation (“AMC”), to hold the shares of Asarco. In 2001, Asarco sued Mt. McKinley and other insurers in Nueces County, Texas, seeking payment under an insurance policy for asbestos claims made against Asarco. Grupo was not a party to that litigation.

Asarco and Mt. McKinley entered into a “Settlement Agreement, Release and Policy Buy-Back” whereby Mt. McKinley agreed to pay $12 million in exchange for the release of all claims against it and the voiding of the insurance policy. The agreement further provided:

“ASARCO agrees that it shall defend, indemnify, save and hold harmless Mt. McKinley from and against any and all claims, crossclaims, actions or liability of any kind (including, but not limited to, direct action suits, suits for contribution, indemnification or subrogation, claims by other insurers and any claims for coverage by any other insured or alleged insured under the Policies) encompassed by this Agreement and from all costs or expenses, including reasonable attorneys’ fees incurred in defending against any such claims, crossclaims, actions or liabilities.”

In 2005, Asarco and several of its wholly-owned subsidiaries filed for bankruptcy. Two years later, Asarco initiated adversary proceedings against Mt. McKinley in bankruptcy court, in which it sought to avoid the 2003 release as a constructive fraudulent transfer.  In the adversary proceedings, Asarco contended that it released its right to insurance coverage for less than “reasonably equivalent value” and that it was insolvent at the time or became insolvent as the result of the release.

Mt. McKinley asked Grupo to acknowledge its duty, pursuant to the 2003 settlement agreement, to defend and indemnify it for the adversary proceedings in bankruptcy court. Grupo refused to do so. Mt. McKinley filed the underlying suit in Nueces County against Grupo, Asarco, and AMC, seeking a declaratory judgment that the defendants were obliged to defend and indemnify Mt. McKinley under the settlement agreement. McKinley also sought damages for the amount it incurred and will incur in connection with the bankruptcy adversary proceedings.

DISCUSSION

Non-residents are subject to the personal jurisdiction of Texas courts if:

  1. jurisdiction is authorized under the state’s long-arm statute; and
  2. it comports with guarantees of the United States and Texas Constitutions. Under Texas’s long-arm statute, a non-resident defendant is within the court’s jurisdiction if the defendant conducts business in the state.

The evidence pertinent to the jurisdictional inquiry includes the 2003 settlement agreement, which, as noted, defined “ASARCO” to include Grupo.

ANALYSIS

It is undisputed that Asarco and AMC have continuous and systematic contacts with Texas such that the exercise of general jurisdiction over those entities is proper. The question for this Court, then, is whether those entities may be fused with Grupo for jurisdictional purposes. The Texas Supreme Court has relied on the following factors in determining whether a subsidiary is separate and distinct from its parent corporation for personal jurisdiction purposes:

  1. the amount of the subsidiary’s stock owned by the parent corporation;
  2. the existence of separate headquarters;
  3. the observance of corporate formalities; and
  4. the degree of the parent’s control over the general policy and administration of the subsidiary.

The only evidence that Grupo purposefully availed itself of the Texas forum was that it authorized McCaffrey to execute the settlement agreement on Grupo’s behalf.  But even if the court of appeal wa to assume the truth of that allegation, that would not change the facts that: (1) the agreement was executed in New Jersey, (2) performance of the contract was not required to take place in Texas, and (3) Grupo was not a party to the settled Texas litigation. Accordingly, Grupo’s alleged status as a signatory to the agreement cannot, by itself, support specific jurisdiction.

The court of appeal concluded that, on the evidence presented, the trial court did not err in granting Grupo’s special appearance.

By their supplemental discovery request, appellants sought to obtain the evidence presented during the bankruptcy adversary proceedings, which resulted in the bankruptcy judge finding that the record establishes without a doubt that German Larrea rules Grupo and all of its affiliates and no major decision is made without his approval.

This evidence would be relevant to appellants’ theory that personal jurisdiction existed over Grupo under the alter ego doctrine. Consideration of the materiality and purpose of the discovery sought, therefore, weighs in favor of a finding of abuse of discretion on the part of the trial court in denying a continuance.

Although a substantial amount of time passed between the filing of the special appearance and the hearing thereon, it is apparent that Grupo was engaged in a strategy of obstruction that went beyond, as it claims, merely “oppos[ing] discovery requests as needed to protect its rights.” Instead, Grupo sought to avoid even the most benign and reasonable discovery requests-such as a request to confirm that Grupo is a Mexican corporation with its principal place of business in Mexico. Moreover, Grupo’s counsel repeatedly urged that Grupo was under no obligation to respond to discovery requests until the trial court ruled on the special appearance-a position that is plainly belied by the rules of civil procedure.

Under the circumstances of this case, the court of appeal concluded that the trial court abused its discretion by denying appellants’ motion for continuance.  The trial court abused its discretion in denying a continuance of a special appearance hearing especially in light of defendants’ apparent strategic avoidance of plaintiff’s attempted discovery.

CONCLUSION

The judgment granting Grupo’s special appearance was, therefore, reversed, and the case was remanded to the trial court with instructions to grant the motion for continuance and for further proceedings consistent with the opinion.

ZALMA OPINION

The insurers, in this case, entered into a settlement agreement with its insured and the parent company of its insured by paying – without adjudication of its exposure – the payment of $12 million in exchange for the return of the policy and  a promise to defend and indemnify it against any action to recover under the policies voided.

The fact that Grupo refused to fulfill the agreement and was unwilling to fulfill the terms of the agreement could have been easily solved at the time of the settlement by including in the agreement a choice of laws provision with each party agreeing to resolve all disputes in a court in Texas, or any federal court, or by arbitration. Failure to include such language resulted in this suit and will cost all of the parties for lawyers money that should never have been expended.

Settlement agreements must be drawn with care to avoid further litigation, especially when some of the parties are foreign corporations.

© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Incomplete Structure Is Vacant

Vacant 60 Days

A developer, Joy Investment Group (“Joy”), obtained a construction loan from a bank, and began construction on a multi-unit condominium complex. The bank required the developer to maintain builder’s risk insurance on the property and to identify the bank, and its successors and assigns, as loss payee. The developer complied.

When the condominium complex was near completion the developer fell behind in its payments on the loan. After the developer’s default, the bank sold the loan to an investor, who ultimately foreclosed on the property.

After the assignment to the investor, but before the foreclosure sale, the developer’s construction insurance policy lapsed and the developer sought a new policy. At this point, the developer represented to its insurance broker that a homeowner’s association had been created, and that most of the condominium units had been sold. Given those facts, the broker discussed the possibility of replacing the builder’s risk policy with a condominium policy issued to the homeowners association. The developer agreed and obtained a condominium policy for the homeowners association, from an insurer for which the broker was an authorized agent. Contrary to the representations of Joy no certificate of occupancy was ever issued and no units were ever occupied. No unit ever sold.

Shortly after the new policy issued, the property was allegedly damaged by theft and vandalism. The developer filed for bankruptcy and the investor obtained the property through foreclosure. Subsequently, the investor filed a claim against the insurer for the losses from the theft and vandalism. The insurer denied the claim, on the basis that the condominium policy excluded coverage for such losses if incurred when the property was vacant. The investor sued the insurer for breach of contract, and against the broker (and the insurer, as the broker’s principal) for professional negligence.

The insurer and broker both moved for summary judgment, and their motions were denied. The insurer and broker filed petitions for writ of mandate, challenging the trial court’s rulings. The court of appeal, in Travelers Property Casualty Company of America et al v. Superior Court of the State of California, County of Los, No. B243650, (Cal.App. Dist.2 04/17/2013), resolved the dispute.

FACTUAL BACKGROUND

It is undisputed that Joy “informed Koram (the broker) that several of the units at the [p]roperty had buyers and were in escrow and that Joy had recently created a homeowners[] association for the condominium complex [(HOA)].” Koram prepared a proposal concerning a Travelers ‘HOA’ policy, conditioned upon 80% of the condominium units being sold.

The vacancy exclusion at issue in this case is part of the businessowners coverage. The vacancy clause states, “We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been ‘vacant’ for more than 60 consecutive days before that loss or damage occurs…”

The Loss

At some point in February 2009, there was a loss at the property, purportedly caused by vandalism or theft. Specifically, all of the appliances, toilets, faucets, and air conditioning returns were removed from the units.

At the time of the loss it was undisputed that nobody lived in the units at the property. Indeed a certificate of occupancy had not been issued. Travelers argued that the breach of contract cause of action failed because the loss occurred when the property had been vacant for more than 60 days.

The trial court denied Travelers’s motion.

ANALYSIS

First, the court of appeal considered the issue of whether the policy provided coverage for the purported vandalism loss. Preliminarily, it had serious doubts as to whether the insured HOA, which had applied for coverage conditioned upon 80% occupancy, had a reasonable expectation of coverage for vandalism when the property was vacant.

The trial court concluded that the period “for more than 60 consecutive days before” the vandalism must, in fact, commence at or after policy issuance. However, as the court of appeal noted, there is no limitation in the clause which so states, nor is there any language in the clause which permits such an interpretation.

When the policy language is defined in terms of “days before [the] loss,” the time period is clearly backward-looking from the date of the loss, and does not implicate policy issuance.  At the time the policy was issued, it was intended to run for the entire year; 10 of 13 units were in reported to be in escrow, and the HOA claimed it reasonably anticipated the units becoming occupied early in the policy period. Thus, the HOA purchased a policy which provided many other coverages immediately, and was expected to provide vandalism coverage shortly into the policy period.

There is no reason why a particular coverage, which was anticipated to be triggered at some point later in the policy period, would be considered illusory, as did the trial court, simply because it was not active at the time of policy issuance.

It cannot reasonably be disputed that the insured, the HOA, was the owner of the building and not a tenant. As such, the court of appeal was required to determine whether at least 31% of its square footage was rented and used by tenants, or whether at least 31% of the building was used by the HOA to conduct customary operations. Neither was true. None of the units were sold. None of the units were rented and being used. Moreover, the HOA was not using any of the building for any purpose.  The property was indisputably vacant for 60 days prior to the loss, and the exclusion clearly applies.

