Emotional Decision of Jury Overturned

Two Juries Give Verdict to Church and Ignores Law

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

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

FACTS

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

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

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

POLICY EXCLUSION

The policy provides:

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

  1. Water.

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

(2) Mudslide or mudflow,

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

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

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

(b) Basements, whether paved or not; or

(c) Doors, windows, or other openings.

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

ANALYSIS

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

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

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

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

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

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

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

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

That was not the situation here.

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Excellence in Claims Handling

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

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

PROMISES MUST BE KEPT

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

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

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

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

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

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

Insurance claims professionals are people who:

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

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

A Proposal to Create Claims Professionals

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Failure to Conduct Real Investigation Supports Bad Faith Judgment

Hiring Counsel Not Investigation

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

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

FACTS

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

DARWIN’S DUTY TO DEFEND

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

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

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

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

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

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

TERMINATION OF DARWIN’S DUTY TO DEFEND IN AMERITOX

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

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

SUMMARY

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Pollution Exclusion Unambiguous

After Insurer Proves Exclusion Applies Burden Shifts to Insured to Prove Otherwise

Pollution exclusions have been rewritten over the last few decades until courts now agree that the absolute pollution exclusion is not ambiguous. In Hiland Partners GP Holdings, LLC v. National Union Fire…, United States Court of Appeals, Eighth Circuit — F.3d —-, 2017 WL 405645 (January 31, 2017) the Eighth Circuit was faced with a claim asking it to reverse a trial court decision that the exclusion was ambiguous and did not apply to an injury suit.

FACTS

Hiland Partners GP Holdings, LLC, Hiland Partners, LP, and Hiland Operating, LLC (collectively, Hiland) sued National Union Fire Insurance Company of Pittsburgh, PA (National Union). Hiland alleged that National Union had a duty to defend and indemnify it in connection with a lawsuit arising from an explosion at its natural gas processing facility. The district court granted National Union summary judgment after concluding that an exclusion to the insurance policy barred coverage.

Hiland owns and operates a natural gas processing facility in Watford City, North Dakota. The processing facility receives gas and hydrocarbon products and processes them into byproducts for sale. Hiland entered into a master service contract with Missouri Basin Well Service (Missouri Basin). That contract provided that Missouri Basin would “from time to time, be requested by Hiland … to perform certain work or furnish certain services to Hiland.” The contract also required Missouri Basin to obtain insurance policies which named it as the primary insured and Hiland as an additional insured.

THE POLICY

Missouri Basin also procured a commercial general liability insurance policy through National Union in April 2011, which was effective through April 2012.  The policy required National Union to pay all “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ ” which the policy covered. The policy also required National Union “to defend the insured against any ‘suit’ seeking those damages.”

The policy included an endorsement which excluded coverage for: “(1) ‘Bodily Injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants…”

The endorsement defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The endorsement provided that subparagraphs (1)(a) and (1)(d) do not apply if the pollution “commences during the term of the policy,” the insured discovers the pollution within seven days “after it commences,” and the insured reports the pollution to the insurer within twentyone business days following its discovery.

THE LOSS

In October 2011, Hiland requested that Missouri Basin remove water from its hydrocarbon condensate tanks at its Watford City processing facility. Condensate is one of the marketable byproducts derived from the facility’s processing of gas and hydrocarbon products. It is a flammable, volatile, and explosive product. Missouri Basin asked B&B Heavy Haul, LLC (B&B), a subcontractor, to haul the water. After B&B employee Lenny Chapman arrived at the facility he positioned his truck in front of one of the condensate tanks. Before Chapman began removing the water, one of the tanks overflowed. The condensate then caused an explosion which seriously injured Chapman.

Chapman and his wife filed sued Hiland, alleging negligence and loss of consortium. The Chapmans later settled their claims against Hiland. National Union refused to defend and indemnify Hiland as an additional insured under its insurance policy with Missouri Basin. Hiland then sued for declaratory judgment action against National Union, arguing it was an additional insured under the insurance policy and that National Union had breached the policy by refusing to defend or indemnify it.  The trial court concluded that although Hiland was an additional insured under the policy, the Chapmans’ action fell within the pollution exclusion.

ANALYSIS

Hiland first argued that the pollution exclusion in the National Union insurance policy is ambiguous. National Union argued that Hiland waived any argument that the pollution exclusion was ambiguous because Hiland did not raise any such argument before the district court.

In its memorandum in support of summary judgment, National Union argued that the pollution exclusion in its policy “is clear and unambiguous.” Hiland chose not to contest this point in its response in opposition to summary judgment. Hiland instead argued that hydrocarbon condensate is not a pollutant under the unambiguous terms of the policy. Because Hiland did not directly dispute the ambiguity issue, it is waived.

Regardless, North Dakota has not addressed whether pollution exclusions like the one in this case are ambiguous. However, the “majority of state and federal jurisdictions have held that absolute pollution exclusions are unambiguous as a matter of law.” Church Mut. Ins. Co. v. Clay Ctr. Christian Church, 746 F.3d 375, 380 (8th Cir. 2014

Hiland next argued that the district court erred by concluding that condensate is a pollutant. National Union’s insurance policy excluded from coverage bodily injuries or property damage “arising out of the … discharge, dispersal, seepage, migration, release or escape of pollutants.” The policy defined pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The policy did not define irritant or contaminant, however. North Dakota applies “the plain, ordinary meaning” to an undefined term in an insurance policy so long as the term is not subject to strict technical usage.

According to Chapman’s complaint, condensate is a saleable byproduct that results from the processing of gas and hydrocarbon products. The complaint described condensate as “flammable, volatile, and explosive.” Condensate is therefore a contaminant because flammable, volatile, and explosive liquid and gas has the ability to soil, stain, corrupt, or infect the environment.

The conclusion that condensate is a pollutant is further supported by Noble Energy, Inc. v. Bituminous Cas. Co., 529 F.3d 642 (5th Cir. 2008). In that case Noble Energy contracted with a water hauler “to collect and dispose of Basic Sediment and Water (‘BS&W’) from Noble’s storage tanks” at an oilfield recycling facility. The water hauler was covered by an insurance policy that contained a pollution exclusion that is identical in all relevant parts to the exclusion here. While an employee of the water hauler was unloading the BS&W from a truck, condensate vapors dispersed and caused the truck’s engine to explode. The court concluded that condensate “indisputably [met] the policy’s definition of ‘pollutant’ ” and the explosion “indisputably arose out of the discharge, dispersal, release, or escape of the BS&W and its vapors.” The Eighth Circuit found Noble Energy, Inc. persuasive and indistinguishable from the current action and found that the trial court did not err.

BURDEN OF PROOF

In North Dakota the insurer has the burden to prove the applicability of a policy exclusion.”  The insured, however, carries the burden to prove the applicability of an exception to the exclusion in order to benefit from coverage. National Union met its summary judgment burden by proving the applicability of the pollution exclusion. The district court then properly placed the burden of proving the applicability of an exception to this exclusion on Hiland. Because Hiland did not offer specific facts showing that it reported the pollution to National Union within twentyone days, the district court did not err by concluding that the exception to the exclusion did not apply.

ZALMA OPINION

Insurance companies do not want to cover pollution related injuries for the standard premium charged for a Commercial General Liability insurance policy. For years courts fought over the meaning of pollution exclusions until the insurers wrote the absolute pollution exclusion that left no space to argue ambiguity. Insurers who deal with pollutants, like Highland, should be care about the coverages they acquire and make sure that the exclusion is removed and pay the extra costs.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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New Jersey Eliminates Stink Over Assignments of Claims

Non-Assignment Clauses Only Prevent Assignment of Policy Not a Perfected Loss and Claim

Every third party liability insurance policy contains an anti-assignment condition that prevents an insured from assigning the policy to a third party without the permission of the insurer. The clauses do not prohibit assignment of claims that resulted from a covered occurrence during the policy period of the insurer.

When a perfume maker was sued for environmental pollution its insurers refused to defend or indemnify because they were not named as insureds in the policy and that they did not approve an assignment of policies from various predecessors of the plaintiff, Fragrances.

Insurers, faced with an avalanche of case law across the country, allowing assignment of the claim – a chose in action – and refuse to apply the anti-assignment clause to claims, continue to try to convince courts to make the condition include rights not mentioned in the policy wording. They tried again in New Jersey this year in Givaudan Fragrances Corporation v. Aetna Casualty & Surety..., Supreme Court of New Jersey, — A.3d —-, 2017 WL 429476 (2/1/2017) when the Supreme Court of New Jersey was asked to settle whether New Jersey adheres to the rule that an anti-assignment clause in an insurance policy may not bar the assignment of a post-loss claim even though the claim has not been reduced to a money judgment.

FACTS

Plaintiff Givaudan Fragrances Corporation (Fragrances) faces liability as a result of environmental contamination from a manufacturing site that a related corporate entity operated in a facility in Clifton, New Jersey, in relevant part, from the 1960s through 1990. The crux of this appeal involves Fragrances’s effort to obtain insurance coverage for environmental claims.

Defendants are insurance companies that wrote primary, excess, or umbrella policies of insurance for predecessors of Fragrances. Collectively, defendants refuse to honor Fragrances’s right to bring insurance contract claims against them.

THE ISSUES

Fragrances asserts that it has the right via an assignment of rights to claim coverage under the policies. That right, Fragrances asserts, may not be defeated by a clause, common to the policies at issue, that makes any assignment subject to the insurer’s consent (the “anti-assignment clause”). The language of that clause, as it appears in one representative policy, provides: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon…”

The dispute between Fragrances and defendants began in earnest when Fragrances was sued. Fragrances notified defendants of the environmental claims, but, generally stated, all defendants declined to provide coverage because Fragrances was not the named insured under the policies. Fragrances sued and while the declaratory judgment action was pending, Fragrances notified defendants that Flavors intended to assign its post-loss rights under the insurance policies to Fragrances. Defendants refused to consent to the assignment. Nevertheless, Flavors executed the assignment to Fragrances, which Fragrances maintains transferred its rights with respect to coverage for claims related to the fragrances operations that had been transferred pursuant to the 1998 restructuring.

After the assignment was executed, Fragrances filed a motion for summary judgment, asserting (1) that Fragrances has the rights of an insured under the policies because of the post-loss assignment of the claims.

Defendants countered that the 2010 assignment from Flavors to Fragrances was a policy assignment because it aimed to grant all rights under the policies to Fragrances. Defendants stated that insurance policies are personal contracts specific to the insured party that may not be assigned without the insurer’s consent.

The Appellate Division reversed and remanded. The panel explained that the policies were occurrence policies, where “the peril insured is the occurrence itself.” Although the anti-assignment clauses in the occurrence policies at issue would prevent an insured from transferring a policy without the consent of the insurer, once a loss occurs, an insured’s claim under a policy may be assigned without the insurer’s consent.

Defendants assert that Flavors’s assignment was invalid as it added a second insured to the policy, increasing their liability. More specifically, they contend that Flavors’s assignment was a proscribed policy assignment, not an allowable transfer of a claim under the policy. Fragrances argues that Flavors validly made a claim assignment—not a policy assignment—to Fragrances.

ANALYSIS

In Elat, Inc. v. Aetna Casualty & Surety Co., 280 N.J. Super. 62 (App. Div. 1995), the appellate court concluded that a post-loss insurance policy claim may be assigned. In Elat, the Appellate Division concluded that an anti-assignment condition in an insurance policy cannot restrict a policyholder’s ability to assign a post-loss claim.

The reason for the distinction between a transfer of a contractual relationship and a transfer of a money claim is critical. The purpose behind a no-assignment clause in a casualty or liability policy which is to protect the insurer from insuring a different risk than intended. The assignment only changes the identity of the entity enforcing the insurer’s obligation to insure the same risk. Thus, the purpose behind the no-assignment clause is not inhibited by allowing claim, as opposed to policy, assignment.

The reasoning in Elat aligns with the overwhelming majority of jurisdictions that have, over the decades, spoken on the issue presented in the instant matter.

The majority rule in the United States is that a provision that prohibits the assignment of an insurance policy, or that requires the insurer’s consent to such an assignment, is void as applied to an assignment made after a loss covered by the policy has occurred. Once the loss has triggered the liability provisions of the insurance policy, an assignment is no longer regarded as a transfer of the actual policy. Instead, it is a transfer of a chose in action under the policy.

The majority rule is an exception to the general principle that parties to a contract may freely limit assignment of their contractual rights. The principle underlying the rule is a deeply rooted public policy against allowing restraints on alienation of choses in action. The rule also embodies a recognition that “once a loss occurs, an assignment of the policyholder’s rights regarding that loss in no way materially increases the risk to the insurer.” 17 Williston on Contracts § 49:126 (4th ed. 2016).

The key issue is whether claims based on injuries that occurred during the policy period, but that had not been reduced to money judgments, were assignable without the insurer’s consent.

With respect to the core argument about the enforceability of insurance policy anti-assignment provisions concerning post-loss claims, the Supreme Court found no reason to hesitate to adopt the position that an anti-assignment clause is not a barrier to the post-loss assignment of a claim. The better rule is the generally recognized majority rule on that issue.

Simply stated, that general rule recognizes that anti-assignment clauses in insurance contracts apply only to assignments before loss, and do not prevent an assignment after loss. Post-loss assignments do not further the purpose of the anti-assignment clause, which is to protect the insurer from increased liability, because, after the events giving rise to the insurer’s liability have occurred, the insurer’s risk cannot be increased by a change in the insured’s identity.

Having adopted the majority rule, the Supreme Court turned to its application to the case at hand. In doing so, it considered first whether Flavors’s assignment to Fragrances was a post-loss claim assignment, or, as the insurers argue, an attempt to assign the insurance policies themselves. The court concluded that it was a post-loss claim assignment and therefore that the rule adopted voiding application of anti-assignment clauses to such assignments applies.

Here, the right to insurance coverage for the “occurrence” of environmental contamination was assigned to Fragrances after the policies had expired. The loss event occurred during the policy periods.  Nothing in the form of the assignment from Flavors to Fragrances alters the conclusion that only post-loss claims were assigned.

The Supreme Court concluded that the assignment does not increase the risk undertaken by the insurers for the policy periods for which they wrote coverage, in specified amounts, for occurrence-based claims pertaining to the Givaudan site in Clifton.

Where a valid post-loss claim assignment is made as to a given claim, an insurer has a duty to defend the assignee as the holder of that claim.

ZALMA OPINION

Environmental claims are expensive. Insurers would prefer not to pay them. However, the need to avoid payment, doesn’t work when insurers go against the majority rule on assignments and ask that the Supreme Court of New Jersey to rewrite the policy to provide language not there – something insurers argue against when clear language is modified or made ambiguous by courts – and were doomed to fail. They could have written the policy to avoid assignments of choses in action but did not. The insurers arguments against Fragrances raised a stink rather than the sweet smell of insurers providing defense and indemnity to their insured.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Judge Gorsuch on Insurance

Entire Policy Must Be Read – Not Just Selected Parts

Since Tenth Circuit Judge Gorsuch has been submitted to the U.S. Senate to be confirmed to sit on the U.S. Supreme Court I thought it would be interesting to review one of his insurance decisions. In Western World Ins. Co. v. Markel American Ins. Co., Tenth Circuit, 677 F.3d 1266 (2012) Judge Gorsuch recognized and applied, with humor and skill, one of the most important rules of insurance interpretation: read the entire policy. I look forward to his opinions from the Supreme Court.

Haunted houses may be full of ghosts, goblins, and guillotines, but it’s their more prosaic features that pose the real danger. Tyler Hodges found that out when an evening shift working the ticket booth ended with him plummeting down an elevator shaft. But as these things go, this case no longer involves Mr. Hodges. Years ago he recovered from his injuries, received a settlement, and moved on. This lingering specter of a lawsuit concerns only two insurance companies and who must foot the bill.

FACTS

The problems began at the front door of the Bricktown Haunted House in Oklahoma City. There Mr. Hodges was working the twilight hours checking tickets as guests entered. When his flashlight failed Hodges was aiming for the freight elevator, where (imprudently, it turns out) spare flashlights were stored. When he reached the elevator, Mr. Hodges lifted the wooden gate across the entrance and stepped in. But because of the brooding darkness, Mr. Hodges couldn’t see that the elevator was on a floor above him and he crashed 20 feet down the empty elevator shaft.

It is here the insurance companies enter the picture. Mr. Hodges sued Brewer Entertainment, the haunted house’s operator, for various torts. But no doubt wary of liability arising from its occult operation, Brewer had attended well to its insurance needs. It held two separate insurance policies, one with Western World Insurance Company and another with Markel American Insurance Company. Western World had thought far enough in advance to exclude from its haunted house coverage “any claim arising from chutes, ladders, … naked hangman nooses, … trap doors … [or] electric shocks.” But it hadn’t thought to exclude blind falls down elevator shafts, so it admitted coverage and proceeded to defend Mr. Hodges’s suit. Markel, however, balked, refusing to defend or pay any claim.

Western World wants Markel to fork over half the cost it incurred in defending—and eventually settling—Mr. Hodges’s claim. Markel directed the court to an “escape clause” that, it said, allowed it to elude the liability that would otherwise arise from the terms of its policy. Ultimately, the district court agreed with Markel, found the escape clause a viable escape hatch, and entered summary judgment in Markel’s favor—a decision, naturally enough, Western World now appeals.

The Oklahoma doctrine of equitable contribution, which “apportion[s] a loss between two or more insurers who cover the same risk so that each pays his fair share of a common obligation, and one co-insurer does not profit at the expense of the others. The only issue in this appeal, the parties agree, is whether the escape clause lets Markel escape liability.

Viewed in isolation, the clause seems to suggest as much. It provides that “[t]his insurance shall not apply to any entity that is already an insured under any other insurance provided by any company….” This seems a clear statement (or as clear a statement as one is likely to find in a densely drafted commercial insurance contract) disclaiming liability in the very circumstances we face.

But like so much else about this case, things are not always as they first appear. However appealing in isolation, Markel’s argument faces serious problems when viewed in context. The escape clause does not appear in Markel’s general commercial liability policy. Instead, the clause was added by a later endorsement.

ANALYSIS

If the immediate context casts a shadow over Markel’s reading of the escape clause, surrounding context darkens it. In Section IV of Markel’s policy there is a provision conspicuously titled “Other insurance,” addressing exactly the subject its heading suggests. The provision states (subject to various exceptions not relevant here) that Markel’s insurance provides “primary” coverage. And it adds that, if another insurance policy is also “primary” (as Western World’s is), the two carriers will share the cost of coverage according to a specified formula—either in equal shares or pro rata based on policy limits, all depending on the contents of the other policy.

This poses a problem for Markel because its reading of the escape clause renders its own “Other Insurance” provision a dead letter. Under Western World’s interpretation of the contract, Section IV’s “Other Insurance” provision states the general rule that Markel will provide co-insurance and the escape clause provides a limited exception for entities insured under Section II paragraph 2—certainly a plausible (if not metaphysically compelled) reading, one that at least gives some effect to every provision in the policy. Yet under Markel’s interpretation of the contract, the escape clause absolves it of all liability when another insurer is lurking about—an interpretation rendering Section IV’s “Other Insurance” provision more apparitional than corporeal. And that has to be a serious strike against Markel’s interpretation given contract law’s abhorrence of words without meaning and other superfluities. The whole of a contract is to be taken so as to give effect to every part, if reasonably practicable.

Even viewed in its best light, the applicability of the escape clause to an entity, like Brewer, insured under Paragraph 1 is far from clear. And in these circumstances, Oklahoma contract law tells us the tie must go to the insured. If (as here) the relevant limiting policy provisions are “unclear or obscure,” then the objectively reasonable expectations of a person “in the position of the insured” control. Put differently, when a policy’s escape hatch is less a clearly marked exit than it is a hidden trap door, the reasonable expectations of an insured who has read and become familiar with the policy language supplies the rule of decision. The plain terms of the contract are always the best evidence of the parties’ intentions and always control. But when the terms of the contract are unclear, or when the contract is susceptible to two reasonable interpretations, it is the expectations of the insured that control.

Applying the reasonable expectations doctrine to this case, we have no doubt a reasonable insured in Brewer Entertainment’s shoes would have expected coverage from Markel. Expected coverage in light of Markel’s general policy language promising Brewer coverage for accidents just like this one. Expected coverage in light of Section IV’s promise that Markel will shoulder the burden of co-insurance. Markel’s five page letter to Brewer explaining its decision to deny coverage rehearsed many other arguments—arguments it gave up the ghost on long ago—but the letter never once mentioned the escape clause. In fact, based upon the record the parties have presented to us it appears the first time Markel itself unearthed the escape clause from the depths of the contract and invoked it as a potential basis for evading liability was only after this litigation began.

Of course, few rules lack exceptions. And it’s at least conceivable Oklahoma might someday choose to create an exception to the reasonable expectations doctrine for cases where (arguably as here) both parties to the insurance contract are sophisticated and able to vindicate their interests without any extra help. But no such exception yet exists. When sophisticated insurers (like Markel) can much more easily and inexpensively avoid the sting of the reasonable expectations doctrine by the expedient of drafting clear and plain escape clauses that courts can enforce those that are not clear and plaint cannot be enforced.

ZALMA OPINION

Circuit Judge Gorsuch applied a rule of insurance contract interpretation carefully, correctly and with good humor. He placed light upon the haunted house and the policies insuring the risks of loss at the haunted house he made clear the need for an insurer to draft clear and unambiguous language and be careful when adding an endorsement that changes a contract and make some terms in other parts of the policy useless and inapplicable. Writing an insurance policy is hard and changes by endorsement, as did Markel, must be done carefully and avoid ambiguities or superfluities.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Zalma’s Insurance Fraud Letter – February 1, 2017

Lie on Health Insurance Application Is Criminal  

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

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

the insurance industry.

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

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

Visit the Zalma Insurance Claims Library

THE “ZALMA ON INSURANCE” BLOG

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

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

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.
The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

 

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Four Corners Rule Strikes Again

Employee’s Suit Against Employer For Mesothelioma Barred by Workers’ Compensation Exclusivity

Every state in the United States has a workers’ compensation system where, to avoid the need to prove liability of an employer who is believed to have negligently injured an employee. In exchange for the protection without a need to prove fault the employee is limited by state law to the exclusive remedy of workers’ compensation.

In National Fire Insurance Company Of Hartford and Transportation Insurance Company v. Burns & Scalo Roofing Company, United States District Court, E.D. Pennsylvania, 2017 WL 372144, Civil Action NO. 15-6028, (01/26/2017) the USDC for the Eastern District of Pennsylvania was asked to compel insurers defend the employer to a tort suit brought by an ex-employee.