Koram Owed Braum No Duty to Obtain Different Coverage

Braum’s (the purchaser of the loan) professional negligence cause of action against Koram (and Travelers as its principal) is based on the theory that Koram breached a duty to him by not obtaining a policy which actually provided coverage for the instant loss.

Insurance brokers owe a limited duty to their clients, which is only to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. Koram breached no duty to Joy or the HOA, and Braum does not argue that it did. Koram procured the insurance that Joy had decided was best for the HOA.

There is no evidence that, when Joy forwarded that document to Koram, Joy in any way requested Koram to review the policy and modify it, where necessary, to comply with the terms of the request. Joy and the HOA were Koram’s clients; Koram’s duty to provide insurance extended only so far as Joy and the HOA requested.

Braum, as the bank’s assignee, was owed a contractual duty by Joy to obtain certain insurance coverage. Joy did not obtain that coverage; as such, Braum’s remedy can only be with Joy. Koram owed duties only to Joy, and satisfied those duties. Braum cannot manufacture a duty of care owed to him in the absence of any evidence that Joy had requested Koram to satisfy its contractual duties to the bank on its behalf. As such, Braum has no cause of action against Koram or Travelers for professional negligence.

The petitions for writ of mandate were granted and the court of appeal ordered the trial court to vacate its orders denying the motions for summary judgment of Travelers and Koram and to issue a new and different order granting the motions. The stay of proceedings in the trial court is lifted. Travelers and Koram are to recover their costs in this writ proceeding.

ZALMA OPINION

California trial lawyers believe that it is axiomatic that Writs of Mandate are usually met with a post card from the court of appeal denying the writ. Travelers Insurance, confident of their position, filed a writ regardless of the axiom. Travelers was correct. The lender’s only case is against Joy, now bankrupt, and “judgment proof” not against the insurer or the agent who wrote the insurance that Joy ordered.

Clearly, at the time the policy was acquired, the property, the risk of loss of which Travelers Insured, was not as represented. Rather than a complete condominium with a large majority of the units sold and occupied, it was an incomplete structure where none of the units were sold and none were occupied.

All insurers, including Travelers, recognize that vacant structures pose a greater risk of loss by vandalism or theft than an occupied building. Almost no insurer is willing to take that risk and I have never seen a policy without the 60 day vacancy exclusion.

Finally, although not necessary for the motion for summary judgment, the policy was acquired based upon an intentional misrepresentation of material fact. Had Travelers know that the structure was not complete and none of the units had been sold it would never have issued the policy. It is, by its terms, and California statutory law voidable and had Travelers rescinded before the suit was filed it would have been successful.

© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Health Insurance Fraud

CGL Does Not Insure Against Fraud and Conspiracy Charges

Midwest Open MRI (“Midwest”) asked West American Insurance Company (“West American”) to defend and indemnify it to a suit brought by a competitor. West American filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Midwest in the underlying lawsuit and Midwest filed a counterclaim seeking a declaration of coverage. The parties filed cross-motions for judgment on the pleadings. The trial court granted West American’s motion and denied Midwest’s motion, finding that:

  1. The underlying claim alleged an economic loss that was not covered under the policy;
  2. the underlying lawsuit contained no discrimination claims; and
  3. West American was not estopped from raising defenses to coverage.

In West American Insurance Co v. Midwest Open MRI, Inc, 2013 IL App 121034 (Ill.App. Dist.1 04/16/2013) the insured asked the Illinois Court of Appeal to resolve the insurance coverage dispute and compel the insurer to defend and indemnify it to the suit brought by the competitor.

BACKGROUND

Midwest provides magnetic resonance imaging (MRI) services to patients. It was sued by one of its competitors, Advanced Physicians, for allegedly violating section 2 of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act). Advanced Physicians and its principals, Richard and Dana Vallandigham, filed a series of amended complaints which, for the purposes of this appeal, are all substantially similar in their allegations.

Advanced Physicians generally alleged that Midwest engaged in “widespread solicitation and conspiracy to engage in kickback-for-referral arrangements with certain physicians or clinics and submitted false and deceptive billing records to patients and third-party payers. Advanced Physicians claimed that it has been restrained from capturing much of the outside MRI business in the region because a substantial part of that market was being illegally monopolized by Midwest in conspiracy with those referring physicians and clinics.

Specifically, Advanced Physicians alleged that Midwest contracted with certain physicians who referred patients to it for MRI scans and allowed the referring physicians to share in the medical billing revenues. The alleged scheme is conducted in one of two ways. In the first scenario, a physician would refer a patient to Midwest’s facility.

Dr. Richard Vallandigham, the principal of Advanced Physicians claimed that many of the physicians he met told him that they had contractual referral agreements with Midwest. The physicians told Vallandingham their contracts with Midwest caused them to receive compensation for referred MRI scans and for which they did no work. Vallandigham was also told that these physicians entered into “sham lease agreements” with Midwest, which purported to show that physicians leased space at Midwest to attend to their patients, although they did not in fact see any patients at Midwest’s facility. The “sham lease agreements” allowed Midwest and the physicians to submit false billings to patients and their insurers.

As a result of these arrangements between Midwest and the referring physicians, Midwest was alleged to perform 300 to 400 scans per month at the below-market contracted rate for services. On the other hand, Advanced Physicians claimed it charged its patients the usual and customary rate but performed less than half as many scans, despite its capacity to perform 750 scans per month. Furthermore, of its 145 monthly scans, only 20 of them resulted from “open market referrals.” Advanced Physicians alleged that Midwest’s wrongful conduct interfered with the market competition, doctor-patient relationships, and the public’s right to choose their own physician. Advanced Physicians sought a declaration that Midwest’s conduct violated the Consumer Fraud Act, a permanent injunction to prevent Midwest from engaging in the unlawful conduct described, monetary damages and restitution, penalties awarded under the Consumer Fraud Act, and attorney fees.

Midwest tendered each version of the Vallandigham and Advanced Physicians complaints to West American pursuant to the terms of its general liability insurance policy. West American filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Midwest in the underlying action after the disposition of the first Vallandigham complaint. West American amended its declaratory judgment complaint each time Midwest tendered an amended complaint filed by the Vallandighams or Advanced Physicians in the underlying lawsuits.

THE DECLARATORY JUDGMENT ACTION

West American challenged coverage on several grounds. First, it alleged that the Vallandigham and Advanced Physician complaints failed to allege an “occurrence” or “Bodily Injury,” “Property Damage,” or “Personal and Advertising Injury” as defined by the policy. West American also asserted several policy exclusions for intentional and criminal behavior and alleged that the claimed injuries suffered by Advanced Physicians occurred before the effective date of the policy pursuant to the known loss doctrine.

The trial court concluded that the harm allegedly incurred by the Vallandighams and Advanced Physicians did not constitute a “loss of use of tangible property that is not physically injured,” as contemplated by the policy; rather, it was an ordinary economic loss that was not covered by Midwest’s policy. Furthermore, it found that the underlying complaints did not allege a “personal or advertising injury.” Specifically, such coverage only applied to personal injuries to a natural person and, therefore, could not apply to Advanced Physicians.

The court further found that West American was not estopped from denying coverage even though its declaratory judgment action was filed after the first Vallandigham complaint had been dismissed for improper joinder. The court concluded that although the dismissal was a final order, the dispute had not been finally resolved by “judgment or settlement” such that estoppel should apply because the matter continued under a different civil docket number after being refiled against Midwest as a single defendant.

ANALYSIS

The appeal concerns whether the insurer has a duty to defend, which involves the construction of an insurance contract. In evaluating an insurer’s duty to defend, the court first looked to the allegations in the underlying complaint and compared them to the relevant provisions of the insurance policy.

The insurance policy applies to losses caused by property damage only if the property damage is caused by an “occurrence.” The policy defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Although the policy does not define the term “accident,” this court has long recognized that for purposes of insurance coverage claims, an accident is ” ‘an unforseen occurrence, usually *** an undesigned sudden or unexpected event of an inflictive or unfortunate character.’ ” State Farm Fire & Casualty Co. v. Young, 2012 IL App (1st) 103736.

The court of appeal read the underlying complaint and reached “the unavoidable conclusion that it does not allege an occurrence because it makes no allegations of accidental conduct or consequences.” Advanced Physicians alleged that Midwest and the referring physicians engaged in predatory pricing schemes that had the effect of pricing other non-participating MRI facilities out of the market and drastically reducing competition in the diagnostic testing market. Advanced Physicians asserted that Midwest’s conduct was willful, intentional, and evidence of an evil motive that harmed Advanced Physicians.

West American, therefore, had no duty to defend Midwest on the claims asserted in the underlying actions.

Midwest, unwilling to give up its claims, also argued that the underlying complaints alleged a discrimination claim that triggered a duty to defend under the personal and advertising injury clause. The court of appeal disagreed. The policy provides coverage for personal injury claims asserting “discrimination or humiliation that results in injury to the feelings or reputation of a natural person,” but only if the act was “not done intentionally by or at the direction of an insured.” Furthermore, the policy specifically excludes coverage for ” ‘personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’ ”

Because Advanced Physicians is a corporate entity and not a natural person, the complaints filed by it cannot trigger coverage under the policy’s personal injury coverage. The court of appeal concluded that none of the allegations of Midwest stated a covered claim against West American and left it to defend itself with its own funds.

ZALMA OPINION

The coverage decision was fairly easy. No occurrence, no personal injury, no coverage. The intentional conspiracy alleged in the complaint filed by Advanced Physicians against Midwest could not conceivably be a fortuitous event that was insurable.

What the court did not mention is that Advanced Physicians had uncovered a massive medical insurance, Medicare and Medicaid fraud. If true the actions of Midwest are not only an intentional act to deprive Advanced Physicians of business, it is a criminal conspiracy to defraud insurers and government based medical programs like Medicare. The case should be reviewed by the local states attorney and the U.S. Attorney for the area.

© 2013 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television programing, http://wrin.tv.

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Negligence Per Se

Don’t Ride Bike on Sidewalk

Almost every automobile accident involves insurance even if the word “insurance” is never mentioned by the parties or the courts of Appeal. It is important, therefore, that insurance professionals understand the meaning of negligence and what is necessary to prove or defend against claims of negligence. In Micheal Spriesterbach v. Janice Holland, No. B240348 (Cal.App. Dist.2 04/09/2013) Micheal Spriesterbach sued Janice Holland after an accident between her automobile and his bicycle for negligence. He alleged that he suffered a serious shoulder injury as a result of the collision. The jury returned a verdict for Holland, finding by special verdict that she was not negligent.

Spriesterbach appealed.

FACTUAL BACKGROUND

On March 10, 2010, Spriesterbach left Santa Monica City College (SMCC) and began riding home on his bicycle.  When he got to the intersection of National Boulevard and Barrington Avenue, he crossed to the sidewalk on the opposite (north) side of National Boulevard, where he continued to travel east. As he approached a supermarket parking lot on his left, he saw a car, driven by Holland, stopped at the threshold between the parking lot exit and the sidewalk. Holland did not see Spriesterbach, and she began to move forward just as he was directly in front of her car. Holland’s car hit Spriesterbach’s left bicycle pedal, causing the bicycle and Spriesterbach to fall to the street.

Spriesterbach filed the present action against Holland on August 20, 2010. He alleged two causes of action, for general negligence and motor vehicle liability. Holland filed a general denial and asserted 11 affirmative defenses, including that Spriesterbach’s own negligence was the cause of the accident.

As he continued riding on the sidewalk adjacent to National Boulevard, he rode next to a hedge and wall separating the sidewalk from an adjacent supermarket parking lot. He noticed Holland’s car at a “dead stop” at the threshold of the parking lot and the sidewalk. Spriesterbach could not tell whether Holland saw him because there was a glare on her windshield. He did not do anything to get her attention because he “just assumed that she was at a stop sign and she was either waiting for me to cross or she was waiting for like a gap in the traffic to pull out and safely merge into National Boulevard.”

As he rode in front of Holland’s car, she pulled forward and hit his left pedal, causing the bicycle to fall over. Spriesterbach’s handlebar hit the emblem on Holland’s car and Spriesterbach’s shoulder landed on the hood of the car. When Holland stopped her car, Spriesterbach “fell off the hood of the car into National Boulevard.” Holland continued to move after the impact, stopping two to three feet from the threshold of the parking lot and the sidewalk.

Dave King is a forensic engineer who reconstructs accidents. He testified for Spriesterbach that based on the area of impact indicated by the police report, Holland’s car hit Spriesterbach’s bicycle at the “inboard arrow” of the parking lot (i.e., the parking lot entrance), not “outboard arrow” (the parking lot exit). “King assumed, based on the physical evidence, that Holland’s car was traveling four to six miles per hour at impact and that Holland accelerated before hitting Spriesterbach. He also assumed, because Spriesterbach testified that his bicycle was in the lowest gear, that Spriesterbach was traveling three to five miles per hour immediately before the accident.” (Emphasis added) King estimated that Spriesterbach would have been visible to Holland for four to seven seconds before the impact. If Holland had instead exited over the exit arrow, Spriesterbach would have been visible to Holland for 2.2 to 3.4 seconds before impact.

Janice Holland testified that upon leaving the Ralphs parking lot at about 4:40 p.m., she came to a complete stop behind the line separating the parking lot from the sidewalk. As she took her foot off the brake and began to move forward, Spriesterbach rode directly in front of her and she drove her car into him. She immediately braked and stopped about 18 inches into the sidewalk area. He had been coming from the right, opposite the flow of traffic on the roadway.

Holland immediately got out of her car and asked Spriesterbach if he was okay. He said, “You fucking bitch. I’m going to sue you.” He picked up his bicycle and threw it, and then picked it up again and threw it against a tree. He pulled earplugs from his ears and called the police.

Henricus Jansen is an engineer and an accident reconstruction expert. He testified for Holland that in performing his analysis, “he assumed Holland had been sitting eight feet from the front of her car and was as far away from the wall as possible, giving her the best possible line of sight in the direction from which Spriesterbach was traveling.” (Emphasis added)

Verdict and Judgment

The jury returned a verdict for Holland, finding by special verdict that she was not negligent. The jury did not reach the issues of Spriesterbach’s contributory negligence or damages.

DISCUSSION

Spriesterbach contends the trial court made two prejudicial instructional errors. First, the court refused to instruct that if the jury found Holland violated Vehicle Code section 21804, it must find she was negligent per se. Second, the court instructed that Spriesterbach was negligent per se because immediately before the accident, he had been traveling on the sidewalk against the flow of traffic, in violation of the Vehicle Code.

Where a statute establishes a party’s duty, proof of the party’s violation of a statutory standard of conduct raises a presumption of negligence that may be rebutted only by evidence establishing a justification or excuse for the statutory violation. This rule, generally known as the doctrine of negligence per se, means that where the court has adopted the conduct prescribed by statute as the standard of care for a reasonable person, a violation of the statute is presumed to be negligence.

Although the Vehicle Code required defendant to yield the right of way, that requirement did not imply that an entrant from a private driveway onto a road was necessarily negligent if a collision occurred. Courts have interpreted the section to mean that a prospective entrant from a private road may lawfully enter a highway so long as there is no vehicle so near as to constitute an immediate hazard.

Further, disobedience of the statute only sets up a presumption of negligence. A jury can still find that the presumption has been overcome if the facts warrant a finding that disobedience of the statute was excused or justified. Although the trial court declined to give a negligence per se instruction, it did instruct the jury regarding the Vehicle Code section and a driver’s duty of care.

Spriesterbach’s Asserted Negligence Per Se

Spriesterbach contends the trial court erred by instructing the jury that riding a bicycle on the sidewalk in the opposite direction of the street traffic violated the Vehicle Code and, therefore, was negligent per se. The Court of Appeal concluded that the statute did not require Spriesterbach to ride in the same direction as the vehicular traffic. The failure to do so was not negligent per se. However, although the instruction was erroneous, it was not prejudicial because the jury never reached the issue of Spriesterbach’s negligence

The Vehicle Code does not require bicyclists riding on a sidewalk to travel in the same direction as vehicular street traffic. The trial court erred in so instructing the jury. However, a court of appeal will only reverse if it appears probable that the improper instruction misled the jury and affected its verdict. It is not probable that the jury was misled by the erroneous instruction and, therefore, the erroneous instruction does not require reversal.

The jury was asked to answer special interrogatories and answered “no” to question 1: “Was Janice Holland negligent?” It therefore never considered Spriesterbach’s own negligence – the only issue to which the Vehicle Code instruction was relevant. The instruction, though erroneous, was not reasonably likely to have affected the jury’s verdict.

ZALMA OPINION

Riding a bicycle on the sidewalk is not negligent because it is a violation of law. Entering a roadway from a private drive is not presumptively negligent. Expert testimony will almost always be ignored if the opinions of the expert are based on “assumptions” as was the testimony of the experts in this case.

Mr. Spriestrbach’s attitude, negligence in assuming that Ms. Holland saw him coming, while riding directly into her path at a high speed for a bicycle could have added to the jury’s conclusion that he was negligent. They, however, did not need to decide his negligence when it was clear that Ms. Holland was not negligent.

Defense counsel, probably paid by Holland’s insurance carrier, retained an expert who assumed less than the plaintiff’s expert and presented evidence that Holland was not negligent.

© 2013 – Barry Zalma

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

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

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

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

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Untimely Notice

Additional Insured Must Report Claim Promptly

The Supreme Court, New York County (trial court judge Doris Ling-Cohan, J.), entered an order that granted Mt. Hawley Insurance Company’s (Mt. Hawley) motion for summary judgment declaring that it has no obligation to defend or indemnify plaintiff in the underlying personal injury action, granted defendant Metropolitan Opera Association, Inc.’s (the Met) motion for summary judgment declaring that Mt. Hawley is obligated to defend and indemnify the Met in an underlying personal injury action, denied Mt. Hawley’s cross motion for summary judgment declaring that it is not obligated to defend or indemnify the Met in the underlying action, and dismissed the Met’s second and third cross claims against Mt. Hawley on the basis that they were abandoned. Later, the same court and Justice, upon reargument, reinstated the Met’s second and third cross claims on the basis that they were not abandoned. Upon reargument the trial court declared that Mt. Hawley’s duty to defend and indemnify is conditioned upon a finding of negligence by plaintiff or those acting on plaintiff’s behalf modified the order to:

  1. deny Mt. Hawley’s motion for the dismissal of the complaint as against it upon the declaration that Mt. Hawley has no duty to defend and indemnify plaintiff,
  2. to dismiss the Met’s third cross claim against Mt. Hawley for expenses incurred in this action,
  3. to delete that portion of the court’s October 16, 2012 order upon reargument that conditioned Mt. Hawley’s duty to defend and indemnify the Met upon a finding of negligence by plaintiff in the underlying action and to declare that Mt. Hawley’s duty to defend the Met shall arise and be conditioned upon a finding of an act or omission by plaintiff or one acting on plaintiff’s behalf, and otherwise affirmed, without costs.

DECISION

The appellate division, in Strauss Painting, Inc v. Mt. Hawley Insurance Company, No. 9623 103588/09 (N.Y.App.Div. 04/11/2013), found that the trial court properly determined that Mt. Hawley is obligated to defend and indemnify the Met in the underlying personal injury action. It is undisputed that there was a contract between plaintiff and the Met and that the contract required plaintiff to purchase insurance coverage naming the Met as an additional insured. It is also undisputed that plaintiff’s commercial general liability (CGL) policy from Mt. Hawley contained an additional insured endorsement.

The wording of the court’s declaration that the Met is entitled to defense and indemnity in the underlying action must be altered, however, to exclude the necessity of a finding of negligence by plaintiff in the underlying action. The additional insured endorsement speaks in terms of “acts or omissions,” not negligence. Thus, in the unlikely event that it would be found that some nonnegligent act by plaintiff caused the accident, the Met would still be entitled to coverage under the additional insured endorsement.