Plaintiffs moved for summary requesting judgment in their favor and a declaration that Plaintiffs do not owe a further duty to defend and/or indemnify Defendant in the above-referenced state court action because the four corners of the underlying lawsuit clearly fit within the exclusion for no coverage for injuries to employees.

BACKGROUND

Briefly, in the underlying state court action filed by Carl and Lori Bremer (collectively “the Bremers”) against Burns & Scalo, (the same Defendant in this federal case), Carl Bremer (“Dr. Bremer”) contends that during the summer months of the years 1973 through 1976, he was employed by Defendant, was exposed to asbestos dust and fibers during his employment and, as a result of this exposure, developed malignant mesothelioma. In said complaint, his wife, Lori Bremer, pled a claim for loss of consortium. The state court complaint incorporated, by reference, allegations and causes of action asserted in a master long form complaint filed as In re Asbestos Litigation in Philadelphia Court of Common Pleas, No. 8610-0001 (“the Master Long Form Complaint”), including, inter alia, an allegation in Count VII that Dr. Bremers injuries resulted from Defendant’s intentional tortious conduct as Bremer’s employer. The nine-paragraph state court complaint contains very little by way of factual allegations. However, it explicitly alleges that Dr. Bremer was employed by Defendant, and that his exposure to asbestos dust and fiber during the course of his employment with Defendant was the proximate cause of his injuries.

In the state court matter, Defendant sought a defense and indemnification from Plaintiffs consistent with the provisions of the general liability insurance occurrence policies issued to Defendant between the years 1988 and 1992 (“the Policies”). The Policies, which contained identical provisions, essentially provide for a defense and indemnification in any lawsuit seeking damages for “bodily injury” that occurs during the policy coverage period. The Policies defined the term “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.”

After being served with the state court complaint, Defendant provided Plaintiffs with the notice of the underlying state court action. On August 26, 2015, Plaintiffs denied insurance coverage.

On September 12, 2016, a jury trial in the state court action commenced. The Bremers, as the plaintiffs therein, presented evidence of Dr. Bremer’s summer employment with Defendant between 1973 and 1976, of his exposure to asbestos during that employment period, and his subsequent diagnosis of malignant mesothelioma. While the jury was deliberating but before a verdict was rendered, Defendant and the Bremers reached a confidential settlement for an amount within the Policies’ ̈limits.

DISCUSSION

Under Pennsylvania law, an insurer’s duty to defend is broader than its duty to indemnify. However, there is no duty to indemnify if there is no duty to defend. To determine whether Plaintiffs owe a duty to defend and/or indemnify Burns & Scalo, the allegations in the state court complaint and the language of the insurance policies issued to Burns & Scalo, must be examined.

If the underlying complaint alleges an injury “which may be within the scope of the policy, the company must defend the insured until the insurer can confine the claim to a recovery that the policy does not cover.” However, to prevent artful pleading designed to avoid policy exclusions, it is necessary to look at the factual allegations in the complaint, and not how the underlying plaintiff frames the request for relief. The particular cause of action that a complainant pleads is not determinative of whether coverage has been triggered. The burden rests upon the insurer to demonstrate that the allegations of the complaint cast that pleading solely and entirely within the policy exclusions.

Plaintiffs moved for summary judgment on the premise that they have no duty to defend Defendant in the underlying state court matter because the facts and injuries therein alleged unambiguously fall within the exclusionary provision of the Policies. Defendant does not dispute Plaintiffs characterization of the factual allegations in the state court complaint. Rather, Defendant argues that Plaintiffs have not foreclosed the possibility that the allegations in the state court complaint fall outside the Exclusion eliminating coverage for injuries to employees.

In determining if a duty to defend exists, the court is charged with deciding whether the underlying complaint creates any possibility of coverage. The factual allegations of the underlying state court complaint clearly and unmistakably indicate that the Bremers’ causes of action arose out of the exposure to asbestos during the course of Dr. Bremer’s employment with Defendant. The Bremers successfully litigated their state court action based upon these facts.

It is patently clear that the allegations in the underlying state court complaint fall within the Exclusion provisions and, therefore, outside the scope of any insurance coverage. The state court complaint has the hallmarks of an action asserted by an employee against his employer for an occupational disease.

Notwithstanding, Defendant contends that these general allegations do not necessarily foreclose the theoretical possibility that Dr. Bremer was not Burns & Scalo’s employee during the entire period of his exposure to asbestos. Defendant urges this Court to consider a wide array of extrinsic evidence, including the testimony of the Trybuses in the underlying action, to conclude that Dr. Bremer was an independent contractor or subcontractor. However, Pennsylvania law is clear that Plaintiffs’ duty to defend a suit must be determined solely by the four corners of the underlying complaint.

The factual allegations in the state court complaint unequivocally indicate that the underlying injuries arose out of and in the course of Dr. Bremer’s employment by Defendant. The state court complaint did not allege any facts that could potentially fall within the scope of coverage. Consequently, because the claims alleged in the state court complaint fall within the Exclusion provisions, Plaintiffs have no duty to defend or to indemnify Defendant in the underlying action.

Plaintiffs’ motion for summary judgment was granted. Plaintiffs have no further duty to defend and/or indemnify Defendant in the underlying law suit identified as Bremer, et al. v. Burns and Scalo Roofing, Inc., Civil Action No. 149004424, Court of Common Pleas of Philadelphia County, Pennsylvania.

ZALMA OPINION

The court applied the law of the state of Pennsylvania that regardless of the existence of extrinsic facts that might create a potential for coverage the four corners rule requires the decision with regard to the duty to defend is limited to the four corners of the lawsuit for which defense is sought. The court only looked to the factual allegations in the complaint, and not how the underlying plaintiff frames the request for relief. The allegations of the complaint limited the exposure to the time Dr. Bremer was employed by the defendant.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Injury to One Spouse Not Injury to Other

Creative Argument Fails

Lawyers are creative people. They try to protect their clients and provide benefits to their clients by making creative arguments. Those creative arguments are often effective but are often just plain ridiculous.

In Lambert v. Nationwide Mutual Insurance Company, Slip Copy, United States District Court, S.D. West Virginia,  2017 WL 320926 (Signed 01/20/2017) the USDC for the Southern District of West Virginia was faced with what I would describe as a ridiculous argument that they dealt with with respect the argument did not deserve.

FACTUAL BACKGROUND

The Plaintiffs, George and Donna Lambert, alleged in their complaint that on or about June 23, 2014, Mr. Lambert was operating his truck along Route 3 in Beckley, West Virginia, with Ms. Lambert as a passenger. The Plaintiffs retained a motor vehicle insurance policy from the Defendant (“Lambert Policy”). The Lambert Policy contained limits of $20,000.00 per person and $40,000.00 per occurrence for injuries caused by underinsured motorists. The Lambert Policy also included a limit of $5,000 of coverage for medical services needed after an accident. On that same day, Mr. Bobby Bolen was operating his truck along Route 3 in Beckley, West Virginia. Mr. Bolen also retained a motor vehicle insurance policy from Nationwide (“Bolen Policy”), and that policy included coverage limits of $20,000.00 per person for bodily injury liability and $40,000.00 per occurrence for bodily injury liability. The Plaintiffs’ complaint alleges that on or about June 23, 2014, Mr. Bolen drove his truck into the truck of the Plaintiffs. Both parties concede that Mr. Bolen was wholly at fault for the accident. Ms. Lambert suffered a back injury from the accident, which required her to undergo two surgeries. However, both parties concede that Mr. Lambert suffered no physical injury from the accident.

On August 21, 2015, Ms. Lambert filed a demand for insurance benefits based on her injuries in the accident. Because the facts of the accident were not in dispute, Nationwide, who insured both Ms. Lambert and Mr. Bolen, tendered payment of all Ms. Lambert’s demands for a total of $45,000.

On December 14 and 15, 2015, Mr. Lambert made a separate demand of Nationwide for the exact same policy limits ($20,000 in liability from the Bolen policy, $20,000 in uninsured from the Lambert policy, and $5,000 in medical pay from the Lambert policy). Mr. Lambert asserted that he was due these policy limits because Ms. Lambert’s medical bills exceeded the $45,000 in policy limits she was entitled to, and, pursuant to West Virginia Code § 48-29-303, Mr. Lambert was now responsible for that outstanding debt as her husband. Nationwide denied Mr. Lambert’s claims for the additional policy limits, explaining that Mr. Lambert did not suffer bodily injury in the accident and therefore was not entitled to any benefit.

DISCUSSION

The Defendant argues in its motion for declaratory judgment that Mr. Lambert is not entitled to any additional insurance benefits regarding the June 23, 2014 automobile accident. The Defendant argues that the plain language of the Bolen policy limited insurance coverage to $20,000 per injured person, and the plain language of the Lambert policy limited insurance coverage for underinsured motorists to $20,000 per injured person and $5,000 for medical expenses. The Defendant argues that Mr. Lambert’s claim results from and arises out of Ms. Lambert’s injury and is subject to the same per person limits already exhausted by Ms. Lambert’s demand.

The Plaintiffs counter that Mr. Lambert is entitled to coverage because, although he did not suffer a physical injury, he was “injured.” The Plaintiffs suggest that, because Mr. Lambert is responsible for paying the remainder of Ms. Lambert’s medical bills as her husband pursuant any injury she suffered is imputed to him. The Plaintiffs assert that the effect of this statutory responsibility is to make Ms. Lambert’s injury Mr. Lambert’s injury, and Mr. Lambert is therefore entitled to another $25,000 from the Lambert Policy and $20,000 from the Bolen policy.

Pursuant to West Virginia law, like the law across the country, language in an insurance policy should be given its plain, ordinary meaning. Further, where the provisions in an insurance policy contract are clear and unambiguous they are not subject to judicial construction or interpretation, but full effect will be given to the plain meaning intended. To be ambiguous, the policy provision must be reasonably susceptible of two different meanings or be of such doubtful meaning that reasonable minds might be uncertain or disagree as to its meaning.

The insurance policies at issue are both issued by Nationwide and both define bodily injury as “a) physical injury; b) sickness; c) disease; or d) resultant death; of any person which results directly from a motor vehicle accident.”

The Court found that the language in both of these policies is neither reasonably susceptible of two different meanings, nor of such doubtful meaning that reasonable minds might differ as to its meaning. The Lambert Policy and the Bolen Policy define “bodily injury” in exactly the same manner, including physical injury, sickness, disease, or resultant death. Both policies further limit per-person coverage for bodily injury to include all claims arising out of one person’s bodily injury.

Both parties conceded that Mr. Lambert did not suffer any physical bodily injury as defined within the insurance policies. Mr. Lambert’s claims for additional policy limits, based solely on his responsibility to pay Ms. Lambert’s medical bills, are claims resulting from and arising out of Ms. Lambert’s injury. Giving the clear and unambiguous language from both policies its plain meaning, the Court concluded that Mr. Lambert is not entitled to any additional insurance benefits. Having received $45,000 from Nationwide based on her demand, Ms. Lambert has exhausted the limits of the Plaintiffs’ entitlement.

ZALMA OPINION

Whether Mr. Lambert needed to pay his wife’s medical bills or not he suffered no bodily injury. The policies have a single limit for bodily injury incurred as a result of a tort. Since Mr. Lambert suffered no bodily injury. He had no right to recover for bodily injury suffered by his wife.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Undisputed Material Misrepresentation Sufficient to Support Rescission

Misrepresentation to Save Premium Eliminates Coverage

People who have no experience with insurance when faced with a potential savings of insurance premium if the insured does not present true facts to the insurer is exceedingly expensive and can surprise the insured to find he has no coverage at all.

In Great Lakes Insurance SE v. Charles Queen, Slip Copy, United States District Court, M.D. Georgia 2017 WL 343637 (01/23/2017) defendant Charles Queen was insured under a homeowners insurance policy issued by Plaintiff Great Lakes Insurance SE. One of Queen’s outbuildings was destroyed in a fire, and Queen made a claim under the policy to recover for the damage to the contents of that building. When Great Lakes investigated the claim, it discovered that Queen’s home was on an eight acre parcel. Queen’s application for the insurance, which was completed by his independent agent but signed by him, indicates a response of “no” to a question that specifically asked whether the property to be insured was on more than five acres.

FACTUAL BACKGROUND

The record revealed that Queen owns the property located at 1213 Old Monroe Madison Highway in Monroe, Georgia. His mother previously owned the property, which was divided into four tracts. When Queen’s mother died, Queen inherited tracts 3 and 4, and Queen and his sister jointly inherited tracts 1 and 2. Queen’s sister later deeded Queen her interest in tracts 1 and 2; Queen now owns the entire parcel located at 1213 Old Monroe Madison Highway. The parcel is approximately 8.2 acres.

After Queen became the owner of the property he sought insurance coverage. He retained Mike Sorrells, an independent insurance agent with Alfa Agency, to procure homeowners insurance. Queen told Sorrells that he wanted to insure the dwelling and outbuilding on one of the tracts within the entire parcel. That particular tract was less than five acres. Queen was aware that if he sought coverage for the entirety of his property, he would have been required to pay an additional premium and procure a different type of insurance coverage.

Sorrells completed an insurance application on behalf of Queen. The application does not indicate that coverage is only sought for a certain tract within the parcel. The application asks: “Is the property situated on more than five acres?” Sorrells checked “no.” Queen signed the application, stating that he had reviewed the application and declaring that the statements in the application were true, to the best of his knowledge.

Southern Insurance Underwriters, Inc. acts as managing general agent for Great Lakes and issues policies on behalf of Great Lakes pursuant to certain underwriting guidelines. Southern Insurance relied on Queen’s application in deciding whether to issue Queen a policy and on what terms. Southern Insurance also relied on the information provided in Queen’s application in deciding whether to renew Queen’s policy. Great Lakes submitted uncontroverted evidence that if Queen had disclosed that the insured location was more than five acres, Southern Insurance “could not have originally issued the Policy or continued coverage under the Policy.” Instead, Southern Insurance “would have charged a different premium, offered different coverage, or written coverage under a different insurance carrier.” Queen presented no evidence to contradict this assertion.

Queen did not dispute that the property identified by this address exceeds five acres. By so doing he admitted he misrepresented a material fact asked by the application for insurance.

During the coverage period, a shed on Queen’s property caught fire, and the contents of the shed were destroyed. Queen claims that the destroyed personal property was worth $120,000. This shed is near Queen’s house, and the house and shed both sit on a tract that is less than five acres. While investigating the claim, Great Lakes discovered that the parcel is greater than five acres. Based on that discovery, Great Lakes concluded that Queen had made a material misrepresentation in his insurance application and rescinded the policy. Great Lakes tendered to Queen a refund of all the premiums he had paid for the policy.

DISCUSSION

To void Queen’s insurance policy, Great Lakes must demonstrate both that [Queen] made false representations and that the misrepresentations were material from the view of a prudent insurer.

Was There A Misrepresentation?

Construction of an insurance contract (or application) is generally a question of law for the Court. If the terms are unambiguous, then the insurance provision must be enforced as written. Ambiguity exists in an insurance policy when its terms are susceptible to different reasonable interpretations. Here, the Court foundthat even though Queen may not have fully understood the question in the application, it is not ambiguous.

The application asks if “the property” is situated on more than five acres. Though “the property” is not defined, its plain meaning is the property for which coverage is sought based on the face of the application. The application also asks for a “location address” of the property to be insured. The undisputed evidence in the present record indicates that the property associated with this insured location address exceeded five acres.

The application on its face unambiguously seeks coverage for the property located at 1213 Old Monroe Madison. And that is how the policy was issued; the insured location is approximately 8.2 acres. The fact that Queen may have had no intention to mislead anyone has no legal significance in the present context, which the Court finds to be a bit harsh but the law.

Was the Misrepresentation Material?

A misrepresentation in an insurance application shall not prevent recovery under an insurance policy unless it is material either to the acceptance of the risk or to the hazard assumed by the insurer would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise.

Dianne Brennan, an underwriting manager at Southern Insurance, the managing general agent for Great Lakes with regard to Queen’s policy testified by affidavit that if Queen had disclosed that the Property was greater than five acres, Southern Insurance could not have originally issued the Policy or continued coverage under the Policy. According to Brennan, Queen’s misrepresentation about the size of the insured location “changed the nature, extent, and character of the risk.

Georgia courts generally find that summary judgment may be granted on the materiality issue based on the uncontroverted affidavit of an insurance company’s representative establishing that the policy would not have been written as issued had the insurance company known of the misrepresentation. Without some evidence from Queen to create a genuine fact dispute on the issue of materiality, Great Lakes is entitled to summary judgment on this issue.

CONCLUSION

In summary, based on the present record, there is no genuine fact dispute that Queen, through his agent Sorrells, misrepresented the size of the insured location in Queen’s insurance application. There is also no genuine fact dispute that the misrepresentation was material. Accordingly, Great Lakes was entitled to rescind the policy. Therefore, the policy may be rescinded even though Queen thought he was only insuring his house and the outbuilding that sat on less than five acres of his entire eight acre parcel.

ZALMA OPINION

Rescission is an equitable remedy where the court determines it would not be fair to allow an insurance policy to exist. As a result of the rescission all premium paid is returned to the putative insured and the policy is returned to the insurer or declared void from its inception.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Material Misrepresentation Sufficient to Rescind PIP Policy

Innocent Party Doctrine Not Applicable to Commercial Insurance

I continue to report, until I turn blue in the face, that the covenant of good faith and fair dealing applies equally to the insured as it does to the insurer. Insurance is nothing more than a contract that requires, to be effective, that each party deals fairly with the other and that they reach an agreement as to who, for what perils, and what amounts insurance is sought. If either party lies to the other about the who, what, why, where, when and how of the insurance policy a contract cannot be made.

When one of the parties to an insurance policy learns that the other lied the injured party has the right to rescind the policy, return the consideration, and be in the same position they were in before the contract of insurance was issued. In Farm Bureau General Insurance Company Of Michigan v. Robert Elzer, doing business as Diverse Contracting, Defendant, and Devon Holmes, Intervening Defendant, and Citizens Insurance Company Of America and State Farm Automobile Insurance Company, Court of Appeals of Michigan 2017 WL 359731, No. 329332 (January 24, 2017) Farm Bureau asked the Court of Appeals to allow it to rescind even though an innocent person, not a party to the contract, was injured.

FACTS

Robert Elzer secured no-fault insurance coverage under his Farm Bureau commercial automobile policy for a personal vehicle owned and operated by a family friend. Elzer’s misrepresentation to Farm Bureau appeared to entitle the insurer to rescind the policy. However, the circuit court rejected Farm Bureau’s attempt to avoid providing coverage.

Robert Elzer owned a business—Diverse Contracting and secured a business automobile insurance policy through Farm Bureau General Insurance Company of Michigan. The insurance application indicated that all insured vehicles must be titled to Elzer. Elzer also checked a box indicating that he was the sole driver of the vehicles insured by the policy.

On January 20, 2014, Elzer contacted Farm Bureau to add a 2002 Ford Explorer to the policy. Elzer neither owned nor drove the vehicle. The vehicle was titled to and used by Danielle Petrie, a friend of Elzer’s wife. Elzer reported that he insured the Explorer because Petrie “couldn’t afford insurance of her own” and Elzer wanted “to help her out.”

One month later, the Explorer was involved in an accident. Petrie’s sister’s fiancé, Shawn Kimbrough, was driving and collided head-on with a vehicle in which Devon Holmes was a passenger. Both Kimbrough and Holmes were injured. Kimbrough was treated at Munson Medical Center and incurred more than $200,000 in medical expenses.

Munson approached Farm Bureau for reimbursement of personal protection insurance (PIP) benefits. Farm Bureau denied the claim based on Elzer’s purported misrepresentation that the Explorer was titled to and driven by him and was used for his business.

A series of lawsuits followed. The current action was filed, in part, to determine whether Farm Bureau could rescind the policy covering the Explorer and to determine the priority of insurers to cover Kimbrough’s first-party PIP benefits: Farm Bureau (as issuer of Elzer’s commercial auto policy), Citizens (as assignee by MACP), or State Farm Automobile Insurance Company (the no-fault insurer of Kimbrough’s mother, with whom he resided). Ultimately, the circuit court accepted Citizen’s position. The trial court applied the innocent party doctrine when it concluded Farm Bureau could not rescind.

ANALYSIS

On June 14, 2016, after the trial court decision, the court of appeal in Bazzi v Sentinel Ins Co, ___ Mich App ___; ___ NW2d ___ (Docket No. 320518, 2016) concluded that innocent permissive driver loses entitlement to first-party PIP benefits when the insurer rescinds coverage due to someone else’s fraud in the application process. Pursuant to Bazzi, Farm Bureau had the authority to rescind the policy for the Explorer and deny PIP benefits even to Kimbrough, who played no role in the application process, if Elzer committed fraud.

Elzer made a material misrepresentation when he contacted his insurance agent to add a vehicle to his commercial policy knowing that the vehicle was not being used for commercial purposes. A misrepresentation need not be an oral or verbal statement. Misrepresentation means any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts. Elzer clearly knew the commercial policy covered only vehicles used for his business. Therefore, by calling to add the vehicle, Elzer was representing that the vehicle was commercial in nature. Under Michigan law, the liability portion of a policy that exceeds the statutory mandated minimum may be rescinded due to applicant fraud despite that an innocent person seeking third-party liability damages may be affected.

Elzer admitted at his deposition that he knew the vehicle was not commercial.  Elzer’s own admissions established the second and third elements for Farm Bureau’s fraud defense. Elzer also clearly intended Farm Bureau to act in response to his misrepresentation. He called the insurance agent to elicit action—the addition of the vehicle to his policy. And Farm Bureau acted in reliance on Elzer’s misrepresentation by following through and adding the vehicle to the policy’s coverage. If Farm Bureau were not permitted to rescind the policy, it would suffer harm as a result of relying on Elzer’s knowing, material misrepresentation.

Elzer’s admissions supported Farm Bureau’s claim to rescind the insurance coverage of the Explorer, warranting summary dismissal of any claim against this insurer. Accordingly, the court reversed the circuit court’s denial of Farm Bureau’s summary disposition motion and remanded for further proceedings consistent with this opinion.