Regardless, the Met is not entitled to reimbursement of expenses incurred in this action. The court properly found that Mt. Hawley is not required to defend and indemnify plaintiff in the underlying action. Plaintiff’s notice of the accident to Mt. Hawley was untimely as a matter of law, and Mt. Hawley timely disclaimed coverage on that ground. Plaintiff’s notice to its broker did not provide timely notice to Mt. Hawley. There is no indication that plaintiff’s broker acted as an agent for Mt. Hawley or that the CGL policy listed plaintiff’s broker as its agent. Nor was plaintiff’s alleged belief of non-liability reasonable under the circumstances. Mt. Hawley was entitled to a declaration in its favor, but the complaint should not have been dismissed as against it.

ZALMA OPINION

In New York an untimely report of loss is insufficient to require an insurer to defend or indemnify the insured. Although the Met was an additional insured and entitled to defense or indemnity as such, it deprived itself of the right to indemnity from Mt. Hawley because it was late in reporting and only reported to a broker who was not an agent of Mt. Hawley.

This case teaches that it is imperative everywhere, but especially, in New York to report a loss immediately upon knowledge of its existence regardless of the insured’s opinion of liability. There is no excuse or reason to delay reporting to insurers and those who named the party as an additional insured. Nothing is gained by the failure to report and everything can be lost.

© 2013 – Barry Zalma

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

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

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

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

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Sometimes Insurance Fraud Loses

Sometimes Insurance Fraud Loses

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

  1. Why a doctor who provides fake health care and collects from Medicare and Medicaid must go directly to jail and stay there;
  2. The escalating war on insurance fraud and a report on its increase;
  3. Murder and Old Lace, a new serialized fictional story of insurance fraud; and
  4. A press release from the Coalition Against Insurance Fraud why the nation must close large gaps and better coordinate fighting prescription-drug abuse.

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

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

The last 19 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

1.    Don’t Change The Risk April 12, 2013
2.    Fraud Must Occur on Premises April 12, 2013
3.    Evidence of Mailing Sufficient April 12, 2013
4.    “Crash for Cash” April 11, 2013
5.    Medicare Fraud Ignored April 11, 2013
6.    To Stack or Not to Stack April 10, 2013
7.    Family Exclusion April 9, 2013
8.    Vicarious Liability of an Auto Lessor April 8, 2013
9.    Prejudice Presumed April 5, 2013
10.    Don’t Buy a Stolen Car April 4, 2013
11.    Barry Zalma on WRIN.tv April 3, 2013
12.    He Who Testifies Best April 3, 2013
13.    Home Inspection Contract Limitation April 2, 2013
14.    No Harm, No Foul March 29, 2013
15.    Insured Must Prove Disability March 28, 2013
16.    Technicalities Lose March 27, 2013
17.    Medicaid Pre-empts State Law March 26, 2013
18.    Something Borrowed March 25, 2013
19.    Investigation is a Profession March 22, 2013

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

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

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

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

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

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Don’t Change The Risk

Insurer Need Only Respond to Risk It Agreed to Insure

In Seneca Insurance Company, Inc., Plaintiff-Appellant-Respondent v. Cimran Co., Inc., et al., Defendants-Respondents-Appellants., No. 9226 (N.Y.App.Div. 04/09/2013) the parties brought an appeal that provided the New York Appellate Division with the opportunity to reiterate and reaffirm an ancient principle of insurance law: that insurance coverage cannot be imposed based on liability for which insurance was not purchased or provided.

It is axiomatic that insurance coverage cannot be imposed based on liability for which insurance was not purchased or provided.

Seneca’s motion for summary judgment sought a declaration that it has no duty to defend and indemnify defendants in the underlying personal injury action because the commercial general liability insurance policy it issued to them did not cover the portion of their property on which the accident occurred. Simply, that it never agreed to insure the insured against the risk of loss at any place other than the place described in the policy.

FACTS

On or about October 12, 2009, while construction was under way to add three additional stories onto defendants’ one-story building at 34-45 Francis Lewis Boulevard, in Flushing, Queens, an employee of the subcontractor handling the framing for the additional floors fell and sustained injuries. While the complaint in the personal injury action states merely that the plaintiff fell at “the construction site,” the bill of particulars adds that the incident took place while “the plaintiff was working on the fourth floor on top of the steel framing of the fourth floor side and/or edge.”

By a Notice of Occurrence/Claim dated February 19, 2010, defendants provided notice of the occurrence to Seneca. In a letter dated March 3, 2010, Seneca advised defendants that it had received the summons and complaint, stating that this constituted its first notice of the claim. By follow-up letter dated March 15, 2010, Seneca reserved its rights to disclaim coverage and/or rescind the policy, stating that further investigation of the claim was needed, including whether defendants had misrepresented on their insurance application that they had no intention of conducting demolition or construction at the premises.

Meanwhile, by notice of cancellation dated March 11, 2010, Seneca had cancelled defendants’ policy effective April 1, 2010, for the reason that “[t]he building is currently under construction.”

THE LITIGATION AND ANALYSIS

Seneca then sued seeking a declaration that it had no duty to defend the defendants in the underlying action because the accident did not take place at the “Designated Premises” covered by the policy. The policy described the insured premises as a 10,000-square-foot, one-story building. The accident occurred on the three story addition, which materially altered the “Designated Premises.”

Both sides moved for summary judgment.

The appellate court concluded that there were no issues of fact precluding summary judgment declaring that the construction site from which the injured worker fell was not part of the insured premises and therefore was not covered under the policy.  He was on the fourth floor, 40 feet or more above the ground, when he fell and was injured.

The property was described in defendants’ application for insurance, and on the policy, as a one-story building occupied by a billiard hall and a health spa. Since the policy was explicitly issued in reliance on the representations made in the application, there can be no real dispute or confusion that the purchased coverage was limited to the one-story building, which housed two commercial tenants. Nor was there any dispute or confusion regarding where the accident occurred; according to the plaintiff’s bill of particulars in the personal injury action, the accident took place “on the steel framing of the fourth floor” of what he described as the “construction site” at 34-45 Francis Lewis Boulevard.

Coverage cannot be afforded on liability for which insurance was not purchased. While the obligation to defend is broader than the duty to indemnify, it does not extend to claims not covered by the policy.

If a policy insures a portion of a building, it does not cover an injury occurring in another portion of the building. Since the policy only provided coverage for injuries arising out of the insured building, namely, the 10,000 square feet located on the first, and at that time only, floor of the building, it necessarily did not provide coverage for an additional three floors of an intended four-story structure, nor for the structure that existed during the construction of three additional floors on top of the insured building.

Seneca is therefore entitled to summary judgment on its second cause of action for a declaration that it has no obligation to defend and indemnify defendants for the claim brought against them by the plaintiff in the underlying action.

ZALMA OPINION

Insurance is a contract of indemnity that specifies in clear and unambiguous language the risks the insurer is willing and agrees to assume. The risk faced by a one story pool hall is much different than the risks faced by an insured in the process of adding three additional floors to the original structure.

The obligation of an insured to treat its insurer with the utmost of good faith requires that the insurer be advised of such a major change in risk or risk having no coverage at all. In this case the failure of the insured to advise the insurer of the change in risk, resulted in a total loss of coverage. The risk was materially changed and the loss did not occur at the place described by the policy.

The prudent insured changing a structure will advise its insurer of the change, gain a commitment to insure the new risks and buy a course of construction policy to protect the insured if the structure is damaged during construction. Keeping it a secret saved the insured nothing and cost the insured, in this case, all coverage and probably a great deal of fees paid to lawyers to try to obtain the coverage that had never been purchased.

© 2013 – Barry Zalma

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

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

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

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

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Fraud Must Occur on Premises

Limitation of Coverage for Fraud in a Financial Institution Policy

Banks are often used by criminals to effect a fraud against a depositor who keeps funds in the bank. Banks insure their exposure with a Financial Institution policy that protects the bank against certain specified perils including fraud committed in the bank. Like all insurance policies a financial institution policy covers many, but not all, risks of loss faced by the bank. The bank attempted to obtain coverage by parsing the language of the policy and make ambiguous wording that was clear and unambiguous.

FACTS

From 1997 through 2009 Sujata Sachdeva, the vice president for accounting at Koss Corporation, instructed Park Bank, where Koss had an account, to prepare more than 570 cashier’s checks. The checks were payable to Sachdeva’s creditors and used to satisfy her personal debts. She embezzled about $17.4 million this way, pleaded guilty to several federal crimes, and was sentenced to 11 years’ imprisonment. The SEC sued Sachdeva and an accomplice because their scheme (of which the checks from Park Bank were only a part) caused Koss to misstate its financial position.

Koss and Park Bank are litigating in Wisconsin about which of them bears the loss. The bank sued in federal court to compel its insurer, under the diversity litigation, seeking defense and indemnity. The Bank alleged that Federal Insurance must defend and indemnify it under a financial-institution bond, sometimes called a financial institution policy or a fidelity bond, but which for simplicity is an insurance policy. The Seventh Circuit resolved the dispute in Bankmanagers Corporation and Park Bank v. Federal Insurance Company, No. 12-3202, 13-1506 (7th Cir. 04/05/2013).

Park Bank relied on Clause 2 of the policy, which promises indemnity for “Loss of Property resulting directly from . . . false pretenses, or common law or statutory larceny, committed by a natural person while on the premises of” the Bank. The parties agree that Sachdeva did not enter the Bank’s premises. She gave instructions by phone, then sent one of Koss’s employees to fetch the checks. The trial court concluded that this makes Clause 2 inapplicable and entered judgment in the insurer’s favor.

ANALYSIS

The Bank concedes that every court that has considered the subject has held that a fraud orchestrated from outside a financial institution’s premises is not covered under Clause 2 (which is industry-wide language from Form 24 of a fidelity bond). The objective of an “on premises” clause is to exclude coverage of schemes such as Sachdeva’s.

According to the Bank, the policy does not exclude fraud but only “larceny” and therefore is inapplicable to its claim. The Seventh Circuit noted that the “on-premises requirement is the same whether the crime is fraud or larceny.” The Bank belabors the contention that Sachdeva committed larceny, citing decisions for the proposition that if A sends an agent to steal B’s property, then A has committed a crime even though A did not enter B’s land. That’s true enough but has nothing to do with Clause 2. To come within it, the Bank would need to establish that B (who does enter the victim’s premises) commits larceny even if B is A’s dupe and lacks the mental state required for conviction.

The Seventh Circuit explained that had Sachdeva asked the Bank to send the checks by mail or FedEx, the postal carrier or courier could not have been convicted of a crime. The Bank lacks an answer to the question why it should matter, under Clause 2, why the criminal rather than the financial institution chooses the guiltless person who transports the checks.

Because the insurer need not defend or indemnify the Bank in its litigation with Koss, the parties’ disputes about deductibles and attorneys’ fees need not be addressed.

The trial court’s judgment was affirmed.

ZALMA OPINION

This case did not strain the judicial mind of the Seventh Circuit. It resolved a jurisdictional issue without difficulty not discussed here and then looked at the insurance issue.

The policy in clear and unambiguous language made it clear that for coverage to apply the fraud Sachdeva committed needed to occur on the premises of the bank. There was no question that the fraud by Sachdeva occurred away from the premises of the bank. Coverage would only exist if Sachdeva came to the bank personally and defrauded the bank into allowing her to obtain the cashier’s checks the coverage could apply.

This was originally published April 9, 2013 and somehow fell off the list.

© 2013 – Barry Zalma

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

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

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

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

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Evidence of Mailing Sufficient

No Right to Coverage After Nonrenewal

Insurance companies, as a matter of course, will send notices of non-renewal and notice of cancellation by means of the United States Postal Service. When they do so they do not go to the extra expense of sending the notice Registered-Return Receipt Requested, but just first class mail with a record attesting to the fact that the notice was mailed, postage prepaid. When a loss occurs after a notice of non-renewal or cancellation, it is almost certain that the person who incurred the loss will claim the mail was never delivered. Courts, recognizing the fact, are faced continuously with cases like Jessica Tome v. State Farm Fire and Casualty Company, A Corporation, No. 4D11-2255 (Fla.App. 04/10/2013) which resolved the claim as have other states over the years. In fact, one of the first cases I ever tried was decided on the same issue in the same manner as the Florida Court of Appeal decided Ms. Tome’s claim.

Jessica Tome (“Tome”), appealed the final summary judgment granted in favor of State Farm Fire & Casualty Company (“State Farm”), arising from State Farm’s denial of automobile insurance coverage on the basis that Tome’s policy had been non-renewed.

FACTS

The following facts are not in dispute. Tome insured her Dodge Durango with State Farm in April 2007, on the same policy that insured her husband’s Toyota Corolla. In August 2007, State Farm discovered that Tome’s husband’s driver’s license had been suspended and that he had been convicted of driving on a suspended or revoked license. State Farm sent Tome a Driver Exclusion Agreement to exclude her husband and the Corolla from the policy. In September, Tome received notice that her husband and the Corolla were to be non-renewed. At the end of 2007, Tome received another Driver Exclusion Agreement for the Durango, which she returned with the understanding that the Exclusion only applied to her husband. At about the same time, State Farm issued an insurance identification card for the Durango indicating that the policy had the effective date of January 1, 2008.

On March 4, 2008, State Farm sent Tome a letter indicating that it was non-renewing the Durango policy as of May 1, 2008. State Farm cited the driving record of Tome’s husband. State Farm obtained a “Certificate of Mailing” addressed to Tome from the United States Postal Service indicating that the March 4th letter had been delivered to the post office, postage pre-paid. However, Tome contended that she never received notice of non-renewal.

On May 28, 2008, Tome’s Durango was stolen. Tome timely reported the theft to State Farm. State Farm denied coverage on the grounds that her policy had been non-renewed based on her husband’s driving record. According to State Farm’s internal policies, State Farm cannot “do driver exclusions on a spouse,” which precluded Tome from keeping her policy. State Farm successfully moved for summary judgment.

ANALYSIS

Tome first argues that there are genuine issues of material fact as to whether State Farm provided proper notice that it had non-renewed her insurance policy. The Court of Appeal noted the general rule that once an insurer establishes that its notice of intention not to renew complied with state law requirements for mailing the insured’s evidence of non-receipt is irrelevant. The official United States Postal Service Certificate of Mailing  introduced by State Farm showing that the Notice of Intent was mailed to the insured at the address given by him prevails, as a matter of law, over the insured’s self-serving denial of receipt. The court of appeal concluded therefore, that State Farm’s Certificate of Mailing was sufficient proof of notice as a matter of law. Tome’s only response was to deny receipt of the Notice of Intent and that response was found to be insufficient.

State Farm non-renewed the policy for the legitimate reason that it discovered that Tome’s husband’s driver’s license was suspended. The insurer does not violate any statute or act arbitrarily or capriciously in refusing to renew an automobile insurance policy. There is no general duty to issue a new policy at the end of the policy period. State Farm presented un-rebutted evidence that it acted pursuant to its internal policy prohibiting driver exclusions on a spouse of an insured. Moreover, State Farm believed that it was legally bound to adhere to its policy and had acted consistently by non-renewing the Corolla policy.

Finally, Tome argues that the trial court erred in granting final summary judgment on the promissory estoppel claim. The essential elements of estoppel are

  1. a representation as to a material fact that is contrary to a later-asserted position,
  2. reliance on that representation, and
  3. a change in position detrimental to the party claiming estoppel, caused by the representation and reliance thereon.

For a trial court to properly grant summary judgment on promissory estoppel, there must be an absence of disputed fact as to all three elements. In insurance law, this represents a very narrow exception to the general rule that equitable estoppel may be used to prevent a forfeiture of insurance coverage. Estoppel, however, may not be used to create coverage where none exists.

Tome’s only basis for the assertion that State Farm “represented” coverage was the Driver Exclusion Agreement. However, the Driver Exclusion Agreement, in and of itself, does not constitute a definite promise “as to terms and time” – the exclusion of certain coverages while the husband operated a vehicle was in no sense a promise that the policy would provide coverage that would extend beyond its expiration term.

Tome failed to raise a genuine issue of material fact regarding the reasonableness of her reliance on the Driver Exclusion Agreement. The court of appeal concluded that Tome could not have reasonably relied on the exclusion as a promise that the policy would extend beyond the policy’s stated expiration date, especially after State Farm sent non-renewal notices for the two policies.

ZALMA OPINION

The reason why proof of mailing is all that is required to prove proper notice of non-renewal was given is to avoid fraud. Ms. Tome was given notice of the non-renewal in a form and by a method required by law. She could not create coverage by merely stating she did not receive the mail. Regardless of the lack of confidence many have in the U.S. Postal Service, its record of delivery of mail properly addressed and with sufficient postage is almost perfect.

© 2013 – Barry Zalma

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

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

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

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

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“Crash for Cash”

Barry Zalma Reports on WRIN.tv

Staged Accidents, or “Crash for Cash” scams, are a major concern for law enforcement, as well as auto and fleet insurers.

In fact, police in Durham broke up one of the largest ‘Crash for Cash’ scams in UK history. A gang of 60 is believed to have been responsible for at least £3 million in fraudulent claims. The UK’s Insurance Fraud Bureau is investigating some 49 rings that cost insurers an estimated £66 million in fraudulent claims.

In the US, the National Insurance Crime Bureau revealed a scam along a stretch of highway outside Las Vegas. As many as 100 suspected staged accidents have been reported in the past 18 months 25 of those targeted big rig trucks.

WRIN.tv spoke with insurance attorney Barry Zalma about staged accident. Barry is a noted fraud and claims expert, and author of Zalma on Insurance Fraud and Zalma’s Insurance Fraud Letter.  Mr.Zalma discussed:

  •  Definition of a staged accident
  • Examples of staged accidents
  • How do people profit from staged accidents
  • What can insurers do to protect themselves from staged accidents

For more of Barry Zalma’s commentary on insurance fraud, visit our On Demand Library. For more information on Barry Zalma and Zalma Insurance Consultants go to http://www.zalma.com.

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Medicare Fraud Ignored

Qui Tam Case Not Original

Medicare and Medicaid fraud is rampant. Some estimates indicate that as much as $300 billion is taken by fraud perpetrators each year. Federal authorities are loathe to expend the funds necessary to prove that fraud exists. To encourage prosecution of fraud perpetrators Congress enacted laws that allow citizens to bring whistleblower suits. Such suits must be first filed under seal and delivered to the state and federal governments to cause them to agree or not to join in the suits. Whistleblower suits have been successful across the country to force the governmental agencies to join in actions against fraud perpetrators. Since the whistleblower may profit from the action whistleblower suits have been abused. Regardless of the abuse the number of whistleblower suits it has become clear that the government is not willing to expend the time and money necessary to prosecute Medicare fraud.

Marc Osheroff (“Relator”) brought a qui tam (whistleblower) suit attacking certain inducements offered by medical clinics to Medicare beneficiaries in the Miami area. Defendants HealthSpring, Inc., HealthSpring of Florida, Inc., Leon Medical Centers, Inc., and Benjamin Leon, Jr. (Collectively “Healthspring”), filed Motions to Dismiss. The Middle District of Tennessee resolved the issue in United States of America, Ex Rel v. Healthspring, Inc, No. 3:10-1015 (M.D.Tenn. 04/05/2013).

BACKGROUND

Relator is a resident of Broward County and works there and in Broward and Miami-Dade County as well. Defendant HealthSpring, Inc. is one of the largest managed-care organizations in the United States, and is focused on the Medicare market, and more specifically, the Medicare Advantage market.

Relator is an “entrepreneur” who has operated numerous successful businesses in varied fields, ranging from electronics, to motorcycles, to commercial real estate, to medical office buildings. High school educated, and having completed no business or marketing courses, Relator relies upon “informal marketing research” to determine whether a business venture should be explored.