ZALMA OPINION

Although I can feel sorry for the injured party the innocence of the injured person does not require an insurer to give up its right to rescission when the insurer is the victim of fraud. The injured party is not without a remedy and may sue and obtain judgment for the injuries from the person responsible for the injuries. Farm Bureau owes nothing.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Lie on Health Insurance Application Is Criminal

Stupidity is No Defense to Insurance Fraud Crime

In an appeal from a judgment of the Lucas County Court of Common Pleas that found appellant Marvin Arnold guilty of one count of insurance fraud, a felony of the fourth degree, Arnold appealed. In  State of Ohio v. Marvin Arnold, Court of Appeals of Ohio, 2017 WL 275943, No. L–15–1126 (Jan. 20, 2017) the Court of Appeal was called upon to reverse the judgment.

FACTS

Arnold was employed by the city of Toledo from July 2002 until September 2013. On June 6, 2014, appellant was indicted on one count of insurance fraud. The matter came for trial before a jury on February 25, 2015. Calvin Brown, who was the commissioner of the city’s department of human resources from August 2002 through August 2013, testified that ex-spouses were not eligible for benefits through the city unless the ex-spouse paid the premiums through COBRA. Arnold applied for family health care coverage to begin August 12, 2002. Appellant indicated on the application, which he signed, that he was married and listed his wife Carlene Arnold (“Carlene”) and two minor children as dependents. Appellant supported the application with a 1999 federal income tax return indicating that he and Carlene had filed under married status.

Based on appellant’s application, benefits were extended to Carlene. The city did not initially investigate the veracity of the application when it was submitted in 2002 and Carlene availed herself of the health insurance benefits. Over the years, the city made payments on her dental, medical and prescription expenses. In 2011, however, the city conducted a full dependent audit of its employees and identified several employees who were potentially wrongfully using the city’s health insurance. At that time, appellant provided the city with a 2010 income tax return indicating that he and Carlene filed as a married couple.

In 2012, the city’s record check indicated that appellant and Carlene had been divorced in 2001 and that Carlene had been receiving benefits from at least 2006 forward. Arnold was charged with six counts including theft of city benefits, falsification of city records and gross misconduct. Following a hearing held on September 11, 2013, appellant was found guilty of all six counts. A recommendation was then filed to terminate appellant from his city of Toledo employment.

Toledo Police detective Blake Watkiss testified that when appellant was hired he was divorced from Carlene. Watkiss obtained a copy of a marriage certificate showing that appellant married Carlene on September 5, 1986. He further testified that he obtained a certified copy of a divorce decree indicating that the marriage between appellant and Carlene was terminated. Arnold provided Watkiss with a certified copy of another marriage certificate showing that appellant and Carlene remarried on September 3, 2013. As part of the investigation, Watkiss developed spreadsheets detailing health care benefits totaling $46,643.23 paid by the city on behalf of Carlene.

Miranda Vollmer, formerly with the city’s human resources department, testified that administrative hearing officer concluded in his report dated September 25, 2013, that appellant was guilty of conduct unbecoming a city employee, gross misconduct, theft of city benefits, falsification of city records and failure to properly notify the city of a qualifying event related to health care eligibility. Appellant was terminated from his employment shortly thereafter.

Arnold testified on his own behalf. Appellant acknowledged marrying Carlene in 1986. He stated that in 2001, the couple had marital difficulties and he moved out of their home for approximately two months, during which time Carlene filed for divorce. The complaint for divorce was filed August 2, 2001, and was final on October 17 of that year. The couple eventually resumed living together and approximately four months later, in July 2002, appellant began working for the city. Appellant testified that in his mind he and Carlene were married throughout the time he worked for the city and said that they filed income tax returns each year as “married filing jointly.”

Appellant was found guilty of the offense of insurance fraud. On April 14, 2015, appellant was sentenced to five years community control and ordered to pay $46,643.23 in restitution, among other sanctions.

ANALYSIS

In order to prove ineffective assistance of counsel, appellant tried to show defense counsel’s performance fell below an objective standard of reasonableness, and a reasonable probability exists that, but for counsel’s error, the results of the trial would have been different. In Ohio, a properly licensed attorney is presumed competent.

Based on the court’s finding that Arnold was not prejudiced by the admission of evidence regarding the administrative hearing, it was unable to find that counsel was ineffective for failing to object during the hearing.

Arnold also argued that counsel was ineffective for failing to ask for a jury instruction on the defense of entrapment. The affirmative defense of entrapment is established where the criminal design originates with the officials of the government, and they implant in the mind of an innocent person the disposition to commit the alleged offense and induce its commission in order to prosecute. The burden of production and the burden of proof, by a preponderance of the evidence, is on the defendant.

In this case, appellant is not able to point to any evidence in the record that any criminal design originated with the officials of the city of Toledo. There is no evidence that the city encouraged employees to claim benefits for individuals such as ex-spouses who were not otherwise eligible. Nor did appellant present any evidence that the city “implanted in the mind of an innocent person” the disposition to commit insurance fraud.

When considering whether the state provided legally sufficient evidence to support a conviction, an appellate court must examine all of the evidence admitted at trial and determine whether the evidence, if believed by the trier of fact, would convince the average mind of the defendant’s guilt beyond a reasonable doubt. The relevant inquiry is whether, after viewing the evidence in a light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime proven beyond a reasonable doubt.

Arnold was convicted of insurance fraud whose statute provides that no person, with purpose to defraud or knowing that the person is facilitating a fraud, shall present to, or cause to be presented to, an insurer any written or oral statement that is part of, or in support of, an application for insurance knowing that the statement, or any part of the statement, is false or deceptive .

When viewing the evidence in a light most favorable to the prosecution, a rational trier of fact could have found the essential elements of insurance fraud to be proven beyond a reasonable doubt. The Ohio Supreme Court has summarized the standard as follows: “The court, reviewing the entire record, weighs the evidence and all reasonable inferences, considers the credibility of witnesses and determines whether in resolving conflicts in the evidence, the jury clearly lost its way and created such a manifest miscarriage of justice that the conviction must be reversed and a new trial ordered.” State v. Thompkins, 78 Ohio St.3d 380, 386, 678 N.E.2d 541 (1997).

Considering the evidence as summarized above the court could not say that the jury clearly lost its way and created a manifest miscarriage of justice when it found Arnold guilty of insurance fraud.

ZALMA OPINION

Stupidity is no defense to insurance fraud. When Arnold claimed that he was married when he was not to gain insurance coverage for his ex-wife and children, was either stupid or – as the trial court and administrative judge found – was an intentional taking of property of value – medical services – and must pay the city back. Arnold claimed to be stupid and the court did not agree, he was acting criminally and is lucky he was not sentenced to prison.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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It is Expensive if an Insured’s Lawyers Don’t Read and Understand Policy

Insured May Not Expect Payment if it Settles Claim Without Insurer’s Consent

Lawyers have an obligation to protect their clients from wasting money and need to understand insurance before entering into an agreement to settle a third party law suit. When hired to represent a client in a third party lawsuit that might be covered by an insurance policy for defense or indemnity it is essential that the defense lawyers obtain, read, analyze and understand all policies available to defend or indemnify the client(s) or considering immediately giving notice to the lawyers errors and omissions insurance.

In OneWest Bank, FSB, a Federal Savings Bank v. Houston Casualty Company, U.S.Ct. of App. 9th Cir, 2017 WL 218900 (January 19, 2017) the insured and its lawyers failed to read and understand the policies available to fund a settlement with the plaintiff.

FACTUAL HISTORY

OneWest Bank, FSB (“OneWest”) appealed the district court’s grant of summary judgment in favor of Houston Casualty Company (“Houston”). OneWest commenced this insurance coverage action alleging breach of contract and breach of the implied covenant of good faith and fair dealing. These claims arise from Houston’s denial of coverage for a settlement agreement that was executed without Houston’s prior knowledge or consent.

OneWest’s parent company, IMB HoldCo LLC, and Houston first negotiated the professional liability insurance policy in 2009. They later executed a renewal to provide coverage for the period beginning March 19, 2012 and concluding May 15, 2013. The policy establishes a $10 million ceiling on liability and includes a $2.5 million self-insured retention provision.  Section 8 of the policy states, in relevant part: “The Insureds shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs without the prior written consent of the Insurer. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy.”

On August 9, 2012, Assured Guaranty Municipal Corporation (“Assured”) sued OneWest for its alleged failure as a loan servicer to mitigate or avoid losses on mortgage loans for which Assured guaranteed the principal and interest payments. After engaging in extensive settlement negotiations, OneWest and Assured agreed to a settlement. This agreement was memorialized in a settlement term sheet, which OneWest and Assured executed.

OneWest did not seek or obtain Houston’s written consent prior to executing the term sheet. After executing the term sheet, OneWest informed Houston of its settlement negotiations in the underlying lawsuit and sought coverage under the policy. Houston denied coverage based on OneWest’s breach of Section 8 of the policy.

DISCUSSION

A prior written consent provision is enforceable in California “in the absence of economic necessity, insurer breach, or other extraordinary circumstances.” Low v. Golden Eagle Ins. Co., 2 Cal. Rptr. 3d 761, 770–71 (Ct. App. 2003) (quoting Jamestown Builders, Inc. v. Gen. Star Indem. 15 Co., 91 Cal. Rptr. 2d 514, 516 (Ct. App. 1999). This is an indispensable condition to the insured’s receiving indemnification under its policy.

Insureds cannot unilaterally settle a claim before the establishment of the claim against them and the insurer’s refusal to defend in a lawsuit to establish liability. Here, Section 8 of the policy prohibits OneWest from admiting or assuming any liability, or entering into any settlement agreement without Houston’s prior written consent. This language is unambiguous. The settlement term sheet demonstrates OneWest and Assured’s mutual intent to fulfill all of the material terms of their negotiated settlement agreement.

Under California law, OneWest and Assured intended to enter into a final and binding settlement agreement when they executed the term sheet.

Every contract implies a covenant of good faith and fair dealing. To prevail against an insurer for breach of the implied covenant, an insured must demonstrate that (1) the insurer withheld benefits due under the policy; and (2) the insurer’s reason for denying benefits was unreasonable or without proper cause. Because OneWest cannot establish that Houston has withheld benefits due under the policy, its implied-covenant claim must fail as a matter of law. Thus, OneWest’s remaining claims for declaratory relief and punitive damages fail as a matter of law.

ZALMA OPINION

A friend of mine sells a T shirt that states: “RTFP” which stands for “Read the F_____ing Policy”. Had One West, its risk managers and lawyers had RTFP they would have brought in Houston to investigate and participate in the settlement negotiations. By presenting a settlement agreement as an action which is completed before those affected by it are in a position to query or reverse it. As a result One West must pay the full amount of the settlement and will receive nothing from Houston because it did not RTFP.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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It’s Not Nice to Apply Policy Condition but it is Proper

No Excuse for Failure to Promptly Give Notice of Loss

New York law, unlike most states, properly requires that an insured must comply with the condition requiring prompt notice and refuses to apply the so-called notice-prejudice rule. U.S. Courts, like the Second Circuit Court of Appeal, when dealing with a New York based insurance dispute is required to follow New York Law.

In Nikolai and Harutyun Minasian v. Company, DBA Ameriprise Insurance Company, State Farm Fire & Casualty Company, United States Court of Appeals, Second Circuit 2017 WL 219105 (January 19, 2017) Plaintiffs Nikolai and Harutyun Minasian appealed from an award of summary judgment in favor of defendants IDS Property Casualty Insurance Company, doing business as Ameriprise Insurance Company, and State Farm Fire & Casualty Company, on plaintiffs’ claims that defendants breached their insurance contracts by failing to pay for losses resulting from an alleged burglary of plaintiffs’ property.

FACTS

The parties agree that the three insurance policies here at issue respectively required the insured to provide notice of loss to the insurer “as soon as reasonably possible,” “immediate[ly],” and “as soon as practicable.” They also agree that the alleged burglary occurred on January 1, 2014; that plaintiffs became aware of the burglary that day; and that plaintiffs did not notify defendants of their losses any time before March 28, 2014. Plaintiffs do not dispute that they were aware of the policies’ coverage.

PLAINTIFFS FAILED TO PROVIDE TIMELY NOTICE

Timely notice is a condition precedent to insurance coverage under New York law, see White v. City of New York, 81 N.Y.2d 955, 957, 598 N.Y.S.2d 759, 760 (1993), and the failure to provide such notice relieves the insurer of its coverage obligation, regardless of prejudice. A notice obligation is triggered when the circumstances known to the insured would have suggested to a reasonable person the possibility of a claim. Where an insurance policy requires notice be given as soon as practicable, such notice must be accorded the carrier within a reasonable period of time.

ANALYSIS

The circumstances as of January 1, 2014, would thus have suggested to a reasonable person the possibility of a claim in light of the policies’ theft coverage, and the 86-day delay that followed was unreasonable as a matter of law. As the district court concluded, these related determinations find support in the language of the policies. The same sections of the policies providing for notice to the insurer require notice to the police in case of theft—which plaintiffs did on the day of the burglary—suggesting that the insured is expected to contact both the insurer and the police in short order after discovering the loss of insured property. Moreover, the State Farm policies also require the insured to submit a formal proof of loss within 60 or 90 days after loss. The preliminary notice requirement that is the subject of this action can only reasonably be construed to require notice sooner than these formal notice requirements. Any different construction would render the preliminary notice requirement a nullity.

Plaintiffs argued this time under the umbrella of the contention that the district court failed to construe the evidence in the light most favorable to them and resolved a disputed question of fact, that:

(1)   their notice was timely, or

(2)   their delay should be excused because

(a) they reasonably believed that the police investigation was ongoing and the jewelry might be located, and

(b) they notified defendants promptly after learning that the police investigation was “closed.”

Even assuming plaintiffs held the professed belief in a possible recovery, that would not have prevented a “reasonable person” from suspecting “the possibility of a claim.” No exception is made to the timely notice requirement for losses which in the insured’s estimation may not ultimately ripen into a claim.

THE POLICIES ARE UNAMBIGUOUS

Plaintiffs next argue that the term “covered loss” is ambiguous and must be construed against the insurers. The term “covered loss” is unambiguous on its face. Indeed, the fact that plaintiffs submitted claims at all proves that they recognized that the purportedly stolen items constituted covered losses.  Therefore, no reasonable person could interpret this language to mean that a known theft of property only becomes a covered loss once the police cease to conduct an active investigation.

ZALMA OPINION

The state of New York is not nice to insureds because they require the insured to comply with a clear and unambiguous condition of the policy. The notice-prejudice rule requires courts to be nice to insureds and ignore clear and unambiguous contract language. By so doing, the courts that apply the notice-prejudice rule violate rules of contract interpretation and rewrite the contract to include words not agreed to by the parties to the contract of insurance.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Consent to Call Defeats TCPA Suit

Robo-Calls Are Not Always Wrongful

I, like everyone else, hate receiving unsolicited robo-calls. They are especially annoying during the political season or from surveyors who want my opinion on products I would never use. The Congress enacted Telephone Consumer Protection Act (“TCPA”) to protect all of us from annoying calls. I use caller ID and call blocking to avoid the calls because litigation is annoying.

In Smith v. Blue Shield of California Life & Health Insurance Company, United States District Court, C.D. California, 2017 WL 167451 (01/13/17) Plaintiff Shannon Smith sued Defendant California Physicians’ Service, d/b/a Blue Shield of California (“Blue Shield”) alleging violations of the TCPA. Plaintiffs claim is brought on behalf of herself and all others who received an automated, pre-recorded telephone call on December 3, 2015, from Blue Shield regarding renewal of health insurance for 2016.

BACKGROUND

Plaintiff completed an application for health coverage for her family through Covered California for insurance provided by Blue Shield. As part of the application, Plaintiff provided her telephone number as the best number at which to contact her. The coverage agreement was effective as of April 1, 2014, and remained in effect until December 31, 2015. Coverage was set to renew automatically, though with modifications, for the 2016 year.

The Affordable Care Act and its regulations mandate that an individual’s insurance coverage automatically renews to ensure continuity of coverage. However, insurance providers such as Blue Shield are authorized to modify insurance plans each year in various ways, including increasing premiums or copayment amounts, modifying coverage for particular services, and delineating which medical providers were within the insurance network. To ensure that individuals are aware of changes to their insurance, providers such as Blue Shield are required to provide written notice of renewal “before the date of the first day of the next annual open enrollment period” in which the individual can opt to select different coverage and/or a different insurance provider

Blue Shield, in compliance with applicable statutes and regulations, mailed Plaintiff a packet of information regarding changes to her insurance in late 2015. Included in the packet was information of alternative insurance plans offered by Blue Shield. In response to the numerous packets that were returned as undelivered in previous years, Blue Shield decided to call each of its existing members using a pre-recorded message to alert them to the fact that their packets had been mailed.

The text of the pre-recorded message went through several iterations and was drafted by Blue Shield’s marketing communications department, which “houses the professional writers that are responsible for crafting all communications” with existing and prospective customers.

Blue Shield called Plaintiff at the number she provided on the Covered California application, which was her cellular telephone number, on December 3, 2015. Three days later, the call had its intended effect when Plaintiff completed an application with Blue Shield for a different health insurance plan for the 2016 year.

DISCUSSION

The TCPA prohibits initiating any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party.

Consent

The TCPA prohibits pre-recorded phone calls made without prior express consent of the called party. Accordingly, consent is a defense to a TCPA claim.

In relationships between consumers and businesses, providing one’s phone number has generally been deemed to constitute implied consent to communications that are closely related to the purpose for which the number was provided.

The District Court concluded that defendant is correct that TCPA does not require that a call be made for the exact purpose for which the number was provided, but it undoubtedly requires that the call bear some relation to the product or service for which the number was provided.

In this case, Blue Shield argues, and Plaintiff does not contest, that she provided express consent by providing her cellular telephone number as the best number to reach her on her Covered California application. However, Plaintiff argues that the call constituted telemarketing and accordingly express written consent was required. The parties do not dispute that providing her number as the best way to reach her does not constitute express written consent — there was no clear authorization of telemarketing, there was no disclosure informing her that she was providing such consent (let alone a clear and conspicuous disclosure), and the call’s text did not include or reference an opt-out mechanism. Therefore, this case turns on whether the call constituted telemarketing.

The Ninth Circuit has stated that courts should evaluate the content of purported telemarketing with a measure of common sense. Blue Shield argues that because the call was purely informational it was not an advertisement or telemarketing call. Plaintiff disagrees, based on the fact that the calls were (1) discussed as part of a retention strategy, (2) written by the marketing team, and (3) initially drafted to link to Blue Shield’s renewal page and included “We want to keep you covered.”

Simply stated, the text of Blue Shield’s telephone call is informational. It notified recipients that they should have received information about changes to their insurance plan, encouraged them to seek out information about their plan by examining the information packet and visiting Blue Shield’s website, and directed them to call the member service number (as opposed to the sales department) to resolve any questions or issues. This content is virtually identical to the CMS template letters insurers such as Blue Shield send to customers regarding renewal. Both messages emphasize the importance of their contents, highlight that customers’ insurance plans and benefits had changed, inform recipients that there are alternative plans available, provide the insurer’s contact information, and convey the time-sensitivity of the information and the opportunity to renew or modify one’s insurance coverage.

The informative, non-telemarketing nature of the call is consistent with those in other decisions delineating the informative nature of messages. The content of the call also contrasts starkly with messages that courts have deemed to be telemarketing or advertising. Furthermore, deeming the content of the call to be informative rather than constituting advertising or telemarketing is consistent with the Health Insurance Portability and Accountability Act (“HIPPA”). Plaintiff’s only argument based on the actual text of the call is that urging recipients to visit Blue Shield’s website transformed the call into telemarketing. Blue Shield’s internal discussions regarding inclusion of the website in the call’s script demonstrate that the goal was to direct customers to Blue Shield’s member renewal tool, which allowed consumers to compare their current plan with various Blue Shield alternatives.

Plaintiff argues that various contextual facts make the call telemarketing or advertising. First, she argues that even if the text is facially informative, Blue Shield’s overarching incentive to retain customers and receive premium payments creates a clear implication of encouraging purchase of a good, product, or service.

The fact that Blue Shield initially conceptualized the call as a component of its overall customer retention efforts is insignificant. The call was devoid of marketing content and Blue Shield’s discussions around the call centered on ameliorating its members’ failure to open the mandated mailing and their subsequent displeasure at insurance coverage changes. If the Court accepted Plaintiff’s argument, nearly all innocuous, customer-friendly and informative gestures would be needlessly transformed into telemarketing and advertising.

Evaluating Blue Shield’s call with a measure of common sense, the Court found that it must conclude that the call is not telemarketing or advertisement within the meaning of the statute. It makes no sense to the Court that a single call tracking Blue Shield’s mandatory communications regarding insurance enrollment and renewal would expose Blue Shield to millions of dollars of liability under the TCPA.

ZALMA OPINION

The TCPA is evidence that no good deed goes unpunished and that the good intentions of Congress when it enacted the TCPA resulted in unintended consequences: lawsuits clogging the courts for innocent attempts to keep people insured in compliance with the details of Obamacare. Fortunately the trial court used common sense and threw out the case.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Strained, Forced or Unrealistic Construction Of Insurance Not Allowed

Ambiguity Is not Certain When Term Not Defined

Insurance policies cover many and varied causes of loss. Insurance policies do not cover every possible cause of loss. Even the most broad all risk policy of insurance contains exclusions describing risks of loss the insurer is not willing to take.

In Ducksbury v. Progressive Express Insurance Company, District Court of Appeal of Florida, — So.3d —-, 2017 WL 192028 (1/18/17) an insurer applied what it believed to be a clear and unambiguous policy of insurance. After the trial court agreed with the insurer that an exclusion applied Dennis Ducksbury (“Ducksbury”), the insured, appealed a final judgment on a third party complaint entered in favor of Progressive Express Insurance Company and Progressive Select Insurance Company (“Progressive”).

FACTS

Ducksbury and his friend were planning a trip to Key West to participate in a motorcycle-related charity event. The two planned to drive Ducksbury’s SUV part of the way while hauling their motorcycles in a trailer. The friend secured his motorcycle in the trailer with “tie downs” and the two headed south. Somewhere near Boynton Beach, the trailer began to sway and then flipped, causing approximately $15,000 in damage to the friend’s motorcycle.

The friend submitted a claim to his insurance company, Allstate, which paid it. Allstate then sued Ducksbury for subrogation. Progressive, Ducksbury’s insurer, refused to indemnify and defend Ducksbury, leading Ducksbury to file a third-party complaint against Progressive.

Progressive responded, citing exclusion 10 of Ducksbury’s insurance policy. In pertinent part, the exclusion provides: “Coverage under this Part I, including our duty to defend, will not apply to any insured person for: …. 10. property damage to any property owned by, rented to, being transported by, used by, or in the charge of that insured person.”