Since 1993, Relator has owned a commercial building, and his tenants have included physicians. He understands medical clinics to be very profitable, and has some experience in the medical clinic field, having founded the Centre of Cosmetic Surgery with a physician partner in 1996.

Sometime in the early 2000s, Relator, along with a physician partner, began to investigate opening an outpatient surgery and rehabilitation center in a medical office building he owned on the campus of what is now called the Jackson North Medical Center. Researching the potential, Relator discovered “that the competition for patients faced barriers created by Defendants’ clinics and others, who compete for patients using unlawful inducements,” and that “[o]nce these clinics ‘owned’ the patients by virtue of continued inducements, the patients were removed from the market.”

In 2006, again with a physician partner, Relator began to develop plans for an MRI (magnetic resonance imaging) clinic, having already expended money in MRI hardware and outfitting a facility with high amperage electricity, extra air conditioning, and copper lining in the wall. Relator again researched the market, but backed out because once HealthSpring ‘owned’ the patients by virtue of continued inducements, those patients were removed from the market, and HealthSpring could then choose whether to install their own MRI hardware or negotiate a much less profitable arrangement with an office such as Relator’s.

The inducements about which Relator primarily complains include free transportation and free meals by HealthSpring. Both are allegedly provided to HealthSpring plan participants without any individualized determination of need.

The vehicles utilized by the clinics can hold over a dozen passengers, and operate as private limousines. The vast majority of the time, however, the vehicles transport far fewer than twelve individuals, and most often only one or two passengers. Relator became acutely aware of this after he found the clinics’ vehicles clogging his driveway to his medical office building and his shopping mall in Palmetto.

In addition to free transportation that allegedly violates the applicable regulations, Relator maintains that HealthSpring Clinics provide free food that goes far beyond a nutritional service based upon an underlying medical need, authorized by Medicare provisions. Relator contends that the inducements in the form of free food and rides violate the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, which makes it a crime to even offer illegal remuneration, and the civil Anti-Inducement Act, 42 U.S.C. § 1370a-7a, which prohibits offering remuneration that is likely to influence a Medicare recipient to utilize a specific provider.

This is not the only qui tam action Relator has filed complaining about services provided to Medicare beneficiaries by medical clinics in South Florida. He has filed several similar actions that were less than successful although they clearly pointed out apparent fraudulent conduct by Medicare providers.

LEGAL DISCUSSION

Defendants move to dismiss, arguing that Relator’s claims are barred by the public disclosure bar of the False Claims Act. Under the False Claims Act, a person who submits false claims to the federal government can be assessed civil penalties and triple damages.  Where the government declines to intervene in an action, the relator may proceed independently and be awarded a ‘reasonable amount’ – between 25 and 30 percent – of any proceeds or settlement, along with costs and reasonable attorney’s fees. Such rewards are meant to encourage whistleblowers to act as private attorney-generals in bringing suit for the common good.

To prevent opportunistic relators, the False Claims Act places jurisdictional limitations on qui tam actions, including, so far as relevant here, the “public disclosure bar.” In its present incarnation, the public disclosure bar provides:

(4)(A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed–

(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;

(ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or

(iii) from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. [31 U.S.C. § 3730(4)(A).]

For qui tam actions to be barred by a prior ‘public disclosure’ of the underlying fraud, the disclosure must have (1) been public, and (2) revealed the same kind of fraudulent activity against the government as alleged by the relator. If there has been a public disclosure and if the qui tam complaint raises substantially the same allegations as that already disclosed, the complaint is subject to dismissal, unless the relator is an original source.

In this case, there is no doubt that there have been public disclosures about what has been characterized as the “Cuban-style of health care” in South Florida, the lavishness of the medical clinics serving Medicare beneficiaries there, and the many services and amenities they provide. Obviously, by the very language of the False Claims Act, the Miami Herald is a part of the “news media,” and many courts have held that information on readily accessible public websites constitutes public disclosure.

The pivotal allegations in the First Amended Complaint are substantially the same as the allegations or transactions exposed by the Miami Herald and found on HealthSpring’s Leon Medical Clinics’ website. In fact, in their moving brief, the HealthSpring Defendants provide a side-by-side comparison between the two, and many of the pertinent allegations in the original First Amended Complaint echo, sometimes verbatim, the observations made in the Miami Herald reports, or found on the website.  For the bar to apply the publicly disclosed allegations need only be sufficient to place the Government on notice about the possibility of fraud.

In this case, Relator is not an original source. He does not suggest that he presented to the Government information prior to the public disclosure in the Miami Herald and on Defendants’ website – something which would have been hard to do since much of the First Amended Complaint is founded on those sources. Relator adds nothing that is independent of, and materially adds to, the disclosures that had already been made. Counsel for Relator has declared that “all material evidence relevant to his complaint” has previously been disclosed to the Government, and there is no suggestion that the First Amended Complaint omits any of the information thus disclosed.

ZALMA OPINION

The court’s decision is clearly appropriate under the law. The Relator read about the abuses in a newspaper and based his suit on the newspaper results. Since he was not an original source he could not maintain the action.

What is amazing is that the government had available to it the information, both from the newspapers and the original filing of the complaint and did nothing to prosecute the offenders who were – if the news reports are accurate – buying patients with free limo rides to clinics and free food. Since Medicare pays minimal amounts to providers one could reasonably conclude that the funds for such “free” inducements must come from fraudulent billing of Medicare and Medicaid.

The U.S. Government has a task force in Florida to prosecute these cases and there seems to be no excuse for its failure to investigate, prosecute criminally or sue the clinics for violation of the law.

© 2013 – Barry Zalma

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

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

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

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

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To Stack or Not to Stack

The Effect of Limit Per Occurrence

The courts of California faced with a need to obtain the benefits of either a primary or excess policy are faced with a dilemma and must decide which insurer is forced to pay more than it thought it agreed to pay when the policies were issued. In the multitudinous suits filed as a result of exposure to asbestos, insurers who took a small premium in the 1970’s to protect manufacturers find themselves paying in defense costs and indemnity more than 10,000 times the stated limit of liability and doing so for many years like a never-ending-story.

INTRODUCTION

In Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 (Montrose) the California Supreme Court adopted a “‘continuous injury’ trigger of coverage” approach to continuing injury claims. Under that approach, bodily injuries and property damage that occur in several insurance policy periods are potentially covered by all policies in effect during those periods. Montrose provides no guidance, however, as to how to apportion liability among insurers in continuing injury cases.

That question of apportioning liability for continuing injuries was raised squarely by Kaiser Cement and Gypsum Corporation v. Insurance Company of the State of Pennsylvania, No. B222310 (Cal.App. Dist.2 04/08/2013) where the California Supreme Court required the Court of Appeal to resolve the dispute in accordance with the Supreme Court’s ruling in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186 (Continental) [See my post at http://zalma.com/blog/california-allows-stacking-of-cgl/].

Between 1947 and 1987, Kaiser purchased primary insurance policies from four different insurers, including Truck. During many of the same years, Kaiser also purchased excess insurance policies. The Truck policy has a $500,000 per occurrence limit and no annual liability limit.

The court was asked to decide who is responsible to indemnify Kaiser for asbestos claims that exceed the 1974 primary policy’s $500,000 per occurrence limit. Kaiser and Truck contend that appellant Insurance Company of the State of Pennsylvania (ICSOP), which issued a first-level excess policy to Kaiser for 1974 (the 1974 excess policy), is responsible to pay claims over $500,000. ICSOP disagrees: It contends that primary insurance limits must be “stacked,” such that all available primary insurance policies – that is, all Truck policies issued to Kaiser between 1964 and 1983, as well as primary policies issued to Kaiser by three other carriers between 1947 and 1987 – are exhausted before any excess insurer need indemnify Kaiser for asbestos bodily injury claims.

The California Supreme Court transferred the matter back to the Court of Appeal with directions to vacate its decision and to reconsider it in light of Continental [See my post at http://zalma.com/blog/california-allows-stacking-of-cgl/]. The Court of Appeal considered Continental and again concluded that the policies Truck issued to Kaiser cannot be stacked. It then remanded the case to the trial court to determine whether Kaiser therefore is entitled to summary adjudication of the fifth and sixth causes of action of the cross-complaint.

STATEMENT OF FACTS

Kaiser manufactured a variety of asbestos-containing products, including joint compounds, finishing compounds, fiberboard, and plastic cements, from 1944 through the 1970’s. Kaiser manufactured these products at 10 different facilities at various times. Truck provided primary insurance to Kaiser from 1964 to 1983, through four CGL policies covering 19 annual policy periods. As relevant here, the policy in effect from January 1, 1974, through March 1, 1981, contained a $500,000 “per occurrence” liability limit.

Kaiser was also insured by three other primary carriers between 1947 and 1987. By April 2004, all three primary carriers had given notice that their aggregate limits were exhausted; thus, after April 30, 2004, Truck was the only primary carrier continuing to pay defense and indemnity costs for asbestos bodily injury claims.

ICSOP issued a first layer excess policy to Kaiser from January 1, 1974, through January 1, 1977. That policy provided that ICSOP would indemnify Kaiser for its “ultimate net loss” in excess of its retained limit, up to the policy limit of $5,000,000 per occurrence. Other insurers, including amici curiae issued excess insurance policies to Kaiser in other years.

By 2004, more than 24,000 claimants had filed products liability suits against Kaiser alleging that they had suffered bodily injury, including asbestosis and various cancers, as a result of their exposure to Kaiser’s asbestos products. Kaiser tendered these claims to Truck. By October 2004, Truck’s indemnity payments for asbestos bodily injury claims exceeded $50 million and included at least 39 claims that resulted in payments in excess of $500,000.

ANALYSIS

Truck argued that primary occurrence limits should not be “stacked” because stacking is:

(1)     contrary to Truck’s policy language,

(2)     contrary to California law . . . ,

(3)   contrary to the law of the majority of jurisdictions that have addressed this issue, including many cases in the asbestos context, and

(4)   as Kaiser properly argues, contrary to the reasonable expectations of the insured.