Progressive then moved for summary judgment based on the exclusion, contending that the motorcycle was “being transported by” Ducksbury at the time of the incident. The trial court agreed.

ANALYSIS

On appeal, Ducksbury argues that a proper reading of the phrase “being transported by” indicates that possessory control of the property is required before the exclusion can apply. He further contended that, because the friend never relinquished control of the motorcycle, the friend was the one transporting it, and thus the exclusion does not apply.

When it comes to insurance contract interpretation, the Florida Supreme Court has explained that where the language in an insurance contract is plain and unambiguous, a court must interpret the policy in accordance with the plain meaning so as to give effect to the policy as written. In construing insurance contracts, courts should read each policy as a whole, endeavoring to give every provision its full meaning and operative effect. The terms of an insurance policy should be taken and understood in their ordinary sense and the policy should receive a reasonable, practical and sensible interpretation consistent with the intent of the parties — not a strained, forced or unrealistic construction.

The word “transport” is not defined in the policy.

The lack of a definition of a term in a policy does not render it ambiguous or in need of interpretation by the courts, but rather such terms must be given their every-day meaning and should be read with regards to ordinary people’s skill and experience. There are no cases interpreting the phrase “being transported by” as it is used in the exclusion at issue in this case or in any individual’s insurance policy. Black’s Law Dictionary defines “transport” as “[t]o carry or convey (a thing) from one place to another.” Black’s Law Dictionary (10th ed. 2014). Similarly, a non-legal dictionary defines “transport” as “[t]o carry from one place to another.” The American Heritage Desk Dictionary 985 (1981).

The Court of Appeal opined that it could see only one reasonable interpretation of the language. The plain meaning of “being transported by” encompasses the friend’s motorcycle as being carried or conveyed to Key West by Ducksbury while it was inside a trailer being pulled by a vehicle that Ducksbury was driving. No further interpretation of the very simple, unambiguous language is required.

As found by the trial court and asserted by Progressive on appeal, Ducksbury seeks to interject words and meanings not present in the language of the exclusion when he argues that the exclusion must be read to require that the insured was exercising dominion and control over the property being transported. Exclusion 10 clearly contemplates the scenario at hand and thus the trial court judgment was affirmed.

ZALMA OPINION

Writing a clear and unambiguous insurance policy in “easy to read” language is extremely difficult. For that reason some policies contain multiple definitions giving special meaning to words different from their ordinary meaning. However, when the ordinary meaning of a term, like “transported” is obvious, clear and unambiguous a court has no choice but to apply that meaning as the District Court of Appeal of Florida found.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Insured v. Insured Exclusion

A D&O Policy Does Not Apply To a Suit by an Insured Against a Co-Insured

Almost every policy of liability insurance contains an exclusion that prevents coverage to apply when one insured sues another. The reason for the exclusion is obvious: the potential for collusion between insureds to obtain money from the insurer is obvious and simply impossible to calculate by an actuary.

In Jerry’s Enterprises, Inc. v. U.S. Specialty Insurance Company, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2017 WL 104468 (01/11/2017) the named insured, a closely-held corporation, sued its directors’ and officers’ liability insurer, alleging that insurer was required to provide coverage for a lawsuit brought by a former member of the corporation’s board of directors and her daughters, who were also shareholders, against insured and two other members of its board of directors. The United States District Court for the District of Minnesota, granted the insurer’s motion for summary judgment. Insured appealed.

The Eighth Circuit Court of Appeals was asked to decide the claim of Jerry’s Enterprises, Inc. (“JEI”) for breach of contract and declaratory judgment against U.S. Specialty Insurance Company (“U.S. Specialty”). The conflict concerned the insurance carrier’s refusal to indemnify JEI for the settlement of a lawsuit.

FACTS

In 1950, Jerry Paulson founded JEI as a small butcher shop in Edina, Minnesota. Over the decades, JEI came to operate a score of retail and grocery stores in Minnesota, Wisconsin, and Florida. The closely held family company now employs approximately 4,000 employees. As he grew the business, Jerry Paulson gifted non-voting shares in JEI to his three daughters, including Cheryl Sullivan. He also gifted shares to his grandchildren, including Sullivan’s daughters Kelly and Monica. Paulson established an estate plan that, upon his death, appointed his daughters as members of the JEI Board of Directors. They would remain as directors until such time as their shares, and those of his grandchildren, were redeemed.

Jerry Paulson died on April 5, 2013. In accordance with Paulson’s estate plan, Sullivan became a director of JEI in April, and she held that position until August, when her shares were redeemed. At that time, Cheryl Sullivan owned 28.06% of all outstanding company shares, while Kelly and Monica owned 2.4% and 1.2%, respectively. During her stint as a company director, Sullivan raised a number of concerns with directors of JEI in regards to how her shares were being valued. These concerns were never addressed to her satisfaction.

Sullivan and her daughters filed suit against JEI, alleging multiple acts of misconduct by JEI directors designed to lower the value of their shares. The complaint contained claims for declaratory judgment, breach of fiduciary duty, aiding and abetting tortious conduct, equitable relief under Minnesota common and statutory law, breach of contract, civil conspiracy, and preliminary and permanent injunctive relief. All claims were brought jointly by all three plaintiffs. After several months of negotiation, JEI reached a confidential settlement agreement with Sullivan and her daughters. When JEI sought coverage for its defense costs and for sums paid under the settlement agreement, U.S. Specialty refused to pay.

THE INSURANCE POLICY

JEI held a directors’ and officers’ liability insurance policy through U.S. Specialty. Under the policy, U.S. Specialty agreed to “pay to or on behalf of the Insured Persons [or the Insured Organization] Loss arising from Claims first made against them during the Policy Period or Discovery Period (if applicable) for Wrongful Acts.” There is no dispute that the Sullivan lawsuit is a claim made during the policy period for wrongful acts. The policy defines Insured Person as “any past, present or future director, officer, managing member, manager or Employee of the Insured Organization….” Claim is defined, in relevant part, as “any civil proceeding commenced by service of a complaint or similar pleading.”

Aside from these particular definitions, JEI’s insurance policy contains two other provisions significant to this appeal. The first is the “Insured vs. Insured” exclusion. This provision excludes from coverage under the policy any claim: “[B]rought by or on behalf of, or in the name or right of … any Insured Person, unless such Claim is: ¶ (1) brought and maintained independently of, and without the solicitation, assistance or active participation of … any Insured Person….”

The second significant provision of JEI’s policy is the allocation clause. This clause deals with a lawsuit involving both covered and uncovered loss in the following way: “If Loss covered by this Policy and loss not covered by this Policy are both incurred in connection with a single Claim, either because the Claim includes both covered and uncovered matters, or because the Claim is made both against Insureds and against others not included within the definition of Insured, the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of all such amounts….”

DISCUSSION

Under Minnesota law, the insured bears the initial burden of establishing that coverage exists, at which point the insurer then carries the burden of demonstrating that a policy exclusion applies. If the insurer succeeds, the burden shifts back to the insured to show that an exception to the exclusion applies.

General contract principles apply to the construction of an insurance policy. An insurance policy ‘must be construed as a whole, and unambiguous language must be given its plain and ordinary meaning.  Language in a policy is ambiguous if it is susceptible to two or more reasonable interpretations. But we will not read ambiguity into the plain language of an insurance policy. The courts ‘must fastidiously guard against the invitation to create ambiguities where none exist.

THE INSURED VS. INSURED EXCLUSION

The language of the insurance policy itself, as it applies to this case, is straightforward. The policy defines Claim, in relevant part, as “any civil proceeding commenced by service of a complaint.” Finally, an Insured Person includes any past director. In essence, therefore, the Insured vs. Insured exclusion bars coverage for any lawsuit brought by a former director.

Application of the exclusion to the present case demonstrates that U.S. Specialty does not owe coverage to JEI. Cheryl Sullivan is, JEI concedes, an Insured Person under the policy due to her brief time as a director of JEI’s board. Her lawsuit was a civil proceeding commenced by service of a complaint—in other words, a Claim. She (along with her two daughters) brought the lawsuit against JEI. The Eighth Circuit concluded that loss associated with the Sullivan lawsuit is not covered under the insurance policy due to the presence of a former director—Sullivan—as an active participant.

JEI objects to this seemingly straightforward application of the exclusion clause.

JEI and U.S. Specialty entered into an agreement in which they defined the terms of that agreement. It is the responsibility of the appellate court to give effect to that contracted language.  A claim is not afforded its ordinary meaning under the insurance policy. Rather, the policy defines Claim as a civil proceeding commenced by service of a complaint, i.e. the entirety of the Sullivan lawsuit. U.S. Specialty, therefore, need only show that the exclusion clause applied to the lawsuit as brought. It has done so.

THE ALLOCATION CLAUSE

The allocation clause does not restore coverage for any part of the Sullivan lawsuit. Cheryl Sullivan was the driving force of the litigation. She owned the vast majority of shares at issue in the underlying lawsuit, and she was the former director who repeatedly raised concerns about the valuation of shares to JEI’s board of directors. She then brought the suit as one of the original plaintiffs.

The Insured vs. Insured exclusion speaks directly to lawsuits brought with the participation of Insured Persons. The allocation clause speaks generally to any claim brought with covered and uncovered matters. The exclusion clause controls.

ZALMA OPINION

The insurance policy surprisingly used clear and unambiguous language. By defining its important terms it took away from the court the right to interpret what a “claim” is and made it impossible to make coverage apply by interpreting the meaning of a key word. A court should never, and the Eighth Circuit would not, change the meaning of agreed language.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Zalma’s Insurance Fraud Letter – January 15, 2017

The New Year’s Reminder of Red Flags of Fraud 

Every Insurance Adjuster Must Be Trained About Fraud

In the last 49 years that I have been in the business of insurance I have learned the one thing that is a certainty: the quality of insurance fraud perpetrators is almost non-existent. That means that it is so easy to steal from insurance companies that amateurs with no skills are jumping into the business of defrauding insurers. If the insurance industry learns enough about insurance fraud and defeats the claims of the amateurs the professional fraud perpetrators will go away and work easier crimes. If not, they will continue to bleed the insurance industry. It has been my desire, for the 21 years Zalma’s Insurance Fraud Letter has been published, to help in the effort to make insurance fraud more difficult for the perpetrators and reduce what fraud takes from the insurance industry.

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

 The Current Issue Contains the Following

  • The New Year’s Reminder of Red Flags of Fraud
  • Illumeo Continuing Education
  • A Prerequisite to Effective Anti-Insurance-Fraud Work
  • New from Barry Zalma
    • “Insurance Law”
  • The Purpose of An Insurance Fraud Investigation
  • Barry Zalma Speaks at Your Request
  • The Staged Accident
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • Paper Property
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • Other Insurance Fraud Convictions
  • Books from the American Bar Association
    • The Insurance Fraud Deskbook
    • Diminution in Value Damages
  • Zalma’s Insurance Fraud Letter
  • The Legend.
  • Legal Disclaimer

Zalma’s Insurance Fraud Letter

ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.
Check in every day for a case summary at http://zalma.com/blog.

 Zalma’s Insurance 101 

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

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

Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

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Cannot Create Coverage by Waiver

Insured Only Gets Coverage Purchased

There are many reasons for which people buy insurance. Insurers provide multiple coverages on a homeowners policy from the basic ISO form and additional coverages provided by endorsement for an extra premium. The insured is provided the option to buy limited or expansive insurance coverages. When the insured refuses to buy extended coverages that would have covered a loss had it been purchased, the insured often file suit to change the coverage to that which he or she needed rather than what the insured purchased.

Carl Budny tried to increase the coverage he bought, the trial court granted summary judgment in favor of Budny’s insurer, MemberSelect Insurance Co. (MemberSelect) he appealed and in CARL BUDNY v. MEMBERSELECT…, Court of Appeals of Iowa, Slip Copy, 2017 WL 104964 (January 11, 2017) resolved the dispute.

FACTS

On or around August 11, 2014, Budny purchased homeowners insurance from AAA Insurance, a MemberSelect company. He was given the option to purchase several riders. Budny purchased two riders, “H-290: Personal Property Replacement Cost,” and “H-500: Protection Plus Homeowners Package.” The latter also included within it “H-210: Special Jewelry and Furs Coverage.” He refused to buy extended water damage coverage.

Budny’s insurance policy provides coverage for direct risks of physical loss not specifically excluded and caused by an accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protection sprinkler system or domestic appliance caused by or resulting from water or any other substance from outside the residence premises plumbing system that enters the dwelling or additional structure through household sewers, drains or drainage fixtures or a sump pump, sump pump well or any other system designed to remove subsurface water which is drained from the foundation area; or water or any other substance originating from inside the dwelling or additional structure which escapes the plumbing system through a floor drain inside the dwelling or additional structure.

In November 2015, sewage backed up into Budny’s basement, causing water damage. He reported the damage to his insurance agent. According to Budny, the agent told Budny the loss was covered which was disputed by the agent.

On December 14, the insurance company denied Budny’s claim, citing the EXCLUSIONS paragraph. Budny subsequently sued, asserting claims for breach of contract, waiver, promissory estoppel, unjust enrichment, reasonable expectations, implied warranty, and bad faith. The district court granted MemberSelect’s motion for summary judgment, and Budny filed a timely notice of appeal.

ANALYSIS

Budny contends MemberSelect waived any policy defenses when the agent told Budny the claim was covered. Waiver is “the voluntary or intentional relinquishment of a known right.” Scheetz v. IMT Ins. Co., 324 N.W.2d 302, 304 (Iowa 1982). The essential elements of waiver are the existence of a right, actual or constructive knowledge of the right, and an intention to relinquish the right.

Whether the agent represented to Budny that his claim would be covered is a disputed fact but it is not a material one. Even if the court assumed, viewing the record in the light most favorable to the non-moving party, the agent did make such a statement, Budny cannot prevail. In addition the agent lacked the authority to waive the clear dictates of the policy, including the provision stating, “No change or waiver may be effected in this policy except by endorsement issued by us.”

In Iowa, the doctrine of waiver or estoppel cannot be successfully invoked to create a liability for benefits not contracted for at all.  The district court concluded Budny’s breach-of-contract claim failed as a matter of law because the policy specifically excluded coverage of the claim. Under the circumstances, waiver cannot create liability for coverage not part of the policy.

Promissory Estoppel

Promissory estoppel requires a party to prove (1) a clear and definite oral agreement; (2) proof that plaintiff acted to his detriment in reliance thereon; and (3) a finding that the equities entitle the plaintiff to this relief. Budny’s claim fails on all three counts. First, there was no “clear and definite” oral agreement for services Budny did not contract for.

Waiver

Second, Budny cannot prove he acted to his detriment in reliance on Lee’s representation. Budny argues he would not have hired ServPro but for Lee’s statements to him. Even viewing the record in the light most favorable to Budny, the court found the assertion unlikely. Budny had raw sewage in his basement. If he did not hire ServPro, he would have hired someone else. Whatever difference in expense might have resulted is not sufficient to satisfy this element. Third, the equities fail to favor Budny’s relief. He contracted for certain services and now seeks additional ones he opted not to buy. While his situation is unfortunate, it would be inequitable to force insurers to provide coverages policyholders request after a loss. A court may not strain the words or phrases of the policy in order to find liability that the policy did not intend and the insured did not purchase.  Inherent in most insurance coverage is the risk of damage not covered by the policy. The district court did not err in granting summary judgment on this claim.

Implied Warranty

Insurance policies in Iowa come with an implied warranty. To recover on a theory of implied warranty, an insured must show that the insurer had reason to know the particular purpose for which the policy is purchased; that the insured relied upon the company’s skill or judgment in furnishing such coverage; and that the resulting implied warranty was breached.  Budny failed to prove an entitlement to the implied warranty.

Bad Faith

Finally, Budny asserts MemberSelect acted in bad faith. The elements of bad faith are (1) the insurer lacked a reasonable basis for denying the claim and (2) it knew or had reason to know it lacked a reasonable basis. A reasonable basis exists for denial of policy benefits if the insured’s claim is fairly debatable either on a matter of fact or law. A claim is fairly debatable when it is open to dispute on any logical basis. Stated another way, if reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable.

MemberSelect had a reasonable basis for denying the requested coverage — to wit, that Budny did not contract for said coverage. The district court held Budny did not contract for the coverage.  The trial court judgment was affirmed.

ZALMA OPINION

When an insured refuses to opportunity to cover a risk and refuses the opportunity he may not later claim he secretly intended to acquire that coverage and that the insurer should pay for the loss that was clearly excluded. This type of argument must, and did, fail because the lack of coverage was due solely to the actions of the insured. He should not and cannot change the terms and conditions of his policy after a loss.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Ketchup on Heinz’ Face Because it Lied to its Insurer

Policy Void From Its Inception if Obtained by a Lie

Every policy of insurance includes an unwritten covenant – promise – to deal fairly and in good faith with the parties to the contract. The promise to deal fairly devolves equally upon the insured and the insurer. When a person obtains insurance because of a misrepresentation or concealment of a material fact, the party deceived – insured or insurer – has the right to seek a court order rescinding the policy from its inception.

In H.J. Heinz Company v. Starr Surplus…, United States Court Of Appeals, Third Circuit, — Fed.Appx. —-,  2017 WL 108006 (January 11, 2017)  H.J. Heinz Company appeals the District Court’s order rescinding a product contamination insurance policy it purchased from Starr Surplus Lines Insurance Company. See our discussion of the trial court decision at http://zalma.com/blog/innocent-or-intentional-misrepresentation-requires-rescission/.

FACTS

Heinz makes and sells food products worldwide. Starr is a global insurance company that sells contaminated product insurance that protects food product companies against losses arising from accidental contamination or government-imposed recall of their products. Beginning in May 2014, Heinz sought proposals for contaminated product insurance, including accidental contamination insurance, for the period covering July 1, 2014 to July 1, 2015. Heinz’s new global insurance director, Ian Ascher, was responsible for preparing and certifying the accuracy of Heinz’s insurance application (the “Application”).

Question 6e of the Application asked: “Has the Applicant, its premises, products or processes been the subject of recommendations or complaints made by any regulatory body, internal or third party audit over the past 12 months or have any fines or penalties been assessed against the Applicant by any food or similar regulatory body over the last 3 years?” Heinz responded “NO” without further explanation or qualification.

Question 11a asked: “In the last 10 years has the Applicant experienced a withdrawal, recall or stock recovery of any products or has the Applicant been responsible for the costs incurred by a third party in recalling or withdrawing any products, whether or not insured or insurable under an accidental and malicious contamination policy?” Heinz did not fill in either the “YES” or “NO” box, but instead attached a spreadsheet detailing the company’s loss history from 1998 to 2013. The loss history disclosed only one loss over ten years greater than Heinz’s requested $5 million SIR. In addition to the Application, Aon provided Starr with a loss ratio analysis dated June 5, 2014.

Two weeks later, Chinese authorities informed Heinz that baby food it manufactured in China was contaminated with lead (the “2014 China Lead Loss”). Heinz recalled the product. On August 5, Heinz notified Starr of the loss and sought coverage under the new Policy. During the investigation, the Starr employee responsible for the 2014 China Lead Loss claim found out that, prior to Policy inception, Heinz incurred a loss in excess of $10 million after discovery of excessive levels of nitrite in baby food manufactured in China (the “2014 China Nitrite Loss”). Heinz did not disclose this loss in its Application.

The parties agreed to litigate Starr’s counterclaim first. On February 1, 2016, the District Court issued an opinion agreeing with the jury on misrepresentation, but disagreeing on waiver. The District Court declared the Policy void ab initio and entered judgment for Starr.

ANALYSIS

First, Heinz contends the District Court erred in concluding that New York law, rather than Pennsylvania law, governs Starr’s rescission counterclaim. As a corollary to that point, Heinz argues that Starr’s invocation of the Policy’s choice-of-law provision amounted to ratification of the Policy.

Second, Heinz asserts that the District Court misapplied New York rescission law by holding Starr to the incorrect burden of proof and relieving Starr of its obligation to prove every element of its prima facie case.

Finally, Heinz submits that Starr waived its right to assert rescission.

Choice of Law

Having found that the parties contracted for New York law to apply, the District Court properly employed the two-part test of section 187 of the Restatement (Second) of Conflict of Laws, as adopted by Pennsylvania courts, to confirm that the parties’ contractual choice should not be displaced. The Third Circuit, therefore, held that the District Court was correct that New York law governs Starr’s rescission counterclaim.

But can Starr claim that the Policy should be rescinded as if it never existed, while at the same time seek to have its choice-of-law provision apply to the dispute? Heinz says no—by taking both actions at once, Starr ratified the Policy. The Third Circuit found that the plain text of the Policy’s choice-of-law provision — which states that the “validity … of this Policy will be governed” by New York law, — refutes this argument and the court refused to adopt Heinz’ theory.

New York law entitles an insurer to rescind an insurance policy—thereby deeming the policy void ab initio— if it was issued in reliance on material misrepresentations. A misrepresentation in an insurance application is a false statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.

Burden of Proof

Heinz contends that the District Court held Starr to the incorrect burden of proof and relieved Starr of its obligation to prove every element of its prima facie case. The District Court was correct to hold that Starr’s evidence met the clear and convincing evidence standard in reaching its decision to rescind.

The District Court found that Heinz intentionally made four material misrepresentations of fact about its loss history in its answers to Questions 6e and 11a of the Application. Failure to disclose is as much a misrepresentation as a false affirmative statement. A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.

Starr did what was required and the District Court credited all this evidence in concluding that Starr would not have offered Heinz the Policy at a $5 million SIR if it knew about the misrepresentations. The Third Circuit concluded that the materiality of Heinz’s misrepresentation was self-evident. Heinz’s misrepresentations were of such magnitude that they deprived Starr of its freedom of choice in determining whether to accept or reject the risk upon full disclosure of all the facts which might reasonably affect that choice.

The District Court then held that “Starr properly relied upon the representations of Heinz in the application process coupled with the Certification.” Heinz says that the District Court relieved Starr of its burden of proving reliance.The Third Circuit concluded that District Court erred in not holding Starr to its burden of proving reliance. However it concluded that the District Court’s error was harmless and does not require reversal.

Starr underwriters testified that they looked to Heinz’s loss history in calculating the appropriate risk and conducting their loss ratio analysis. The Policy’s certification, signed by Heinz’ Ascher, stated that he would inform Starr of any material changes to Heinz’s risk. Ascher knew about the 2014 China Nitrite Loss during June, but did not inform Starr.