Under the Language of ICSOP’s 1974 Excess Policy, ICSOP’s Indemnity Obligation Does Not Attach Until All Collectible Primary Policies Have Been Exhausted

There are two levels of insurance coverage – primary and excess. Primary insurance is coverage under which liability attaches to the loss immediately upon the happening of the occurrence. Liability under an excess policy attaches only after all primary coverage has been exhausted.

Normal rules of policy interpretation apply in determining coverage under both primary and excess policies. Although insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. The mutual intention of the contracting parties at the time the contract was formed governs. A court must ascertain that intention solely from the written contract if possible, but also consider the circumstances under which the contract was made and the matter to which it relates.

Absent a provision in the excess policy specifically describing and limiting the underlying insurance, a horizontal exhaustion rule should be applied in continuous loss cases because it is most consistent with the principles enunciated in Montrose. In other words, all of the primary policies in force during the period of continuous loss will be deemed primary policies to each of the excess policies covering that same period. Under the principle of horizontal exhaustion, all of the primary policies must exhaust before any excess will have coverage exposure.

In Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810, also a continuing loss case with multiple primary and excess insurers, the court held that if the limits of liability in the available primary policies were adequate to cover the insured’s liability, no excess carrier would be liable. It adopted the “horizontal allocation of the risk” approach to liability as between primary and excess carriers.  The “horizontal” approach seems far more consistent with Montrose’s continuous trigger approach. That is, if “occurrences” are continuously occurring throughout a period of time, all of the primary policies in force during that period of time cover these occurrences, and all of them are primary to each of the excess policies; and if the limits of liability of each of these primary policies is adequate in the aggregate to cover the liability of the insured, there is no “excess” loss for the excess policies to cover.

The Court of Appeal concurred with the reasoning of the earlier cases and concluded that the 1974 excess policy is excess to all collectible primary insurance, not merely to the primary insurance purchased for the 1974 policy year.

Under the Language of Truck’s 1974 Primary Policy, Truck’s Liability Cannot Exceed $500,000 Per Occurrence

Having concluded that ICSOP’s policy is excess to all collectible primary insurance, the court of appeal then turned to the second issue raised by ICSOP’s appeal: What primary insurance is “collectible”?  The 1974 excess policy provides that ICSOP is liable for Kaiser’s “ultimate net loss” in excess of its retained limit, defined as “an amount equal to the limits of liability indicated [in] the schedule of underlying policies” (i.e., $500,000), plus the limits of “any other underlying insurance collectible by the Insured.” The “other insurance” provision uses nearly identical language, providing that ICSOP’s policy is in excess of the scheduled primary insurance policy plus “other valid and collectible insurance with any other insurer.” The plain language of its policy, ICSOP’s liability is in excess not of all primary insurance, but only of primary insurance that is both “valid” and “collectible.”

In Continental, the California Supreme Court considered a variety of coverage issues in connection with a federal court ordered cleanup of the Stringfellow Acid Pits (Stringfellow site).  Among the issues considered by the Supreme Court was how to allocate liability among several insurers in a “long tail” injury, which it characterized as “a series of indivisible injuries attributable to continuing events without a single unambiguous ’cause.'” (Continental, supra, 55 Cal.4th at p. 196.) It concluded that the policies at issue “obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was ‘on the loss.’ The coverage extends to the entirety of the ensuing damage or injury [citation], and best reflects the insurers’ indemnity obligations under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.”

Having so concluded, the court then turned to a related issue – whether the State could “stack” policy limits across multiple policy periods. It explained that stacking policy limits “‘means that when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy.’ [Citation.] ‘When the policy limits of a given insurer are exhausted, [the insured] is entitled to seek indemnification from any of the remaining insurers [that were] on the risk . . . .’ [Citations.]” (Continental, supra, 55 Cal.4th at p. 200.)

The Supreme Court concluded that an all-sums-with-stacking rule has numerous advantages. All-sums-with-stacking coverage allocation ascertains each insurer’s liability with a comparatively uncomplicated calculation that looks at the long-tail injury as a whole rather than artificially breaking it into distinct periods of injury.

Truck’s Policy Language Does Not Permit “Stacking” of the Various Truck Policies

Although Continental adopted an “all-sums-with-stacking” rule in the absence of contrary policy language, it made clear that any “stacking” analysis must begin with the relevant policy language.

The “limit of liability” portion of the policy limits Truck’s liability for personal injury or property damage to $500,000 “Per Occurrence.” The Truck policy contains a “per occurrence” limit – not a “per occurrence per policy” or “per occurrence per year” limit. This language is facially inconsistent with permitting Kaiser to recover from Truck more than the occurrence limit for a single occurrence.

The parties intended this language to mean what it plainly says – that for any single occurrence – Truck is liable up to the per occurrence limit, and no more. Therefore, the trial court correctly determined that Kaiser may not “stack” the liability limits of Truck’s primary policies, but rather may recover only up to the “per occurrence” limit of one policy.

The conclusion that Kaiser may not “stack” Truck’s annual liability limits is consistent with the Supreme Court’s analysis in Continental. Although the court did not describe such a provision with any specificity, the court of appeal believed Truck’s limitation-of-liability term is exactly a provision regarding the stacking of Truck’s own policy limits contemplated by the Supreme Court in Continental. Truck’s limitation-of-liability term was an absolute cap on its per occurrence exposure – and, as such, it is fundamentally inconsistent with “stacking” the liability limits of the several Truck policies.

Once Truck has contributed $500,000 per asbestos bodily injury claim, its primary policies are exhausted and Truck has no further contractual obligation to Kaiser. The trial court must determine the exhaustion per policy.

ZALMA OPINION

The Continental decision, as I said in my post when it was decided, put to rest the most important part of the Stringfellow story. It teaches insurers that the wording of the Commercial General Liability policy needs rewording to protect against “stacking” and to protect against long tail losses or find, when an insured pollutes, it will be probably be paying its policy limits for every year the policy is in effect.

The Court of Appeal, in Kaiser Cement and Gypsum Corporation v. Insurance Company of the State of Pennsylvania used the Continental decision to limit the ability of insureds in continuing loss situations to stack liability limits if the policy has a clear, per occurrence limit of liability.

Continental and Kaiser teach something neither court discussed: effective underwriting.  An intelligent underwriter with sufficient knowledge would have refused to insure the risk or would have specifically excluded losses resulting from the asbestos exposure or would have included an annual aggregate limit of liability. If the Supreme Court eventually agrees with this Kaiser holding, stacking of primary coverages will be limited and an insurer can rest knowing that once its limits have been exhausted on one occurrence it cannot be made to pay more even if it issued several annual policies to the insured.

© 2013 – Barry Zalma

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

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

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

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

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Family Exclusion

Child Was In Care of Mother’s Cohabitor

Tina Sellers, as the personal representative of her daughter’s estate, and Marcus Degen appeal the trial court’s determination that Hanson Farm Mutual Insurance Company of South Dakota (HFMIC) had no obligation to indemnify or to defend Marcus in an underlying wrongful death action. The Supreme Court of South Dakota resolved the dispute in Hanson Farm Mutual v. Marcus Degen, 2013 S.D. 29 (S.D. 04/03/2013) after resolving an issue of first impression in South Dakota concerning the meaning of the phrase in an insurance policy: “in your care…” as it relates to a household exclusion in the HFMIC homeowners policy.

FACTS

Marcus and Tina met in the spring of 2006 at work. Their work relationship quickly developed into a romantic one. At that same time, Marcus was living with his parents. Tina and her daughters, Adrianna and Zeraya, were living between an apartment and with her parents while Tina was in the process of divorcing the girls’ father.

As their relationship progressed, Tina and Marcus began to look for a home in Alexandria, South Dakota, Marcus’s hometown. After finding a house they liked, Marcus purchased the home in February 2007. As a part of qualifying for a home loan, Marcus also purchased a homeowner’s insurance policy with HFMIC. Marcus was the named insured on the policy. The policy defined certain specific terms that it used.

“Insured” was defined in part as:

a. “you”;

b. “your” relatives if residents of “your” household;

c. persons under the age of 21 residing in “your” household and in “your” care or in the care of “your” resident relatives;

The policy also contained a household exclusion, which read: “Coverage L [personal liability coverage] does not apply to: . . . ‘bodily injury’ to ‘you’, and if residents of ‘your’ household, ‘your’ relatives and persons under the age of 21 in ‘your’ care or in the care of ‘your’ resident relatives.” “[I]n ‘your’ care” was not defined in the policy nor did the policy place a specific time frame as to when “care” had to be rendered in order to fit the definition.

The girls often called Marcus “Dad” and he considered them his daughters. Marcus also purchased birthday and Christmas presents for the girls. Lastly, Marcus named Adrianna as the primary beneficiary in his retirement plan and Zeraya as the secondary beneficiary. Despite this relationship, Marcus never adopted the girls.

On the evening of October 27, 2007, Marcus was leveling dirt on the property with a skid loader. Later, Tina and Adrianna joined Marcus outside. Tragically, while operating the skid loader, Marcus, hit and killed Adrianna.

Based on the household exclusion, HFMIC filed a declaratory judgment action and asked the trial court to determine whether HFMIC had an obligation to indemnify or to defend Marcus in the underlying wrongful death action. A court trial on the declaratory judgment was held on June 19, 2012. Marcus and Tina both testified. The trial court ruled in favor of HFMIC and determined that Adrianna was in Marcus’s care and therefore excluded from coverage under the household exclusion contained in the policy. Both Tina, as personal representative of her daughter’s estate, and Marcus appeal.

ANALYSIS AND DECISION

Marcus and Tina contend that the phrase “in ‘your’ care” is ambiguous.  Initially, the Supreme Court noted that whether or not the phrase “in ‘your’ care” is ambiguous as used in the insurance policy was an issue of first impression for the South Dakota Supreme Court. To resolve the issue the Supreme Court used the the standard rules of interpretation and noted that a court may not seek out a strained or unusual meaning for the benefit of the insured.