It was highly probable that, had the District Court properly held Starr to its burden of proving reliance, the outcome would be the same.

Waiver

Courts applying New York rescission law have found investigation periods from six to twelve months to be reasonable. The five-month period between January 2015 and the filing of Starr’s rescission counterclaim on June 16, 2015, was wholly unobjectionable.

Heinz did not convince The Third Circuit that the District Court erred in concluding that Starr agreed to sell the Policy despite sufficient knowledge of Heinz’s misrepresentations. Heinz failed to prove that Starr waived its right to assert rescission.

ZALMA OPINION

As I said in February 2016, rescission is an equitable remedy that when one party to a contract of insurance is deceived by the other into entering into the contract by misrepresentation or concealment of material fact, the parties must be returned to the status quo that existed before the contract was made. Heinz intentionally deceived Starr to obtain a reduced premium and a smaller SIR. Since equity requires that Heinz should not be allowed to profit from its deception rescission was the only proper remedy because it would not be fair to compel Starr to insure a risk it would not have taken but for the deception.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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The Purpose of An Insurance Fraud Investigation

 Insurance Fraud Investigations

The purpose of an insurance fraud investigation is to gather evidence to establish whether a suspected fraudulent claim is legitimate or is, in fact, an attempt to defraud the insurer.

If the facts reveal the claim is legitimate, the fraud investigation stops and the claim is paid. If the facts support the suspicion, then further evidence must be gathered to allow the insurer to successfully deny the claim and refuse to pay.

Training the Investigators

The introduction of the tort of bad faith resulted in the insurance industry running scared for many years from investigating fraud. Insurers avoided denying claims fearful that they would subsequently be sued for bad faith. Insurers discouraged their adjusters from looking too closely at claims. As a result, knowledgeable personnel either looked for another career or were laid off by companies interested in improving their bottom line by hiring the less experienced personnel.

Insurance fraud investigations are often expensive. The extent of insurance fraud, depending on which of the various estimates are believed vary from $80 billion to $300 billion dollars every year. The sum is so enormous as to defy understanding. Insurers are finding that they cannot increase premiums to honest insureds fast enough to cover the amounts lost to fraud. They cannot afford to let such an enormous amount of money deplete their assets and destroy their profits without a fight.

The first line of defense to stop the hemorrhage of billions of dollars to fraud perpetrators is a staff of well-trained experienced and professional adjusters and investigators.
Although many adjusters will never witness the sorts of frauds described in this book they must be trained to recognize fraud, and thus be equipped with enough knowledge to separate the suspicious from the honest claim. States are, like California, requiring that insurers train all of their claims personnel to recognize insurance fraud, attempted insurance fraud and the indicators or red flags of insurance fraud. The laws and regulations attempting to force the victim of the crime, insurers, to investigate and prepare prosecutions for the state, are unfortunately honored more in the breach than in the following.

What A Fraud Trained Adjuster Must Understand

To turn a claims person into a fraud trained adjuster, the adjuster must become familiar with all of the following:

1.    all insurance policy contracts used by the insurer;
2.    the rules applied by the courts for the interpretation of insurance contracts;
3.    the Fair Claims Practices Act of the jurisdiction in which they work;
4.    the regulations promulgated by the Department of Insurance in their state to enforce the Fair Claims Practices Act;
5.    The statutes in their state compelling the existence of a Special Investigation Unit (SIU);
6.    The regulations established by their state concerning the training and operation of the SIU and claims personnel;
7.    the law of contracts;
8.    the law of torts;
9.    the law of fraud;
10.    the obligations of an insurer to pursue anti-fraud activities;
11.    specialized knowledge for different types of claims, such as:
a.    sufficient medical terminology to understand the diagnoses of
b.    physicians;
c.    treatment of traumatic injuries;
d.    cost of reasonable medical treatment for traumatic injuries;
e.    methods for determining the extent of damage to structures or vehicles and the cost of repair or replacement;
f.    methods for establishing the fair market value of items of personal property, including vehicles;
12.    interview techniques that facilitate the obtaining of detailed information;
13.    negotiation skills required for obtaining fair, reasonable, and acceptable settlements; and
14.    the red flags of fraudulent claims.

This training does not occur overnight. It is a tall order that requires commitment by each insurer to thoroughly train their adjusters and other claims personnel concerning the indicators of fraud. Fraud training, by computer assisted training programs, is available for minimal costs from private vendors like National Underwriter Company, IRMI, A.D. Banker, IRMI’s WebCE, ZIFL, and other materials published by the author. In addition various insurer produced programs exist as well as programs by independent adjusting firms.

Basic classroom type training for insurance personnel is available across the country in local colleges and universities. Local colleges, community colleges, universities and law firms will provide training at little or no cost. The training programs should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce and supplement the information learned.

The insurer should also institute a regular program of auditing claims files to establish compliance with the subjects studied to see how effective the training was to discover and defeat fraudulent claims. Monthly meetings should be held with claims staff to reinforce what was learned in the training sessions and to discuss current investigations where fraud is suspected.

There is no quick and easy way to create insurance claims professionals who are knowledgeable about insurance fraud. The training takes time. The learning takes longer. Those adjusters and other personnel who take the fraud training seriously and apply it to existing claims should be rewarded and honored for their skill. Without applying the training to actual claims the training is wasted.

Red Flags of Fraud

Suspicious claims have common attributes. Insurers and their anti-fraud organizations have collated the common attributes into lists of indicators or red flags of fraud. The lists were created as training aids and to be used to determine whether further investigation is required to determine if a claim is legitimate or false and fraudulent. Continually growing, these lists are known as the “red flags” or “indicators” of fraud lists. There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit.

If, when assessing a claim, three or more red flags are found the need for further investigation should be considered and evaluated by the claims person, a supervisor and the insurer’s special investigative unit. The existence of red flags does not mean a fraud has occurred. Red flags are only a signal to the adjuster to investigate further so that the suspicion may be either removed or confirmed. It is not any single indicator that alerts the adjuster to the possibility of a fraudulent claim but a combination of the red flag or red flags discovered coupled with the results of the thorough claims investigation.

Although the existence of multiple red flags should trigger an investigation, failure to investigate has been held to be reasonable as long as there are no patent inaccuracies or actual knowledge of false representations. In a Missouri case, the following “red flags” were found to be a reason for an insurer to suspect arson for profit:

•     more than one mortgage,
•     late payments,
•     divorce,
•     prior claims,
•     multiple claims,
•     problems affecting title to the property,
•     over-insurance,
•     an increase in insurance coverage right before the claim,
•     recent cancellations of insurance held with prior insurers,
•     liens,
•     threats of foreclosure on the property,
•     lawsuits, and
•     recent job transfers.

As the Nebraska Department of Insurance states in its booklet, Fraud Detection Hints, it is “important to remember that the … possible ‘red flags’ [indicate] that there may be some evidence consistent with an insurance fraud scheme. Any one or two of these by themselves may not raise your suspicions; however, when you have several of these hints (red flags) present or a pattern begins to emerge, you should investigate further or forward your suspicion to the Insurance Fraud Prevention Division.”

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Broker Not Responsible for Fraudulent Insurer

 Broker Must Owe A Duty To Be Held Responsible for Failure of Insurance

Complex insurance programs are required to properly insure major property owning organizations require the services of multiple brokers and sub-brokers. Because of the complexity of the insurance, the number of properties and organizations involved, and the extensive premiums needed to insure the risk, less than honorable people are tempted to engage in fraudulent schemes that cost the various plaintiff a great deal of money. As a result the parties damaged sued everyone in sight.

In M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., v. Norman–Spencer Agency, Inc., United States Court of Appeals, Seventh Circuit, No. 15-2290 (January 4, 2017) the Seventh Circuit was faced with a case that arose out of a complex insurance transaction that ended badly because the supposed insurance turned out to be a complete fraud. Despite the complexities of the broader transaction and the litigation that it spawned, this appeal presents, essentially, a single question: whether Norman–Spencer Agency, Inc., an Ohio insurance agency, owed a duty to M.G. Skinner and Associates Insurance Agency, Inc. and Western Consolidated Premium Properties, Inc., two entities that had engaged a chain of sub-brokers to procure insurance for a vast collection of real property.

M.G. Skinner and Associates and Western Consolidated Premium Properties, plaintiffs-appellants here, contend that Norman–Spencer Agency was one of the sub-brokers in the chain, and thus it owed them a duty of reasonable care in procuring the insurance, which Norman–Spencer Agency breached by failing to point out obvious signs that the ultimate provider of the insurance was dishonest.

BACKGROUND

Appellant Western Consolidated Premium Properties, Inc. (WCPP), a California corporation, is a risk purchasing group through which the owners or managers of commercial property can purchase insurance. Appellant M.G. Skinner and Associates Insurance Agency, Inc. (MGSA), also a California corporation, is an insurance broker that acts as the program administrator for WCPP. Michael Skinner is the sole shareholder of both WCPP and MGSA. WCPP and its affiliated broker MGSA represent more than 600 commercial properties, including office buildings, shopping centers, and residential complexes. The total insured value of these properties is nearly $3.5 billion.

In late 2011, MGSA sought renewal coverage for the WCPP properties.  NCAIG had previous insurance-placement experience with Michael A. Ward and his company JRSO, LLC. By November 1, 2011, Littlejohn and Morash intended to place the WCPP coverage with JRSO. Except that Ward and JRSO did not provide insurance. As it turns out, Ward had created a fictitious insurance policy for WCPP that was not actually backed by a legitimate insurer.

Ward was eventually convicted of wire fraud, sentenced to 10 years in prison, and ordered to pay more than $9 million in restitution to various victims of his fraud, including WCPP.

To fit Norman–Spencer in, the court was required to backtrack and add some details.

Ward, Littlejohn, and Norman–Spencer’s president, Brian Norman, met on November 11, 2011, to discuss Norman–Spencer’s potential retention as the JRSO program administrator. Following that meeting, Norman drafted a document titled “Memorandum of Understanding” that purported to outline the agreement between Ward and Norman. Among the terms of this agreement was that Norman–Spencer would issue a backlog of approximately 64 already-bound policies in exchange for $25,000, and that going forward, Norman–Spencer would underwrite and issue policies for the JRSO program. The memorandum of understanding was never signed, but Norman–Spencer was paid the $25,000 and began issuing the backlogged policies. The 64 backlogged policies included Myan Management’s coverage, but not WCPP’s.

Norman pushed to be involved in more business with Ward. But whatever the terms of Ward and Norman–Spencer’s November 11, 2011, agreement, Ward did not allow Norman–Spencer to be involved in the WCPP placement. In November 2011, Norman discovered an order of conservation issued against Ward and JRSO by the Circuit Court of Cook County that Norman thought could cause concern about Ward’s ability to bind coverage.

None of the proposals or any pricing information came through Norman–Spencer. MC Risk and NCAIG each received a commission from the premium; Norman–Spencer did not.

After Ward’s fraud was discovered, the Myan Management coverage was reincorporated into the WCPP placement. MGSA and WCPP ultimately procured new insurance that cost more than $2 million more than the original, fraudulent insurance.

The district court granted summary judgment in favor of Norman–Spencer concluding that because MGSA was not the “insured” on the Myan Management policy and did not make any payment toward that policy, Norman–Spencer could not have wrongly retained any MGSA funds.

DISCUSSION

Under Illinois law, an insurance broker has a duty to exercise ordinary care and skill in renewing, procuring, binding, or placing coverage requested by the insured or proposed insured. This duty was an aspect of Illinois common law of negligence even before the any relevant statute was enacted.

There are three principles applicable to the duty of insurance brokers that are significant here. First, if the broker is authorized to engage sub-brokers, then the duty extends down the line to the sub-brokers who are engaged to procure insurance. Second, the duty can be breached if a broker fails to disclose information about the insurer that would be material to the insured’s decision to place the insurance with that insurer.  And third, the duty arises once the insured—or prospective insured—requests specific insurance coverage.

WCPP contends that Norman–Spencer was negligent in failing to inform WCPP about the red flags Norman–Spencer discovered while investigating Ward and JRSO. WCPP argues that Norman–Spencer had a duty to WCPP because NCAIG directly requested that Norman–Spencer participate as a sub-agent. This last point is a factual contention that must be supported by evidence.

On appeal, WCPP contends that three pieces of evidence supported this contention. But none of this evidence creates a genuine dispute of material fact about Norman–Spencer’s involvement. The Memorandum of Understanding document as written indicated only Ward’s desire to have Norman–Spencer involved in the WCPP placement. The undisputed facts show that Ward made it clear that Norman–Spencer was not to be involved with the WCPP placement because Ward did not want to cut Norman–Spencer in on the commissions.

The district court was correct: there is no evidence that any broker in the procurement chain ever requested that Norman–Spencer serve as a sub-broker to procure insurance for WCPP. As a result Norman Spencer had no duty to them or the insured.

The evidence shows that Norman–Spencer wanted to get in on the WCPP deal, but no one asked it to procure insurance for WCPP, and it made no affirmative undertaking to do so. Under Illinois law, and the facts of this case, Norman–Spencer had no duty to WCPP, and the district court properly entered summary judgment in favor of Norman–Spencer on WCPP’s negligence claim.

The court concluded that Norman–Spencer could not be liable under a breach of fiduciary duty argument because it did not receive any money from the WCPP placement or participate in that placement. WCPP does not present any evidence showing that Norman–Spencer retained or misappropriated any WCPP funds. Rather, it is undisputed that Norman–Spencer did not receive a commission for the WCPP placement.

MGSA also brought a negligence claim against Norman–Spencer regarding the Myan Management policy. Norman–Spencer was involved in the Myan Management policy; it was one of the 64 backlogged policies that Norman–Spencer issued as part of its administration agreement with Ward. But the policy was bound before Norman–Spencer got involved, and Norman–Spencer received a flat fee for performing certain administrative tasks on all the backlogged policies and nothing else.

Even if Norman–Spencer had a duty to the “insured” MGSA could not sustain a claim regarding the Myan Management policy because MGSA was not the insured on that policy.

MGSA also brought a breach of fiduciary duty claim against Norman–Spencer for wrongfully retaining money it received for issuing the Myan Management policy. Norman–Spencer did not misappropriate MGSA’s funds. Because Myan Management was the insured on that policy, Myan Management’s funds paid for the premium, not MGSA’s—MGSA merely forwarded the premium payment using Myan Management’s funds.

ZALMA OPINION

Victims of fraud refuse to admit that they were victims because of their own negligence. Rather, they sue everyone in sight, in hopes of recovering the millions of dollars they lost when they paid a fraud perpetrator who created multiple fraudulent policies that had no real insurance or reinsurance behind it. The broker who got no money – but probably had insurance – was sued since there was little chance of recovering from the fraud perpetrator who is in jail.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Imperfect Claims Handling Not Bad Faith

Insured is Obligated to Assist Insurer in Effecting Settlement

No plaintiffs’ lawyer with a high value case will accept policy limits from an insurer without first learning whether the insured has assets that are collectible if a judgment is entered in excess of the policy limits. When insurance exists the plaintiff’s attorney will seek information from the insured through its insurer in a sworn statement setting forth the insured’s assets.

Regardless of the intent of every insurer insurance adjusters are often overworked, given heavy caseloads, and sometimes fail to communicate as promptly as they should. Some insurance adjusters are well trained and experienced. Some are young, untrained and inexperienced. Others fit between the two extremes.

When a high value case is put in charge of a less than perfect claims person – even after presenting the policy limits to the claimant’s counsel without a demand – Even when an insurer’s handling of a claim are deficient, and an uncooperative insured causes delays, unnecessary litigation will follow when the adjuster fails to follow up on requests from a claimant for information about the assets of the insured.

In GEICO General Insurance Company v. Harvey, District Court of Appeal of Florida, — So.3d —-, 2017 WL 33659 (1/4/17) the law suit litigation resulted because a lack of communication.

BACKGROUND

On August 8, 2006, the insured, James Harvey, got into a car accident with John Potts, which resulted in Potts’ death. The insured’s vehicle was registered in both the insured’s name and his business’s name. The accident was reported to the insured’s insurer, GEICO, with which the insured had a $100,000 liability policy. The claim was then assigned to Fran Korkus, a claims adjuster.

Three days later, on August 11, GEICO advised its insured in writing that the claim by the decedent’s estate could exceed the insured’s policy limits and that the insured had the right to hire his own attorney. The insured subsequently retained his own attorney to protect his uninsured excess exposure.

At no time did the estate’s attorney provide a deadline for obtaining this statement, nor was Korkus told that the insured’s statement was a prerequisite to settling the insured’s claim. Nine days after the accident, on August 17, GEICO sent the estate a release along with a check for the $100,000 policy limits even though the estate never demanded the policy limits.

Also on August 31, pursuant to her supervisor’s instructions, Korkus contacted the estate’s attorney to find out what kind of statement he wanted. The attorney responded that he wanted to determine what other assets or coverage the insured had available to him. Korkus sent the insured a sample affidavit that had blanks where the insured could input his available assets and coverage to provide this information to the estate.

On September 13, the estate filed a wrongful death lawsuit against the insured and returned GEICO’s $100,000 check. Ultimately, the estate received an $8.47 million judgment against the insured following a jury trial in the wrongful death action.

After the judgment was entered against him, the insured brought a bad faith claim against GEICO. During the course of the bad faith trial, the insured admitted he had known about the estate’s request for a statement at least thirteen days before the estate filed suit.  Nothing in the record shows why the insured could not have given his statement between the time his personal attorney became available and the date the suit was filed.

The estate’s attorney testified at trial that had he known the insured planned on giving a statement, he would have recommended delaying the filing of the wrongful death suit even though he never advised either the insured, the insured’s attorney, or GEICO that without the statement the filing of the lawsuit was imminent. The insured introduced evidence in support of its claim of bad faith by GEICO that Korkus had received some deficient performance reviews, and at times had difficulty managing her workload.

ANALYSIS

GEICO contended that the insured offered insufficient evidence at trial to support his bad faith claim. The Court of Appeal noted that an insurer is obligated to (1) advise the insured of settlement opportunities; (2) advise as to the probable outcome of the litigation; (3) warn of the possibility of an excess judgment; (4) advise the insured of any steps he might take to avoid same; (5) investigate the facts; (6) give fair consideration to a settlement offer that is not unreasonable under the facts; and (7) settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.

In evaluating whether an insurer has acted in bad faith, the jury must consider the totality of the circumstances. To fulfill the duty of good faith, an insurer does not have to act perfectly, prudently, or even reasonably. An insurer’s imperfect handling of a claim does not, by itself, equate to bad faith; the essence of a bad faith claim is that the insurer put its own interests before that of the insured.

Significantly, the estate did not inform GEICO that a full settlement of its claim against the insured was contingent upon providing a statement. GEICO was required to “advise as to the probable outcome of the litigation,” and warn of the possibility of an excess judgment. Here, the record reflects that GEICO promptly warned the insured as to the possibility of an excess judgment. Thus, GEICO satisfied these obligations as well.

GEICO was also obligated to advise the insured of any steps he might take to avoid an excess judgment. The record also shows that GEICO did this too, and recommended that the insured retain his own attorney, which he did, and, as stated above, informed the insured that the estate wanted a statement.

GEICO was further obligated to investigate the facts. Nothing in the record indicates GEICO was deficient in this regard. GEICO could not have given fair consideration to a settlement offer because the evidence was undisputed that the estate never made a settlement offer.

Finally, GEICO was required to settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Here, GEICO attempted to settle with the estate nine days after the accident by tendering, without limitation or even a demand, the full policy limits to the estate’s attorney. Thus, the evidence showed that GEICO also fulfilled this final obligation.

GEICO fulfilled every obligation that an insurer owes the insured. Additionally, although not dispositive to our analysis, we also note that there was no competent, substantial evidence that GEICO, having tendered the full policy limits nine days after the accident, was acting upon what it considered to be for its own interest alone.

The insurer’s bad faith must also have caused the excess judgment. Even assuming that GEICO handled the insured’s claim improperly, the insured failed to establish that GEICO’s conduct caused the excess judgment against the insured. Although, after the fact, the insured claimed he would have provided a statement had GEICO acted differently, the insured’s own inaction belied this after-the-fact assertion.

Before the estate ever filed suit, the insured knew the estate wanted a statement, knew what the estate wanted in that statement, and had the materials to produce a statement. Further, the insured never provided a statement to the estate despite having the assistance of legal counsel for several days before suit was eventually filed. Therefore, the insured failed to show that he would have provided the requested statement but for GEICO’s purported “bad faith.”

GEICO tendered the policy limits, unconditionally, nine days after the accident, and it informed the insured of the estate’s request for a statement. Although GEICO’s claims process was not without fault and could be improved, GEICO’s handling of the claim did not amount to bad faith as a matter of law.

ZALMA OPINION

Neither side in this case was without fault. The plaintiff’s lawyer relied on GEICO to get financial information from the prospective defendant rather than hire a private detective to determine the assets and liabilities of the defendant. The insured defendant should have filled out the form and provided it to the plaintiff’s counsel. The GEICO adjuster should have followed up with the insured. Insurers need not be perfect with regard to every claim. Plaintiff’s lawyers should never take a case to verdict it cannot collect when a $100,000 policy is available and there are no other assets. Everyone was at fault for causing this case to go to the court of appeal.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Insurers are Only Obligated to Provide the Insurance Ordered

Insured Must Take Responsibility For His Policy

Insurance is a contract between the insurer and the person insured. Insurance companies sell to the insured the coverage requested. Insurers have no obligation to force, or even advise, the insured about the limits of liability of automobile liability insurance that should be carried by the insured. Rather, the insurer is obligated only to provide the insurance coverages ordered.

Charles F. Cohan And Lisa K. Cohan v. United Services Automobile Association, No. 683 EDA 2016, Superior Court of Pennsylvania, 2017 WL 57152 (1/5/17) Dr. and Mrs. Cohan tried to get a court to provide liability limits that was not ordered because they believed, as long term customers, they should have been advised to carry higher limits.

Dr. Charles F. and Lisa K. Cohan (Cohans) failed to convince the trial court who dismissed their suit with prejudice.

FACTS

In 1984, while he was a captain in the United States Army, Charles Cohan purchased an automobile insurance policy from USAA with a $100,000.00 per person liability limit. He maintained the policy with the same coverage limits through 2011. He married Lisa Cohan in 1995 and added her to the auto policy as an “operator.” The Cohans never advised USAA that they should increase their automobile liability coverage.

In 2002, The Cohans purchased land and built a new home. On December 6, 2002, they purchased homeowner’s insurance from USAA with liability coverage in the amount of $1,000,000.00 per occurrence.

Lisa Cohan, while driving a Cohan vehicle, collided with another vehicle, causing the driver fatal injuries. The administrator of the estate of the decedent brought a wrongful death/survival action and USAA defended the action on behalf of Ms. Cohan. The matter settled for $300,000.00, but USAA paid only the policy limits of $100,000.00. The Cohans paid the remainder of the settlement amount.

On April 1, 2015, the Cohans sued USAA claiming that it should have advised Dr. Cohan to increase the auto liability policy limits over the years that he was a customer, and requesting judgment in the amount of $200,000.00. USAA filed preliminary objections, which the trial court granted by order and opinion and it dismissed the complaint with prejudice.

ISSUES ON APPEAL

  1. Did the trial court err in holding that despite their twenty-seven year, multi-policy insurer-insured relationship and USAA’s targeted affinity group based marketing, USAA had no duty to coordinate the Cohans liability coverage across their policies or to reform the liability limits of their auto policy?
  2. Did the trial court err in granting USAA’s preliminary objection demurrer to the Cohans’ Unfair Trade Practices and Consumer Protection Law allegations holding that the Cohans must plead that they were “lied to” and that USAA’s targeting affinity group based advertising program was “puffery”?

ANALYSIS

Pennsylvania courts have often stressed that the insured has both the capacity and the duty to inquire about the scope of insurance coverage, rather than rely on hand holding and substituted judgment.” No justification in the law to impose the additional burden on insurers that they anticipate and then counsel their insured on the hypothetical, collateral consequences of the coverage chosen by the insured. The basic contractual nature of insurance coverage requires fair dealing and good faith on the part of the insurer, not hand holding and substituted judgment.

While appellate courts acknowledge insurance is an area in which the contracting parties stand in somewhat special relationship to each other, the relationship is not so unique as to compel this Court to require an insurer to explain every permutation possible from an insured’s choice of coverage. Each insured has the right and obligation to question his insurer at the time the insurance contract is entered into as to the type of coverage desired and the ramifications arising therefrom. Once the insurance contract takes effect, however, the insured must take responsibility for his policy.

The trial court found that USAA did not have a duty to advise the Cohans to purchase higher liability limits on their auto insurance policy, regardless of the terms in the separate homeowner’s policy. The trial court was correct that USAA had no obligation to advise the Cohans of a disparity in liability coverage that they should have been aware of, or to otherwise “coordinate” or “equalize” the liability limits of two different policies. To the contrary, once the insurance contract takes effect the insured must take responsibility for his policy. The Cohans’ argument, that the two policies should have been “equalized,” overlooks the salient fact that an automobile insurance policy and a homeowner’s insurance policy are not coextensive and insure against very different risks.

The purpose of the Unfair Insurance Practices Act (UIPA) is to regulate trade practices in the business of insurance in accordance with the intent of congress by defining or providing for the determination of all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined.

There is no evidence to suggest, and the court had no reason to believe, that the system of sanctions established under the UIPA must be supplemented by a judicially created cause of action.

ZALMA OPINION

The Pennsylvania court refused – properly – to substitute itself as a parent for the Cohans. The court correctly found that the duty to decide the coverages to be purchased from an insurer is the obligation of the insured not an insurer or a court.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Posted in Zalma on Insurance | Comments Off on Insurers are Only Obligated to Provide the Insurance Ordered

The Problem With Easy to Read Policies

By Making Insurance Companies Write “Easy to Read” Policies Ambiguities Are Created

In an attempt to protect people from insurance companies almost every state has enacted statutes or regulations that require all policies be written in “easy to read” language rather than the precise language used in earlier policies. In so doing the statutes and regulations eliminated hundreds of years of appellate decisions interpreting insurance policies. As a result, insurers writing “easy to read” policies find that courts will interpret them in a way the insurer did not intend.

Preferred Contractors Insurance Company Risk Retention Group, LLC (“PCIC”) appeals the district court’s judgment, entered January 29, 2016, resolving the underlying insurance action in favor of plaintiff-appellee Certified Multi-Media Solutions, Ltd. (“Certified”) and intervenor-plaintiff-appellee St. Paul Fire & Marine Insurance Company, Travelers (“Travelers”) (together, “plaintiffs”). The parties dispute the scope of certain contractual provisions that purportedly limit the amount of insurance coverage provided by PCIC to $10,000.

In Certified Multi-Media Solutions, Ltd., St. Paul Fire & Marine Insurance Company, Travelers, v. Preferred Contractors Insurance Company Risk Retention Group, LLC, United States Court of Appeals, Second Circuit 2017 WL 28419, 16-140-cv (January 3, 2017) the Second Circuit was faced with a dispute over the meaning of the easy to read word “you.”

FACTS

In 2008, non-party Getronics USA Inc. (“Getronics”) hired Certified, an electrical contracting company, to provide electrical services at a shopping mall in the Bronx, New York. Getronics was insured under a commercial general liability policy issued by Travelers. On March 14, 2009, PCIC issued to Certified an insurance policy (the “Policy”) consisting of (1) a commercial general liability policy containing a standard set of provisions and (2) a specific set of provisions known as the Manuscript Policy Provisions, which included Endorsement 23.

On March 19, 2009, non-party Anthony Balzano, an employee of Certified, was injured while performing electrical work at the shopping mall. He sued the mall owner, the lessee of the premises, and the general contractor in New York state court. Every agency and contractor involved sued each other. Certified sought coverage under the Policy for its defense and directed Travelers, which was defending Getronics in litigation, to seek indemnification from PCIC as well. PCIC informed Certified in January 2012 that, pursuant to Endorsement 23 in the Policy, it would provide only up to $10,000 of coverage, rather than the full coverage of $1 million, for the claims arising from Balzano’s injuries.

Certified filed this diversity action against PCIC in September 2014 seeking a declaratory judgment that the Policy provides up to $1 million in coverage and that PCIC is required to defend and indemnify it in the state court litigation. Travelers intervened and sought a declaratory judgment requiring PCIC also to pay its defense and indemnity costs in the state court litigation. In December 2015, the district court awarded summary judgment in favor of Certified, holding that, based on the unambiguous and plain meaning of the Policy, the $10,000 cap on insurance coverage in Endorsement 23 does not apply to the claims arising from Balzano’s injuries. The court entered judgments for Certified and Travelers shortly thereafter.

POLICY WORDING

In this case, the disputed language is contained in the coverage-limiting provisions in Endorsement 23, which is entitled “Action Over”: “Notwithstanding the limit of coverage shown in the Declarations and/or Section III …, $10,000 only is the most we will pay as damages for any and all claims, including any claim for contractual indemnification, arising from or related to any “bodily injury”, “property damage” or “personal injury” sustained by an employee of an insured while injured, harmed or damaged in the scope of such employment. ¶ In any action brought by such employee, if you are impleaded into said action, or if any third party action over is commenced against you, irrespective of the claims or theories set forth therein, the $10,000 limit of coverage as provided in this endorsement shall apply when: ¶ 1. The injury sustained by the employee is a “grave injury” as defined by Section 11 of the New York State Workers’ Compensation Law, as follows: [list of qualifying injuries]; and ¶  2. You are required by contract, regulation or law to be insured under a workers’ compensation policy providing liability coverage for claims arising from injuries to employees. ¶ The words “we” and “our” refer to the company providing this insurance. ¶ The words “you” and “your” refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy.”

Although the parties agree that the second paragraph in Endorsement 23 does not apply in this action because Balzano did not suffer a “grave injury,” they dispute whether the first paragraph, read in tandem with the second, imposes a $10,000 cap on damages for claims arising from Balzano’s bodily injuries. The crux of the parties’ dispute is whether the phrase “an insured” in the first paragraph extends to the “Named Insured,” which in this case is Certified. PCIC contends that “an insured” includes the “Named Insured,” and that therefore the $10,000 cap applies as Balzano was an employee of Certified. Plaintiffs counter that the phrase “an insured” cannot be read to include the “Named Insured” because such a construction would render the second paragraph superfluous.

ANALYSIS

The district court agreed with plaintiffs, concluding that (1) the plain meaning of the language in the Policy was clear, (2) the Policy used the phrases “an insured” and the “Named Insured” to refer to different sets of entities, (3) the first paragraph in Endorsement 23 applied the $10,000 cap to claims involving an employee of “an insured,” and (4) the second paragraph applied the $10,000 cap to claims involving the “Named Insured.” When the provisions [in an insurance contract] are unambiguous and understandable, courts are to enforce them as written.

The district court’s reading makes sense.

The first paragraph of Endorsement 23 covers claims arising from injuries or property damage sustained “by an employee of an insured,” while the second paragraph applies “if you are impleaded into said action” or “if any third party action over is commenced against you.” As noted, “you” refers to the “Named Insured shown in the Declarations,” which is Certified. The use of “you” indicates that the second paragraph applies specifically to Certified, while the first paragraph applies generically to any insured. In addition, throughout the Policy there are references to the “Named Insured,” “Insured,” and “Named Insured and/or Insured,” suggesting that the two are distinct and not the same entities.

As the district court concluded, PCIC’s reading of the Policy would render the second paragraph superfluous. If “an insured” in the first paragraph included the Named Insured, there would be no need for the second paragraph. And PCIC’s reading would create a contradiction, as the first paragraph would impose a $10,000 cap with respect to Certified generally, while the second paragraph would impose a $10,000 cap with respect to Certified only when there was a “grave injury.” Plaintiffs’ reading of the Policy avoids this contradiction and gives ready effect to both paragraphs in Endorsement 23.

Accordingly, because Balzano was an employee of Certified and did not suffer grave injuries, the $10,000 cap did not apply to claims arising from his injuries and plaintiffs are entitled to up to $1 million in coverage under the Policy.

ZALMA OPINION

The Second Circuit read the policy as written and concluded that “you” meant only the named insured and that although a named insured is “an insured” it can only be dealt with as a named insured and not “an insured.”  The lesson learned is that an insurer must be very careful when writing an insurance policy. It is hard but because PCIC was not careful in preparing the wording its exposure increased by $990,000.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Litigation Only Because Mortgagee Failed to Confirm Existence of Insurance

Premature Motion for Summary Judgment Fails

It is essential that when a contract requires a person who buys a property must insure against fire must be careful to confirm that the buyer actually maintains a policy.  When the parties to a contract requiring one party insure the property that is the security for a loan fail to confirm the existence of the insurance exists. Failure to do so results in unnecessary litigation to attempt to cure the error.

In Imrie v. Ratto, — N.Y.S.3d —-, 2016 N.Y. Slip Op. 08907, 2016 WL 7469572, Supreme Court, Appellate Division, Third Department, New York (Dec. 29, 2016) the Appellate Division was asked to save a seller from his error by reversing a premature motion for summary judgment.

FACTS

Defendant Andrew R. Ratto bought an auto repair business and garage in January 2010 from plaintiff by securing two mortgages on the property. The mortgages required Ratto to maintain insurance for, among other things, any “loss by fire” and to name plaintiff as the mortgagee on the insurance policy. After Ratto began making payments late and plaintiff learned that Ratto was facing a tax foreclosure, plaintiff sued Ratto to foreclose the mortgage. Suspiciously, a week later, the repair business and garage was destroyed by a fire. After the fire, plaintiff learned that, contrary to the terms of the mortgages, Ratto did not have fire insurance coverage, let alone insurance coverage that named plaintiff as the mortgagee on the insurance policy. However, a third-party-Ratto Restorations, Inc. (hereinafter the corporation)-insured the property against fire loss with defendant Erie Insurance Company. Plaintiff was not listed as the mortgagee or otherwise referenced on the corporation’s insurance policy.

In September 2013, pursuant to an amended complaint, plaintiff added Erie as a defendant by seeking a declaratory judgment determining that Erie was either “legally and equitably indebted” to him for the proceeds of the insurance policy, that the policy should be reformed to add him as the loss payee or that he had an equitable lien on any insurance payments. During discovery, Erie had the opportunity to depose plaintiff.

Nine months after plaintiff had submitted discovery demands, interrogatories and notices of depositions, and without having received any substantive response from Erie regarding the execution of the insurance policy, Erie moved for summary judgment dismissing the complaint. Plaintiff opposed the motion on grounds that included outstanding discovery requests and also moved to amend the complaint to add the corporation as a defendant and to compel discovery against Ratto and Erie. The trial court granted Erie’s motion for summary judgment and denied plaintiff’s motion to amend the complaint and compel discovery from Erie. Plaintiff appeals from that order.

In July 2015, Ratto and the corporation assigned their rights in the insurance policy to plaintiff, and plaintiff, thereafter, sued Erie as the assignee of the corporation.

ANALYSIS

The appellate court concluded that Erie’s motion for summary judgment should have been denied as premature. A summary judgment motion is properly denied as premature when the non-moving party has not been given reasonable time and opportunity to conduct discovery relative to pertinent evidence that is within the exclusive knowledge of the movant or a codefendant. A party seeking reformation of a contract must establish, by clear and convincing evidence, either that the writing at issue was executed under mutual mistake or that there was a fraudulently induced unilateral mistake.

The importance of documents and depositions that plaintiff sought but had not been provided is readily apparent. The premise of plaintiff’s cause of action is that, in executing the relevant insurance policy, the corporation and Erie both intended to include plaintiff as a loss payee but that, by mutual mistake, he was omitted.

Erie had exclusive knowledge of its understanding of the intended coverage and any intended loss payees at the time of the execution of the relevant insurance policy. Moreover, it is likely to be in exclusive possession of any collateral documents memorializing the intended scope of the relevant insurance policy. Further, plaintiff’s contention that Erie has exclusive possession of employees and materials that could shed light on its intent as to the insurance policy is patently reasonable and not merely speculation. Under such circumstances, Erie’s motion for summary judgment should have been denied without prejudice as premature.

The corporation assigned its interest in the insurance policy to plaintiff. Thus, the issue as to whether the corporation could have been inequitably affected by a judgment prior to that assignment is rendered moot by the fact that the corporation no longer has an interest in the insurance policy.

By reversing the trial court’s grant of the motion of defendant Erie Insurance Company Erie must respond completely to the discovery presented by Plaintiff and the case must go to trial or resolved by a motion for summary judgment after discovery is complete.

ZALMA OPINION

The plaintiff, Mr. Imrie, failed to properly protect himself by not confirming that the requirement that Ratto insure the property and name Imrie as a mortgagee could have been resolved by requiring Ratto to provide Imrie a copy of the fire insurance policy naming Imrie as a mortgagee. Because of his failure he needed an assignment of the corporation’s policy and attempt to reform the contract. A great deal of work and legal expense because of his failure to confirm that the insurance required by the mortgage existed.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Lie on Application — Lose All Coverage

Rescission Appropriate When Applicant Misrepresents Use of Vehicle

When a prospective insured seeks insurance he or she submits an application to an insurance company as the set of facts used by the insurance company in determining whether it is willing to offer the applicant a policy of insurance. The covenant of good faith and fair dealing imposed on every party to an insurance contract requires that a prospective insured truthfully respond to questions posed on the application for insurance. It matters not if the application was written, typed, or presented electronically and on line. When the applicant makes a misrepresentation of material fact to acquire the policy the insurer has the right to rescind the policy from its inception.

In Nationwide Property and Casualty Insurance Company v. Donald R. Faircloth, Jr., Robert Jones; Carolyn Jones; Randall Cohea, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2016 WL 7448085 (December 28, 2016) the Eighth Circuit Court of Appeals, applying Arkansas law was asked to reverse the trial court’s summary judgment in favor of Nationwide.

BACKGROUND

In May 2013, Donald Faircloth applied online for an automobile insurance policy from Nationwide. The application asked Faircloth to identify the “primary use” of the vehicle from a multiple choice list. According to Nationwide’s reproduction of the online application, Faircloth had three choices: “Work/School (commute to/from, errands)”; “Pleasure (recreational driving)”; and “Business (deliveries, sales calls, taxi).” Faircloth answered “Work.” Nationwide approved Faircloth’s application and issued a policy.

On June 30, 2013, Faircloth hydroplaned, lost control of his vehicle, and crashed. On July 18, 2013, Nationwide decided to rescind Faircloth’s policy, Faircloth wrecked his car, and Nationwide rescinded the policy. Nationwide sought declaratory judgment that it had no duty to indemnify or defend Faircloth under the policy’s coverage because Faircloth made material misrepresentations in his online insurance application. The district court granted summary judgment to Nationwide, concluding that Nationwide was entitled to rescind the policy because Faircloth misrepresented the “primary use” of his vehicle.

Nationwide tendered the premiums to Faircloth with the notice of rescission. Faircloth did not accept or deposit the tender. On September 8, 2014, Nationwide deposed Faircloth and discovered that Faircloth used the vehicle to make business-related deliveries, putting over 1,200 miles a week on the vehicle for such deliveries. Nationwide contends that these facts establish that Faircloth also misrepresented his “primary use” of the vehicle as “work” instead of “business.” Faircloth and Nationwide filed competing motions for summary judgment.

The district court granted Nationwide’s motion for summary judgment and denied Faircloth’s motion as moot. The court held that Faircloth misrepresented his primary use of the vehicle because “[a] reasonable person in Faircloth’s position—a person putting 1,200 miles a week on his car delivering things—would have chosen business as the primary use.”

DISCUSSION

The burden of proof is particularly relevant when the party with the burden of proof moves for summary judgment and the opposing party presents evidence contesting the veracity of the movant’s evidence. In this situation, if the testimony of a witness is necessary to carry the movant’s burden of proof, the appellate court looks carefully at whether the witness is unbiased and competent, and whether his testimony is positive, internally consistent, unequivocal, and in full accord with the documentary exhibits. If the movant makes this showing, then the opposing party cannot force a trial merely to cross-examine the witness or in the hope ‘that something might turn up at the trial.

As a federal court sitting in diversity, the Eighth Circuit applies the substantive law of the forum state—Arkansas. Under Arkansas law, an insurer may rescind an insurance policy for any misrepresentation that is “material,” even if such misrepresentation is not related to the loss sustained.

The insurer bears the burden of showing that had it known of the misrepresented facts, “the circumstances were such that it would not have issued the present coverage.” Although the district court did not expressly address whether Faircloth’s misrepresentation was material, the Eighth Circuit may affirm the judgment on any basis supported by the record.  Here, the record shows that Nationwide met its burden of establishing that it would not have issued the same coverage had Faircloth chosen “business” as his primary use.

Nationwide presented the affidavit of Richard A. Yuill, an underwriter for Nationwide, which stated: “Had Nationwide known of Mr. Faircloth’s use of his vehicle as a delivery service in connection with his employment, including his full-time use [of] the vehicle as a delivery driver, he would not have been issued this policy over the online application. The policy purchased would not have been available, and he would have[,] [i]nstead, been referred to the Nationwide Call Center in order to purchase a business automobile insurance policy for the vehicle.”

Because the policy purchased would not have been available and Faircloth would have been referred to the call center to purchase a business automobile insurance policy, we conclude that had Nationwide known Faircloth’s primary use was “business,” it would not have issued the same policy.

Except for a general assertion that “materiality” is a fact question, Faircloth failed to present any contrary evidence indicating that Nationwide would have issued the same policy had he selected “business” as his primary use. Therefore, Faircloth failed to raise a genuine question of material fact as to the materiality of the misrepresentation. The district court correctly determined that Faircloth failed to raise a fact issue about how the application screen appeared.

ZALMA  OPINION

There is no excuse for a prospective insured to lie on an application for insurance. Insurers, especially auto insurers, rely almost exclusively on the facts stated in the application and a report from the state about accidents or tickets. The lie in this case was important because the insured misrepresented the use of the vehicle and because he used it to make deliveries he increased the risk of loss by driving more than represented. He lied. His policy was properly declared void from its inception.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Zalma’s Insurance Fraud Letter – January 1, 2017

2017 and Insurance Fraud

May you all have a Happy and profitable New Year and may
all fraud perpetrators spend 2017 in prison.

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

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

The Current Issue Contains the Following

  • The U.S. Government Claims Success in Anti-Fraud Fight
  • Illumeo Continuing Education
  • Anti-Steering Regulations Issued by the California Department of Insurance
  • New from Barry Zalma
    • “Insurance Law”
  • Fraud Conviction Affirmed
  • Barry Zalma Speaks at Your Request
  • Premium Diversion
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • Uberrimae Fidei – Utmost Good Faith
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Coalition’s Hall of Shame
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • The Fraud Interview
  • Books from the American Bar Association
    • The Insurance Fraud Deskbook
    • Diminution in Value Damages
  • Interviewing
  • Zalma’s Insurance Fraud Letter
  • The Legend.
  • Ineffective Fraud Fight by U.S.
  • Legal Disclaimer

Zalma’s Insurance Fraud Letter

ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

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

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

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.
The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

 


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Racial Discrimination is Not an “Occurrence”

All Racial Discrimination Acts are Intentional

Racial discrimination is wrongful under all circumstances. By definition discrimination is an intentional act.

Girard and Lindsay Jones appeal a judgment dismissing their state and federal disparate treatment housing discrimination claims against John Baecker. The Joneses’ race discrimination claims rest principally on Baecker’s explicit identification of Girard as “African American,” and the Joneses’ family status discrimination claims rest principally on Baecker’s stated belief that the Joneses’ desired rental unit was too small to accommodate their six-person family.

In Girard Jones and Lindsay Jones v. John Baecker, et al, Court of Appeals of Wisconsin, 2016 WL 7471577 (December 28, 2016) Baecker’s insurer, West Bend Mutual Insurance Company (West Bend) alleged the circuit court’s determination that the complaint’s allegations triggered its insurance policy obligation to defend Baecker against the Joneses’ intentional discrimination claims.

BACKGROUND

This case arises out of the Joneses’ efforts to obtain rental housing in June of 2011. Lindsay is white; Girard is African American. The Joneses are married and have two children together. Additionally, Girard has two children from previous relationships. Three of the children live with the Joneses full time. The remaining child has a visitation schedule during weekends and the summer.

In March 2011, the Joneses began looking for another rental property. According to Lindsay, they focused their search on three-bedroom rentals in an area that would allow their children to continue attending Putnam Heights Elementary School. The Joneses did not find many locations available that met these criteria, and although they contacted ten to twenty landlords, they did not view any of those properties.