An insurance contract’s language must be construed according to its plain and ordinary meaning and a court cannot make a forced construction or a new contract for the parties. Essentially, this means that when the terms of an insurance policy are unambiguous, these terms cannot be enlarged or diminished by judicial construction. Insurance policies must be subject to a reasonable interpretation and not one that amounts to an absurdity.

In examining the phrase “in ‘your’ care[,]” as stated within the policy, the Supreme Court construed the language of the contract according to its plain and ordinary meaning. The plain and ordinary meaning of “care” is akin to the charge or supervision of another.

Other courts and persuasive authority faced with this same issue have defined the word “care” “as the function of watching, guarding or overseeing and is typically associated with the supervision of children and other physically vulnerable or dependent individuals such as the elderly or infirm.” 9A Couch on Insurance 3d § 128:11 (2012). See Oliva v. Vt. Mut. Ins. Co., 842 A.2d 92, 96 (N.H. 2004) (concluding that “the phrase ‘in the care of’ connotes a level of support, guidance and responsibility that is most often present in situations where an insured cares for a minor child, an elderly person or an incapacitated individual”).

A fact finder should consider the following non-exclusive factors in determining whether an individual is “in ‘[the insured’s]’ care”:

1.     Is there a legal responsibility to care for the person?

2.     Is there some form of dependency?

3.     Is there a supervisory or disciplinary responsibility?

4.     Is the person providing the care providing substantial essential financial support?

5.     Is the living arrangement temporary or permanent, including how long it has been in existence and is expected to continue?

6.     What is the age of the person alleged to be “in the care of” another (generally, the younger the person the more likely they are to be “in the care of” another)?

7.     What is the physical or mental health status of the person alleged to be “in the care of” another (a person with health problems is more likely to be “in the care of” another)?

8.     Is the person allegedly “in the care of” another gainfully employed (a person so employed is less likely to be truly dependent on another)? [9A Couch on Insurance 3d § 128:11 (2012)]

Marcus and Tina argue that the trial court erroneously found that Adrianna was in Marcus’s care. HFMIC counters that the trial court properly utilized the eight-factor test that Adrianna was in Marcus’s care, and therefore excluded from coverage. In support of its argument that the policy exclusion applied, HFMIC presented the adverse testimony of both Marcus and Tina.

Applying the eight-factor test to the undisputed facts, the record demonstrated that, while Marcus had no legal responsibility for the girls, Adrianna and Zeraya depended on Marcus for various facets of their well-being. The girls were dependent on Marcus to provide them with shelter. He paid the mortgage, insurance, real estate taxes, and utilities on the house. Additionally, Marcus and Tina equally divided the household duties in order to provide a suitable home for the girls.

In addition to material needs, the record indicates that Marcus also provided for the girls’ emotional needs. He participated in making decisions concerning the girls’ educational and religious activities. Further, Marcus and the girls each showed affection for one another with the girls referring to Marcus as “Dad” and Marcus considering the girls his daughters. Lastly, Marcus, Tina, and the girls participated as a family in recreational activities, such as going camping and playing outside.

There was evidence in the record that Marcus would occasionally care for the girls by himself. Marcus was also listed as an emergency contact on Adrianna’s school records, which further bolsters his supervisory authority. There is evidence that Marcus was providing substantial essential financial support for the girls. The record also demonstrated that, while not married or engaged, Marcus and Tina had planned to continue the joint living arrangement indefinitely. Marcus and Tina both testified that it was their plan to stay together for the rest of their lives. At the time of the accident, the couple and the girls had been living together for eight months. Following the accident, Tina and Zeraya continued to live with Marcus for a year, until the accident took its toll on Tina and Marcus’s relationship.

CONCLUSION

The Supreme Court concluded that trial court correctly found that the phrase “in your care” was unambiguous. Additionally the trial court did not err in concluding that Adrianna was in Marcus’s care. Because she was in Marcus’s care, Adrianna was therefore excluded from coverage under the household exclusion contained in the policy. Therefore the trial court’s determination that HFMIC had no obligation to indemnify or to defend Marcus in the underlying wrongful death action was affirmed.

ZALMA OPINION

This is an unusual case in that both the insured and the claimant wanted coverage to apply because both cared for and loved the child who was accidentally killed. The family exclusion exists in insurance policies to avoid collusion and fraud not to harm children or their heirs.

The fact that Adrianna was in the care of Marcus was clear as was the policy wording. He, and the woman he lived with, lived together with one of the two children for a year after Adrianna’s death. After a year elapsed the loving couple who intended to stay together for the rest of their lives, separated so the mother could sue the putative father for the wrongful death of the child. Interestingly the father of the child did not sue.

The decision was proper and fit not only the wording of the policy but the intent of the drafters.

© 2013 – Barry Zalma

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

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

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

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

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Vicarious Liability of an Auto Lessor

Federal Law Always Trumps State Law

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

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

BACKGROUND

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

The Florida statute provides that:

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

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

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

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

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

ZALMA OPINION

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

The Florida Supreme Court agreed and appropriately preempted the statute.

© 2013 – Barry Zalma

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

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

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

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

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Prejudice Presumed

Prejudice Presumption Must Be Rebutted by Insured

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

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

FACTS

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

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

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

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

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

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

15.   Suits Against Us.

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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Don’t Buy a Stolen Car

Seizure by Police Not Theft or Damage

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

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

BACKGROUND

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

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

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

ANALYSIS

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

Loss means:

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

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

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

Insurable Interest

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

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

“Loss” Under the Policy

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

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

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

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

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

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

THERE IS NO COVERAGE FOR:

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

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

CONCLUSION

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Barry Zalma on WRIN.tv

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

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

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

 In the first interview Mr. Zalma discussed:

  • The definition of insurance fraud;

  • How much money is lost to insurance fraud;

  • Who typically commits insurance fraud; and

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

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He Who Testifies Best

When an Expert is Not an Expert

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

Background

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

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

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

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

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

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

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

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

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

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

Discussion

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

Expert Testimony

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

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

Closing Arguments

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

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

 

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Home Inspection Contract Limitation

Limitation of Liability Enforceable

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

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

FACTS

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

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

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

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

DISCUSSION

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

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

The lessons learned are:

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

© 2013 – Barry Zalma

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

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

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

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

 

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Sometimes Insurance Fraud Loses

Sometimes Insurance Fraud Loses

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

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

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

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

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

Zalma on Insurance

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

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

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

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

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

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

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No Harm, No Foul

Insurer Victim of Fraud Not Perpetrator

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

FACTS

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

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

BACKGROUND

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

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

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

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

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

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

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

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

DISCUSSION

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

Law of Causation

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

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

 

© 2013 – Barry Zalma

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

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

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

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

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Insured Must Prove Disability

Total Disability Required

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

Conflict of Interest

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

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

ZALMA OPINION

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

 

© 2013 – Barry Zalma

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

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

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

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

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Technicalities Lose

Settlement Negotiations Can Avoid Rule

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

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

Background Facts

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

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

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

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

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

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

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

Discussion

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

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

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

 

© 2013 – Barry Zalma

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

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

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

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

 

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Medicaid Pre-empts State Law

Medicaid Recipients Must Allocate Settlement Amounts

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

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

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

FACTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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Something Borrowed

The Problem with Not Reading The Entire Policy

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

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

GENERAL BACKGROUND

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

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

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

FACTS

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

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

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

THE POLICY

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

ANALYSIS

Duty to Defend/Duty to Indemnify

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

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

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

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

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

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

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

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

ZALMA OPINION

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

© 2013 – Barry Zalma

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

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

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

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

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Investigation is a Profession

SIU Investigators are Special

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

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

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

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

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

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

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

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

FLSA’s Administrative Employee Exemption

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

General Business Operations

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

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

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

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

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

Discretion and Independent Judgment on Matters of Significance

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

Insurer Has Right to Select Those It Will Insure

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

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

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

FACTS

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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Rescission Appropriate for Misrepresentation

Lies on Application Defeat Suit Against Insurer

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

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

FACTUAL BACKGROUND

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Causal Connection Required

Limited Coverage for Additional Insured

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Insurer is Not Insured’s Mommy

Good Faith Limited to Policy’s Promises

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Insurer’s Lawyer’s Advice Not Privileged

Washington Supreme Court Creates Presumption Against Attorney Client Privilege

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

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

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

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

FACTS

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

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

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

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

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

Addressing the Facts of This Case

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

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

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

CONCLUSION

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

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

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

ZALMA OPINION

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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Foolish Insurance Fraud Continues

Foolish Insurance Fraud Continues

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

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

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

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

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

Zalma on Insurance

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

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

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

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

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

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

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Go Directly To Jail

Insurance Fraud as Serious a Crime as Armed Robbery

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

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

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

BACKGROUND

The Fraudulent Billing Scheme

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

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

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

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

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

Reasonableness of Sentence

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

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

Kuhlman’s Sentence

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Murder, Torture, Kidnapping

Intentional Act or Loss Outside Coverage Territory

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

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

FACTUAL BACKGROUND

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

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

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

GROUNDS FOR APPEAL

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

Revision

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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Murder on High Seas

Person Making Claim Must Be Named on Policy

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

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

THE DAMAGE TO THE JOE COOL

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

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

THE LITGATION AND INSURANCE POLICY DEMANDS

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

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

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

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

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

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

ANALYSIS

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

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

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

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

Conclusion

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Contract of Personal Indemnity

Who’s On First?

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

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

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

BACKGROUND

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

© 2013 – Barry Zalma

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

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

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

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

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Diminution or Repair Costs

Diminution or Repair

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

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

BACKGROUND FACTS

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

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

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

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

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

ANALYSIS

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

Instruction No. 29 states:

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

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

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

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

“There is an exception to this limitation if:

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

 

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Don’t Sit on Your Rights

No Excuse For Waiting to Sue for 1995 Accident

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Surety & Bankruptcy

Surety’s Security is New Value

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

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

The trustee may not avoid under this section a transfer –

(1) to the extent that such transfer was –

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

(B) in fact a substantially contemporaneous exchange.

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

Failure to Object Terminal Error

Fifth Amendment Should Never Apply to Civil Plaintiff

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

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

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

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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