When asked at her deposition to explain exactly what was said during the telephone conversation, Lindsay stated Baecker began asking questions about the Joneses’ then-current living situation and she specified that they lived on the corner of State and Hamilton. She claimed that he said that he knew of that house and that they were complete pigs. The potential landlord then allegedly said: “Oh, you’re the one with the African American boyfriend.” She replied, that “actually, that’s my husband, and we’re a family.”

Lindsay admitted she did not seek an application from Baecker or ask to view Baecker’s rental property on Kari Drive, explaining that she would not have done these things only to have Baecker “continue to laugh at me or continue to call us pigs.”

Baecker stated he observed “toys and junk and garbage every day.” Baecker felt the State Street property was “disgusting.” He disputed, however, that he had called the Joneses “pigs”; rather, he testified he told Lindsay the Joneses kept their State Street residence like a “pigsty.”

Baecker acknowledged mentioning Girard’s race during the conversation with Lindsay.

INSURANCE

West Bend had issued to Baecker a general business liability insurance policy effective between January 2011 and January 2012. On April 16, 2014, Baecker’s attorney sent a letter tendering defense of the Joneses’ lawsuit to West Bend. Approximately one month later, West Bend filed a motion to intervene in the Joneses’ action against Baecker.

The circuit court denied West Bend’s motion for summary judgment and concluded West Bend had a duty to defend Baecker from that date forward.

The circuit court granted Baecker’s summary judgment motion. The court deemed it “apparent [Baecker] decided he was not interested in renting to [the Joneses] because of the number of children in the family.”

DISCUSSION

Wisconsin has a long and proud history of prohibiting racial discrimination in various facets of public life. In this case, the Joneses allege they have been unlawfully denied housing because of their race and family status.

Although the plaintiff need not establish that discriminatory intent was the sole reason for the housing decision at issue, the evidence must be sufficiently compelling so as to give rise to a reasonable inference of racial discrimination. While the proffered evidence need not constitute a direct admission of guilt by the defendant, a rational trier of fact must be able to infer, based on the evidence, that the defendant took a particular action because the plaintiff was a member of a protected class.

Nothing in Baecker’s single use of the term “African American” would allow a reasonable fact finder to find a discriminatory motive without resorting to speculation. Consequently, there is no reasonable, unspeculative basis for a fact finder to reject Baecker’s contention that the phrase was used for identification purposes only, as a description of the individual with whom Baecker believed Lindsay was in a relationship.

DUTY TO DEFEND

West Bend cross-appeals, asserting the circuit court erroneously declared it has a duty to defend Baecker. West Bend argued that because the alleged discrimination was a volitional act on Baecker’s part, the complaint failed to allege an “occurrence” that would trigger its duty to defend. Baecker, conversely, asserted that there has been an “occurrence” because the complaint did not allege he intentionally discriminated against the Joneses or intended to cause the Joneses emotional distress by his conduct.

The circuit court denied West Bend’s motion for a declaratory judgment.  Although the four-corners rule bars a court from considering evidence extrinsic to the complaint when determining whether an insurer has a duty to defend, we will “liberally construe” the complaint’s allegations, assume all reasonable inferences from those allegations, and resolve any ambiguity in the policy terms in favor of the insured.

The duty to defend depends upon the terms of the insurance policy. The same rules of construction that govern all contracts are applied to insurance policies. The policy defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” As such, for there to have been an “occurrence,” there must necessarily have been an “accident.”

The complaint alleges Lindsay called Baecker to inquire about renting a unit in the Kari Drive property. According to the complaint, “Baecker would not show or rent the property to Plaintiffs because Plaintiff Girard Jones is African-American and because Plaintiffs have four minor children.” Baecker’s refusals allegedly affected the Joneses’ ability to send their children to their desired school and caused the Joneses “humiliation, frustration, mental anguish, emotional distress” and other unspecified damages.

West Bend argues that nothing in the complaint suggests the existence of an “accident” that would trigger its defense obligations. Over the last approximately twenty years, our supreme court has repeatedly held that, when coverage is contingent on an “accident” occurring, the insurer has no duty to defend against alleged damages that, although unexpected, are brought about intentionally by the insured’s volitional conduct. Comparing the definitions of “negligence” (in the law) and “accident” (in the relevant policy), it is significant that both definitions center on an unintentional occurrence leading to undesirable results.

The complaint here does not allege an “occurrence” triggering West Bend’s defense obligations. Baecker’s alleged acts in this case—his refusal to rent to the Joneses on the bases of race and family status—were made volitionally. Further, assuming the truth of the complaint’s allegations, Baecker intended to deny the Joneses housing on these unlawful bases. As a result, there was no “occurrence” under the relevant case law. This is true even if, as Baecker argues, he negligently believed his actions were permissible or he did not anticipate his conduct would cause the Joneses emotional distress.

Baecker’s “negligent belief” argument is of no moment here because existing case law establishes that volitional conduct producing an intended event bars coverage even if there is precipitating negligence on the part of the insured. It was undisputed that Baecker did refuse to rent to the Joneses. The complaint alleged he did so intentionally, on the impermissible bases of race and family status, and we must take these allegations at face value for purposes of the duty-to-defend inquiry.

Baecker, the insured party, was alleged to have intentionally refused to rent to the Joneses on the impermissible bases of race and family status. Baecker’s alleged refusal can only be interpreted as evidencing “a degree of volition inconsistent with the term accident.” For this reason, the Court of Appeal concluded that there has not been an “occurrence” in this case, and West Bend is entitled to the declaratory judgment it seeks.

ZALMA OPINION

Four Corners states like Wisconsin establish a duty to defend or not from the allegations of the suit. In this case, after a lengthy discussion of the alleged discrimination, it became clear to the appellate court that the trial court erred when it found a duty to defend since all of the allegations and all of the evidence gathered in discovery, it was clear that Baecker was alleged to act intentionally and was, therefore, not an “occurrence.”

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Courts Lack the Authority to Change an Insurance Contracts Purported to be Contractual Interpretation

Ambiguity Can’t Be Created to Change Clear Wording

As I have said since I began this blog, insurance policies must be read as written. People who are injured always seek to recover from every tortfeasor and every insurance policy that might be available to make them whole. Sometimes the demands are ridiculous and require an appellate court to shut down the attempt.

In Bennett v. Brown, — So.3d —-, Court of Appeal of Louisiana, 2016-622, 2016 WL 7386467, (La.App. 3 Cir. 12/21/16) the Louisiana Court of Appeal was asked to resolve whether a “garage policy” issued to a car dealership provides uninsured motorist coverage and/or medical payments coverage to the Plaintiff for damages she sustained in an auto accident while she was driving a vehicle she had borrowed from the dealership. The trial court’s granted summary judgment finding that neither type of coverage was available to Plaintiff.

FACTUAL BACKGROUND

Cynthia Bennett and Samantha Brown were involved in an auto accident on I–210 in Lake Charles, Louisiana. Ms. Bennett, the Plaintiff herein, alleges that Ms. Brown was at fault and that she suffered injuries as a result of the accident.

At the time of the accident, Ms. Bennett was driving a vehicle that she borrowed from Service Chevrolet Cadillac (Service Chevrolet) in Lafayette, Louisiana, while her vehicle was being repaired. Tower National Insurance Company (Tower) had issued a “garage policy” to Service Chevrolet, under which the vehicle driven by Ms. Bennett was a “covered auto” as defined by the policy.

Ms. Brown had an auto liability policy issued from USAA. Ms. Bennett had a personal automobile policy with Allstate that provided uninsured motorist (UM) coverage. After suit was filed, Ms. Bennett settled with both Allstate and USAA, but continued to pursue Tower for what she claimed was the remainder of her damages under the UM and medical payments coverage provisions of Tower’s “garage policy” issued to Service Chevrolet.

Tower filed a Motion for Summary Judgment arguing that Ms. Bennett was not considered an “insured” under the liability portion of the Tower policy because Ms. Bennett was insured by her own policy with Allstate, and therefore Ms. Bennett was also not an insured for purposes of UM coverage.

Ms. Bennett appealed.

UM COVERAGE

In reviewing the Tower insurance policy provisions, the Court of Appeal must apply the rules of contract interpretation set forth in the Louisiana Civil Code. The judiciary’s role in interpreting contracts is to ascertain the common intent of the parties to the contract. If the policy wording at issue is clear and unambiguously expresses the parties’ intent, the insurance contract must be enforced as written. Courts lack the authority to alter the terms of insurance contracts under the guise of contractual interpretation when the policy’s provisions are couched in unambiguous terms.

The “Garage Coverage Form Declarations” page of the Tower policy states: “This policy provides only those coverages where a charge is shown in the premium column below. Each of these coverages will apply only to those ‘autos’ shown as covered ‘autos.’ ” A charge for a premium is reflected on the declarations page in the columns for liability coverage, UM coverage, and med pay coverage. Liability and med pay coverage apply to “Any ‘auto,’ ” and UM coverage applies to “[o]nly those autos you own that because of the law in the state where they are licensed or principally garaged are required to have and cannot reject Uninsured Motorists Coverage.”

Section II of the “Garage Coverage Form,” entitled “Liability Coverage,” states as follows: “3. Who is An Insured ¶ a. The following are “insureds” for covered “autos” ¶…. ¶ (2) Anyone else while using with your permission a covered “auto” you own, hire or borrow except ¶…. ¶ (d) Your customers. However, if a customer of yours: ¶ (i) Has no other available insurance (whether primary, excess or contingent), they are an “insured” but only up to the compulsory or financial responsibility law limits where the covered “auto” is principally garaged. ¶ 5 (ii) Has other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered “auto” is principally garaged, they are an “insured” only for the amount by which the compulsory or financial responsibility law limits exceed the limit of insurance.”

The parties do not dispute that the vehicle driven by Ms. Bennett was a “covered auto” under the policy, but rather only whether Ms. Bennett is an “insured” for purposes of UM coverage. Ms. Bennett argues that, because the policy does not specifically define who is an “insured” for UM coverage, the policy is ambiguous, and summary judgment in favor of Tower was inappropriate. However, the Louisiana Supreme Court has held that “a person who is not insured for liability purposes cannot be considered an insured for UM purposes [,]” noting that “UM insurance follows the person rather than the vehicle [.]” Filipski v. Imperial Fire & Cas. Ins. Co., 09–1013, pp. 4–5 (La. 12/1/09), 25 So.3d 742, 745. Therefore, if Ms. Bennett is not an insured for liability coverage, she is not an insured for UM coverage.

ANALYSIS

It is undisputed that Ms. Bennett had other insurance available to her in the amounts required by Louisiana law. Therefore, Ms. Bennett is not an “insured” for either liability coverage, or for UM coverage, under the policy language.

In Louisiana policy language excluding customers with insurance in the statutorily required minimum amount from the definition of insured under a “garage policy” does not violate public policy or Louisiana statutes. The provision in question does not conflict with the statute because it provides liability coverage when the customer’s insurance is inadequate to satisfy the minimum requirements of the statute. Accordingly, the court found no reason to conclude that the statutory omnibus clause somehow overrides the policy’s omnibus clause in this case that meets the statutory requirements. As a result the Court of Appeal affirmed the trial court’s finding that Ms. Bennett is not entitled to UM coverage under the Tower policy.

The trial court’s dismissal of Ms. Bennett’s claims against Tower was affirmed by the Court of Appeal.

ZALMA OPINION

The Court of Appeal properly slapped down Ms. Bennett’s claims against Tower because the clear and unambiguous language of the policy provided no coverage to her since she had already received the benefits of the Louisiana UM statute and by the terms of the policy did not allow her to get money from the policy issued by the owner of the vehicle that lent the car to her.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Claims Made and Reported Policies Limited to One Claim

There Can Only be one Policy Covering Claims Made Loss

Dr. Kyrsten E. Sutton reported a potential loss to her insurer; on expiration of that policy she acquired insurance with another insurer; and when a formal claim was reported presented a claim to the new insurer. The Fourth Circuit Court of Appeal required the first insurer to defend and indemnify the doctor. She wanted to double down and tried to get the court to require the second insurer to defend and indemnify her.

In First Professionals Insurance Company v. Kyrsten E. Sutton, M.D., U.S.Ct. of Appeals 4th Cir., No. 15-239,  2016 WL 7413529 (12/22/16), the Fourth Circuit concluded that this case, like a bad penny, returned to the Fourth Circuit Court of Appeal after a prior appeal and remand.

It is a multiparty insurance coverage dispute arising under the diversity of citizenship jurisdiction involving two professional liability insurance policies issued to Appellant, Dr. Kyrsten E. Sutton. [First Prof’ls Ins. Co. v. Sutton, 607 F. App’x 276 (4th Cir. 2015).

FACTS

These cross-appeals arise out of an insurance coverage dispute related to claims for alleged birth injuries resulting from professional negligence. Dr. Kyrsten Sutton attended the birth of Richard and Amy Moore’s son, Nathan. The Moores filed suit in state court for medical malpractice against Dr. Sutton.

Dr. Sutton’s former insurers, First Professional Insurance Company (“FirstPro”) and the Medical Protective Company (“MedPro”) disagree as to which, if either, insurer owes Dr. Sutton a duty to defend the lawsuit. FirstPro filed a declaratory judgment action in federal court. After a bench trial, the district court ruled that MedPro, but not FirstPro, has a duty to defend Dr. Sutton and pay damages as may be required under the MedPro policy.

ANALYSIS

Back before the court, after having substantially prevailed in the prior appeal by securing coverage under one of the two policies at issue, Dr. Sutton presents the following issues (as rephrased) for our review from the district court’s adverse coverage determination as to the second of the two policies:

  1. Whether the district court erred, under South Carolina law, in its interpretation of an exclusion in the second insurance policy;
  2. Whether the district court erred in its failure to find that the absence of expert testimony precluded a finding in favor of First Professionals Insurance Company;
  3. Whether the district court erred, under South Carolina law, in its interpretation of a question contained in the application for insurance in respect to one of the policies at issue; and
  4. Whether the district court erred insofar as its findings and conclusions contradicted a conclusion contained in this Court’s prior opinion.

The Fourth Circuit affirmed for the reasons stated by the district court in its thorough memorandum opinion setting forth its findings of fact and conclusions of law. First Prof’ls Ins. Co. v. Sutton, No. 2:12-cv-00194-RMG (D.S.C. Oct. 7, 2015).

ZALMA OPINION

The decision is simple, short and sweet. A claims made insurer is obligated to defend or indemnify the insured who reports a claim or a potential claim during the policy period. If reported to one insurer in effect at the time of the report the coverage of the subsequent insurer is specifically excluded and should have been warranted on the application for insurance.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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What the Heck is Peremption?

Peremption and Statutes of Limitation Require Evidence

Since the beginning of the common law four centuries ago those who sat on their rights and took years to file suit were prevented from moving forward by statutes of limitation and Peremption statutes to prevent stale claims from going forward in litigation. To prevent such stale actions from going forward the defendant must produce evidence that the person seeking relief acted slothfully and failed to file suit within the period allowed by law.

Every insurance agent or broker who takes on a special duty from the an insured to provide the insurance the client needs must fulfill that special duty or be sued for insurance agent and broker malpractice.

In Ray Periso V. Ban Vu, Court of Appeal of Louisiana, 2016 WL 7407397, 2016-0665, 2016 CA 0665, (La.App. 1 Cir. 12/22/16) third party plaintiff, Ban Vu, appealed a judgment granting an exception raising the objection of peremption (the absolute extinguishment of a right that prevents the bringing of an action) filed by third party defendants, Jamie Frazier and Frazier Insurance Agency, Inc., and dismissing his claims with prejudice.

FACTS

This matter began as a tort suit filed by Ray Periso after he fell at least fifteen (15) feet to the ground on April 28, 2011, when a balcony railing collapsed at the property located in  Slidell, Louisiana. Periso alleged that he was an invitee on the property owned by Vu when the incident occurred. Periso alleged that Vu was negligent and that he suffered severe and permanent injuries to his feet, legs, head, body, and mind. Vu filed a third party demand against Southern Fidelity Insurance Company (Southern Fidelity), Frazier Insurance Agency, Inc. (Frazier Insurance), and Jamie Frazier (collectively referred to as “Frazier”). Vu alleged that Southern Fidelity issued a policy of insurance that provided insurance coverage for the rental property he owned in Slidell, Louisiana (insurance policy).

In a prior appeal, the Court of Appeal affirmed the summary judgment dismissing Southern Fidelity, as the insurance policy relied upon by Vu did not provide personal liability coverage.

In the instant case, Vu’s third party demand alleges that Frazier was negligent in not procuring a policy that provided personal liability coverage, which he alleges he requested, or in failing to notify Vu that it had not obtained the requested coverage. Frazier filed a peremptory exception raising the objection of peremption, which the trial court granted dismissing the Vu’s claims against Frazier.

LAW AND DISCUSSION

Vu’s only assignment of error is that the trial court erred in calculating when the peremptive period began and when he was put on notice or should have known that Frazier did not obtain the liability insurance as he requested. In both this appeal and the prior appeal, Vu has mentioned that he is an immigrant from Vietnam, who came to the United States in 1976 with his family. English is not Vu’s first language.

In support of its exception raising the objection of peremption, Frazier relies on a Louisiana statute that governs actions against insurance agents that requires suit within one year from the date of the alleged act, omission, or neglect, or within one year from the date that the alleged act, omission, or neglect is discovered or should have been discovered. However, even as to actions filed within one year from the date of such discovery all events such actions must be filed at the latest within three years from the date of the alleged act, omission, or neglect.

The one-year and three-year periods of limitation provided in the statute are peremptive periods. According to the statute the three-year peremptive period commences on the date of the alleged act, omission, or neglect. The one-year peremptive period commences to run when the insured receives a copy of the policy.

No evidence was introduced at the hearing in support of the exception of peremption. In the absence of evidence, an exception of peremption must be decided based upon the facts alleged in the petition with all of the allegations accepted as true. If no evidence is introduced to support or controvert the exception, the manifest error standard of review does not apply, and the appellate court’s role is to determine whether the trial court’s ruling was legally correct.

Since no evidence was introduced at the hearing on this exception, the appellate court must accept the allegations of Vu’s third party demand as true. The third party demand was filed on April 24, 2012. Vu alleged that “on or before June 2010,” he conveyed to Frazier that he needed an agent to procure all necessary insurance on his properties, including the property in Slidell, Louisiana, for personal and property protection. Vu alleged that he was never informed by Frazier that the insurance he purchased did not provide personal liability coverage, and that “‘he had specifically requested personal liability coverage on his policy” and “was assured by [Frazier] that he would obtain said insurance….”

Regarding the one-year peremptive period, there is no specific allegation in the third party demand as to Vu’s receipt of the policy at issue. Vu alleges that he did not discover the Frazier’s alleged neglect until May 23, 2011, when he was informed that his policy did not provide personal liability coverage for Periso’s accident. The third party demand was filed on April 24, 2012, within one year of the date of Vu’s alleged discovery of the negligent act. Accepting the allegations of Vu’s third party demand as true, the claims are not perempted. Because Vu’s claims against Frazier are not perempted on the face of the third party demand, the burden was on Frazier to prove the facts to support its exception of peremption.

No evidence was introduced at the hearing and, on the face of the record Frazier failed to carry that burden. The trial court legally erred in sustaining the exception of peremption and dismissing Vu’s third-party demand against Frazier.

The trial court’s judgment granting the exception of peremption and dismissing Ban Vu’s third party demand against Jamie Frazier and Frazier Insurance Agency, Inc. is reversed.

ZALMA OPINION

Mr. Vu, with an inadequate knowledge of English and insurance sought the advice and assistance of a professional insurance agent and broker. Unlike most people who fail to read their insurance policy it appears that the agent, Frazier, knew or should have know that Vu could not read the policy. In addition, Frazier failed to present evidence that the time period set by the statute of limitation (peremption) had run.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Time To Grow Up

There is No Insurance To Avoid Hard Work

Modern students have grown up in a system where no one wins and no one loses. They get trophies for participating. Competition is discouraged if not totally eliminated.

To those who graduate from law school the lack of a participation trophy disappears. First, the law student must usually take a bar examination before being allowed to practice law. This year the state of California surprised more than 50% of the law students who took the bar examination by advising them that they failed the bar exam. They were shocked. Students from the most prestigious law schools in the country failed. After spending more than $200,000 to graduate they are prevented from practicing their chosen profession. They are allowed to take it again until they pass but there is no guarantee they will pass. One law student took the California Bar 16 times and eventually went to work for his lawyer son who was an infant the first time he took the bar.

Taking the bar exam, like practicing law, establishes that there are winners an losers. In every lawsuit one party wins and one party loses. There are no guarantees, there are no safe places, there are no participation trophies, there are only winners and losers.

Life is not safe. No one earns a living without work. No one starts work as CEO. No one is promoted to the executive suite after a week on the job. No one wakes you up to be at work on time. If your Mom or Dad wrote your papers for you they cannot, once you move into the real world, no one does your work for you. You will win if you work hard, do more than is expected of you, and make sure that you always do more, without asking the boss what is needed, that what is necessary gets done. Work is what makes people useful. Playing video games, watching television, or spending your days surfing, will do nothing for the rest of the world. If you don’t work hard, if you don’t accomplish anything, if you do nothing to make life better for everyone near and dear to you, you will lose, you will never be promoted, you will never have a successful life. You will live on the work of others.

Every lawyer knows, and explains to his or her client, that winning is not certain. That, no matter how appropriate the litigation or defense is, no matter have damning is the evidence available, no matter how hard your lawyer works, no matter how skillful is the lawyer’s ability at presenting evidence to and arguing your position to a judge or jury, you can lose. That lawyer also knows that his opponent is making the same speech to his or her client. It is for that reason that lawyers meet to discuss settlement and recognize the only way both sides can win a lawsuit is if they settle with both unhappy with the solution.

The lesson is that every young person moving into the real world, outside the fantasy world of safe spaces in school, that nothing is certain. Be ready to find a job, any job, and do the very best you can whether you start in a McDonald’s as a french fry cook or as an associate in a major law firm, you must work to be better and more devoted than any other employee or person working in the same business.

Those of you who actually pass the bar exam recognize that you know nothing about practicing law and that for the rest of your life as a lawyer that you must continue to learn something new about the practice of law every day.

Insurance is a contract where a person promises to indemnify another against loss or damage from a contingent or unknown event as long as premium is paid to obtain the insurance. Regardless of the amount of money offered there can be no insurance preventing failure at work or that will guarantee success. Success comes to him or her who trains to do a job well, who works hard to perform that job, who works harder than anyone else, and who expects nothing other than to do the job expected and to do it better than anyone expected.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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More on the Dam Case

ACV Judgment Limited to ACV and Not Future Replacement Cost

Depending on the wording of an insurance policy actual cash value (ACV) is a method of determining the amount payable to an insured on a replacement cost policy even if the insured does not replace or before the insured is able to replace. In California, if the policy has no definition of ACV it is determined as the difference between the fair market value (FMV) before a loss less the FMV after a loss. When the policy defines ACV as replacement cost less physical depreciation that is ACV and FMV is not considered.

In Sierra Pacific Power Company v. Hartford Steam Boiler Inspection & Insurance Co. and Zurich American Insurance Company, United States Court of Appeals, Ninth Circuit, 2016 WL 7422949 (12/23/2016) a long time litigation and appellate decisions seems to have ended with a dispute over the right to prejudgment interest.

FACTS

After the Farad Dam was destroyed in 1997, its operator, Sierra Pacific Power Company (“Sierra”), brought this action against the Hartford Steam Boiler Inspection & Insurance Company and Zurich American Insurance Company (the “insurers”), seeking a declaratory judgment about insurance coverage. In a prior appeal, we affirmed the district court’s holding that Sierra could recover the actual costs of reconstruction if it timely opted to rebuild the Dam. [Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 490 F. App’x 871, 879 (9th Cir. 2012) and The Dam Case]. The Ninth Circuit remanded to the district court to calculate the amount due to Sierra under the insurance policies if it chose not to rebuild — Actual Cash Value (“ACV”) — by deducting “the appropriate depreciation” from the estimated cost to rebuild the Dam of $19,800,000.

On remand, the court found the appropriate depreciation to be 50% on the Dam and 5% on a wing wall, and determined an ACV of $12,216,600. The court awarded prejudgment interest to Sierra both on the actual costs of reconstruction and the ACV.

Sierra and the insurers each timely appealed.

ANALYSIS

The district court’s depreciation findings are factual determinations, see Jefferson Ins. Co. v. Superior Court, 475 P.2d 880, 883 (Cal. 1970), and therefore is reviewed for clear error. The evidence supported the district court’s findings. Patrick Jeremy, an experienced insurance adjuster with personal knowledge of the Dam, testified without objection to the depreciation rates based on his knowledge of “the last time [the Dam] was replaced and how long they had been lasting in the past.” The Ninth Circuit’s review of the record did not find a “definite and firm conviction that a mistake has been committed.”

The Ninth Circuit rejected the insurers’ argument that Sierra, should it choose to rebuild the Dam, is limited to a payment of $19,800,000. That figure is the present estimated cost to rebuild, not the actual cost, which has not yet been incurred. The district court held before the first appeal that “[t]he policies of insurance provide Sierra with full replacement cost coverage,” subject to policy limits.

The insurers argue that Sierra waived any claim to prejudgment interest by not asserting that claim after the district court entered its original judgment. That argument is correct with respect to the court’s award after remand of prejudgment interest on the actual costs of reconstruction. Because the Ninth Circuit affirmed the district court’s judgment as to those costs and Sierra made no claim for prejudgment interest, Sierra may not now seek to expand the prior ruling.

However, the district court’s award of prejudgment interest on the ACV was affirmed. At oral argument, counsel for the insurers stated that their only contention was that Sierra had waived any right to prejudgment interest on the ACV by not seeking it before the remand. A party may seek an award of prejudgment interest for the first time after the entry of judgment and because the district court’s initial ACV award was less than the applicable deductibles, Sierra plainly had no occasion to seek prejudgment interest before the entry of a new judgment after our remand. Similarly, the award of prejudgment interest on the ACV does not exceed the scope of the remand.

The district court’s judgment as to the ACV and its award of prejudgment interest on that amount was affirmed and the award of prejudgment interest on future reconstruction costs.

ZALMA OPINION

Some lawsuits seem to go on and on over many years. This Dam case is no exception to the rule. An insured can waive an award of prejudgment interest but it can’t waive prejudgment interest it did not know about. The earlier appeal resolved the issue with regard to ACV but not FMV or Replacement Cost. Hopefully, this case that started with a 1997 claim is finally resolved.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Assault or Battery Exclusion Applies

RTFC Before A Claim Arises

It continues to be amazing and stupid to me the failure of people who are insured, their agents, brokers and lawyers, to read an insurance policy before making a claim or filing suit on an insurance policy. Unlike the plaintiffs, the Supreme Judicial Court of Main read the operative policy in Barnie’s Bar & Grill, Inc. v. United States Liability Insurance Company, Supreme Judicial Court of Maine, — A.3d —-,  2016 WL 7368681 (December 20, 2016).

BACKGROUND

Barnie’s Bar & Grill, Inc., appealed from the entry of a summary judgment in the Superior Court in favor of United States Liability Insurance Company (“USLIC”) on a complaint by Barnie’s Bar seeking declaratory relief and damages for a breach of contract. The Superior Court concluded that USLIC had no duty to defend Barnie’s Bar in an underlying negligence action because policy exclusions for assault and battery applied.

On July 14, 2014, Maurice Beaulieu filed a civil lawsuit in the Superior Court seeking compensatory damages, interest, and costs from Barnie’s Bar in Lewiston for its alleged negligence. In his complaint, Beaulieu alleged that he “was violently attacked by a group of [other] patrons” while he “was a customer, licensee and invitee” at the bar. He asserted that Barnie’s Bar was liable for the attack for two reasons. Beaulieu contended that, although Barnie’s Bar “had general and specific notice of the risk that an assault was imminent,” Barnie’s Bar breached its duty of care to prevent or interfere with the assault by “failing to summon law enforcement and otherwise failing to interfere with the assault and battery.” Beaulieu also claimed that Barnie’s Bar breached its duty of care “not to create a dangerous circumstance on its premises” by “affirmatively ejecting” him and his assailants into the parking lot at the same time.

After Barnie’s Bar requested that USLIC defend it in the Beaulieu litigation, the insurer declined to defend the bar relying on the policy’s exclusions for assault and battery.

INSURANCE

At all relevant times, Barnie’s Bar held an insurance policy from USLIC that included both commercial general liability and liquor liability coverage. Both coverage portions, however, contained comprehensive exclusions for assault and battery. The commercial general liability coverage, in relevant part, excluded “Any claim, demand or ‘suit’ based upon any actual or alleged ‘assault’ or ‘battery’, or out of any act or omission in connection with the prevention or suppression of any ‘assault’ or ‘battery’ … whether caused by or at the instigation or direction of an insured, its ‘employees’, agents, officers or directors, patrons or any other person. Further, no coverage is provided for any claim, demand or ‘suit’ in which the underlying operative facts constitute ‘assault’ or ‘battery’.” he assault and battery exclusion in the liquor liability portion of the policy was similarly comprehensive.

DISCUSSION

To determine whether an insurer is contractually obligated to defend an insured in an underlying lawsuit, the Maine courts have long employed the aptly named “comparison test,” in which the court compares the allegations in the underlying complaint with the terms of the applicable insurance policy to determine whether the complaint falls within the policy’s coverage. Although the duty to defend is broad, an insurer may properly refuse to defend a policyholder if the allegations of the complaint fall entirely within a policy exclusion.

In applying the comparison test, the Supreme Court examined the underlying complaint for any potential factual or legal basis that may obligate the insurer to defend the insured, even the mere intent to state a claim within the insurance coverage. We confine this examination to the language of the underlying complaint. The duty to defend arises exclusively from the allegations in the complaint and the language of the policy. Except in rare circumstances, the court will not consider facts extrinsic to the underlying complaint nor will we read allegations into the complaint in determining whether the insurer has a duty to defend.

The USLIC Policy and the Beaulieu Complaint

Applying the comparison test to the instant case, the Supreme Court was faced with policy exclusions that are so broadly written and an underlying complaint that is so narrowly drafted that there are simply no intersections between the policy and the complaint in which to find coverage. Barnie’s Bar’s policy with USLIC contained comprehensive exclusions for claims based upon any actual or alleged “assault” or “battery”, or any act or omission in connection with the prevention or suppression of any “assault” or “battery”.

The only allegations of fact and law found in the Beaulieu complaint relate to the assault and battery on the bar’s premises. Even liberally construing the Beaulieu complaint in favor of Barnie’s Bar, there is no allegation – or even the hint of an intent to state an allegation — that escapes the USLIC policy’s exclusions for assault and battery.

The comparison test is limited to the language of the underlying complaint and the insurance policy. Just as the Supreme Court cannot read extrinsic facts or allegations into an underlying complaint in the comparison test, it cannot selectively read facts or allegations out of that complaint in order to conclude that the insurer has a duty to defend.

Because the allegations of the Beaulieu complaint fall squarely within the policy’s exclusions for assault and battery, the Supreme Court concluded that USLIC was not obligated to defend Barnie’s Bar in that litigation.

ZALMA OPINION

If Barnie’s Bar or its lawyers had read the policy it would have been clear that the assault and battery alleged by Beaulieu was clearly and unambiguously excluded and that USLIC had no obligation to defend or indemnify the bar. The plaintiff wasted the time of the the courts of Maine by bringing a frivolous action.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Qui Tam Suit Can’t Survive on Mere Allegations

Qui Tam Relator Must Allege & Prove Fraud to Government Program

Qui Tam suits do what the government may not – the ferret out fraud against the government or government programs. They exist because the person making the claim of fraud – called the Relator – gets to share in the judgment. This fact, and the multiple millions some Relators collect, tempt others to begin a Qui Tam action in hopes of getting rich even if the evidence does not exist.

In Hagerty ex rel. United States v. Cyberonics, Inc., United States Court of Appeals, First Circuit, — F.3d —-, 2016 WL 7321224 (12/16/16) the First Circuit deal with a Qui Tam case brought by Relator Andrew Hagerty (“Hagerty”) against Cyberonics, Inc. (“Cyberonics”) alleging, among other things, that Cyberonics violated the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., and related state statutes. Specifically, Hagerty alleged that Cyberonics promoted medically unnecessary replacements of batteries in nerve stimulator devices used to treat epilepsy patients, which in turn resulted in patients and medical providers filing false claims for reimbursement from government health care programs.

FACTS & BACKGROUND

The Vagus Nerve Stimulator (VNS) is a medical device that is implanted in patients with refractory epilepsy, a severe form of the disease in which a patient’s seizures seriously interfere with their quality of life and do not respond to other medications or treatment. The VNS works by delivering short electrical pulses to the vagus nerve through a wire. Each VNS system contains a battery, and the entire VNS system must be surgically replaced when the battery nears the end of its life.

Patients with refractory epilepsy often qualify for coverage under government healthcare programs like Medicare and Medicaid. Some treatments for refractory epilepsy, including placement of the VNS, are reimbursed by those programs.

On February 4, 2013, Hagerty filed a qui tam complaint under seal against Cyberonics, alleging that it engaged in a fraudulent scheme to encourage doctors and patients to prematurely and unnecessarily replace batteries in VNS systems. Hagerty, having gained knowledge of the scheme firsthand as a former sales representative of Cyberonics, further alleged that this scheme caused significant monetary damages to government healthcare programs by inducing patients and medical providers to file false claims for reimbursement. On October 29, 2013, the government filed a notice declining to intervene in the case, and on December 5, 2013 the complaint was unsealed and served on Cyberonics.

The First Amended Complaint further alleged that approximately 50% of Cyberonics’ revenue came from Medicare and Medicaid, with additional revenues coming from TRICARE, the Department of Defense, the Department of Veterans Affairs, and the Federal Employee Health Benefits Program.

The district court granted Cybertronics Motion for summary judgment finding that Hagerty had not pled his allegations with the requisite particularity required by federal rules.

ANALYSIS

The FCA penalizes those who present, or cause to be presented, “false or fraudulent claim[s] for payment or approval” to the federal government. Thus, fraud under the FCA has two components: the defendant must submit or cause the submission of a claim for payment to the government, and the claim for payment must itself be false or fraudulent.  Because FCA liability attaches only to false claims, merely alleging facts related to a defendant’s alleged misconduct is not enough. Rather, a complaint based on the FCA must sufficiently establish that false claims were submitted for government payment as a result of the defendant’s alleged misconduct.

A relator can meet the standard by providing factual or statistical evidence to strengthen the inference of fraud beyond possibility without necessarily providing details as to each false claim.  Such evidence generally includes, inter alia, the  specific medical providers who allegedly submitted false claims, the rough time periods, locations, and amounts of the claims, and the specific government programs to which the claims were made.

As the district court noted, the allegations concerning Cyberonics’ scheme are unquestionably adequate to survive a motion to dismiss. Nonetheless, the First Amended Complaint’s factual and statistical evidence struggles to connect these allegations with the submission of any false claims to government programs.

The allegations in Hagerty’s First Amended Complaint are neither specific nor systematic. Despite referencing a long list of healthcare providers who performed and billed for VNS replacement surgeries, the complaint does not allege whether these providers submitted reimbursement claims to the government for unreasonable and medically unnecessary procedures. Likewise, the complaint does not allege how many false claims these providers purportedly submitted or how Cyberonics’ actions caused their submission.

The complaint’s most specific allegation comes where Hagerty states that three healthcare providers, Southbury Training School, Monson Development Center, and Wrentham Development Center, had patients who were “seriously disabled” and eligible for various government healthcare programs, and that the VNS replacement surgeries conducted on those patients necessarily resulted in the submission of at least some false reimbursement claims. Hagerty does not allege that any particular patient was actually covered by a government program, provides no basis for his estimate of 10,000 unnecessary procedures, and does not link Cyberonics’ revenues to these procedures. Viewed individually or as a whole, Hagerty’s “evidence and arguments proceed more by insinuation than any factual or statistical evidence that would strengthen the inference of fraud beyond possibility.”

Plaintiffs may not, having the needed information, deliberately wait in the wings with another amendment to a complaint should the court hold the first amended complaint was insufficient. Such an approach would impose unnecessary costs and inefficiencies on both the courts and party opponents. Thus, the First Circuit concluded both that Hagerty did not meet his burden of providing a valid reason for his delay and that the district court did not abuse its discretion in denying his motion for leave to amend.

ZALMA OPINION

Fraud against governmental entities is a terrible and expensive thing. The government needs the help of the public to fight fraud and the qui tam laws have had a serious effect to reduce fraud against the government. However, to file a successful qui tam action there must be facts to establish that a fraud has occurred. Hagerty failed to do so and his action was properly dismissed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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A Claim Denial Must State All Bases for Denial

Estoppel Limits Defenses But Insured Must Still Prove Loss is Within Coverage

The covenant of good faith and fair dealing requires that the insured honestly and fully report to the insurer the risk it is taking. A concealment or misrepresentation of a material fact is usually – depending on state law – grounds for rescission. If grounds for rescission exist then other grounds also exist related to the misrepresentation or concealment. For that reason, whenever I advised an insurer about its right to rescission to also deny the claim for every possible ground including breaches of material conditions of the policy. Failure to do so can be expensive to the insurer.

In Durham v. Auto Club Group Ins. Co., Court of Appeals of Michigan, Not Reported in N.W.2d, 2016 WL 7233319 (12/13/16) a claim under a homeowners insurance policy for a fire loss the trial court granted the defendant’s summary disposition motion. Defendant contended that the loss is not covered because the property was not at the time of the loss being used by plaintiff as their residence. The trial court ruled that there is no material factual dispute that the insureds’ were not living in the residence. They had relocated, obtained new jobs and new living quarters.

DISCUSSION

Waiver Or Estoppel Defenses

The insured has the burden to establish that his claim falls within the terms of the policy. Defendant may contest coverage under the exception to the rule of estoppel. The doctrine of estoppel at issue in this case has long-standing, common-law origins. Where a party gives a reason for his conduct and decision touching anything involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is estopped from doing it by a settled principle of law.

The Michigan Court of Appeal has many times held, and it must be accepted as the settled law of the state of Michigan, that, when a loss under an insurance policy has occurred and payment refused for reasons stated good faith requires that the company shall fully apprise the insured of all of the defenses it intends to rely upon, and its failure to do so is, in legal effect, a waiver, and estops it from maintaining any defenses to an action on the policy other than those of which it has thus given notice.

On its face, defendant’s October 22, 2013, letter to plaintiffs’ purporting to rescind the insurance policy as of the date of its last renewal on November 9, 2012, on the basis of fraud and concealment, does not refer to the residency defense based on the policy definition of “residence premises” that defendant later asserts in its motion for summary disposition. Defendant argues that its letter included the residency defense because it “clearly identified” that defendant’s decision to rescind the policy and to deny coverage for the claim was based on the fact that plaintiffs did not occupy the insured property at the time of the loss. The October 22, 2013 rescission letter, in fact, alleges misrepresentation at the time the policy was “accepted” or renewed on November 9, 2012, not the condition of the residence at the time of the loss.

The Court of Appeal incorrectly considered that part of the policy that defendant relied on to rescind the policy was General Policy Condition No. 4, Fraud and Concealment. To rely on the contract condition is a claim of breach of contract not a request for the equitable remedy of rescission. Regardless, it set its ruling on that mistake of law since rescission makes the policy non-existent and puts the parties in the position they were in before a policy was issued.

The trial court ruled there was no evidence to support that plaintiffs committed fraud or concealed material facts thereby making Condition No. 4 unavailable to the insurer as a ground for voidance since it has no effect on rescission.

While the rescission letter concerns whether the property was “owner-occupied,” the only time frame stated in the letter referenced when the policy was accepted or renewed on November 9, 2012, not the date of fire.

Because the circumstances establish a prima facie case for the application of the doctrine of estoppel of policy defenses, the burden of persuasion that the doctrine should not apply must rest with defendant.

In the present case, defendant denied the claim after a full investigation, so it had knowledge of all necessary facts to assert its residency defense when it denied plaintiffs’ claim. Therefore, it can be said that defendant’s failure to assert the residency defense was a knowing waiver. Further, the blanket reservation of rights provided absolutely no notice to plaintiffs of the later asserted defense.

Finally, defendant asserts that even if the denial letter does not include the policy’s residency requirement, plaintiffs cannot expand the policy’s coverage through the doctrines of waiver or estoppel. Depending on the coverage provided by the policy at issue, there may be merit to this argument. The Michigan Supreme Court has held that waiver and estoppel could not be used to create a new contract.

The exception to waiver or estoppel of defenses saves defendant’s residency defense only if the policy does not provide coverage for a fire loss unless, at the time of loss, the insureds occupy the insured dwelling. Reading the insurance policy in this case as a whole, we conclude that it clearly extends coverage for the insured premises stated in the declarations sheet while the insureds use it “principally as a private residence.”

In summary, the court found the case law that defendant relies on is distinguishable on the basis of differing policy language and differing facts. Because the policy language in this case covers the residence premises stated in the declarations, “used as a private residence by you,” and grants permission to the insureds to leave the premises “unoccupied without limit of time,” a genuine question of material fact remains for a jury to decide whether plaintiffs continued to use the Benton Township home principally as a private residence at the time of the fire loss at issue.

Therefore, the trial court erred by granting summary disposition to defendant. The case was reversed and remanded for trial at which defendant’s defenses are limited as discussed in the opinion and the trial court erred by granting summary disposition to defendant because a genuine question of material fact remains and because the doctrine of estoppel or waiver of defenses applies to this case.

Consequently, the Court of Appeal reversed and remanded for trial on the issue of whether, despite not actually occupying the insured dwelling at the time of the fire, plaintiffs still, as a matter of fact, used the insured dwelling principally as a private residence. The tort relied upon the estoppel doctrine but also by requiring plaintiffs to sustain their burden of proving coverage.

ZALMA OPINION

Rescission is an equitable remedy. If an insured lies to the insurer when it acquires the policy, as did the plaintiffs when they failed to advise the insurer they no longer occupied the dwelling, sufficient in many states to allow rescission although failure to prove fraud is insufficient to allow an declare the policy void for the breach of the contract term. The insurer should have stated the grounds for rescission and, in the same letter, advise the insured of the policy condition requiring use as a residence premises in the letter. They will probably win on remand since they can prove the plaintiffs did not use the dwelling as a residence premises.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Posted in Zalma on Insurance | Comments Off on A Claim Denial Must State All Bases for Denial

Insurance Coverage Lawyer Work Product Protected


Coverage Memoranda Protected by Attorney Client & Work Product

The reason courts apply the attorney client privilege and the work product protection to keep one party from reading the plans and recommendations of the lawyer for the opponent. The protection is available to make litigation fair and keep strategy and plans of one party from the other.

Insurance coverage lawyers write opinions to help the client – whether insured or insurer – to make decisions regarding how to apply available insurance coverage to a dispute and are, usually, not involved in actions claiming tort damages. The coverage lawyer provides advice about coverage, the amounts available and the interpretation of the policy wording. The work is prepared only for the client.

In Baxter International, Inc. v. AXA Versicherung, United States District Court, N.D. Illinois 2016 WL 7231929 (12/13/2016) Defendant AXA Versicherung (“AXA”) filed a motion to compel Plaintiff Baxter International, Inc. (“Baxter”) to produce certain documents. The only issue now before the Court is whether Baxter must produce the redacted portions of several memoranda written by one of its insurance coverage attorneys and a few emails to which the memoranda were attached when they were sent to Baxter and attorneys representing Baxter in underlying tort litigation.

BACKGROUND

This lawsuit stems from the settlement of a multi-district litigation (“MDL”) involving product liability lawsuits brought against Baxter and other drug companies seeking damages for allegedly contaminated blood products. Throughout the MDL, which the parties refer to as “the Second Generation Litigation,” Dechert LLP (“Dechert”) served as Baxter’s defense counsel. At the same time, Baxter employed Shapiro Rodarte & Forman LLP, (“the Shapiro firm”) as its insurance coverage counsel. In this role, one of the Shapiro firm’s attorneys, Carl Shapiro, wrote a memorandum titled “Settlement Options re ‘Second Generation’ Claims.” During the drafting process, Mr. Shapiro produced several versions of the memorandum (collectively, “the Shapiro Memos” or “the Memos”) that he emailed to Baxter and Dechert.

During discovery in this case, AXA issued requests for production that encompass both the Shapiro Memos and what Baxter refers to as “the cover emails” to which the Memos were attached. Baxter initially withheld these documents in their entirety. Later, Baxter produced all of them but with redactions. According to Baxter, it only redacted portions of these documents that constitute its insurance coverage counsel’s privileged coverage analysis.

DISCUSSION

Baxter argues that the attorney-client privilege and the work product doctrine protect the redacted portions of the Shapiro Memos and the cover emails.

The Illinois Attorney-Client Privilege

The parties’ dispute with respect to the Illinois attorney-client privilege is narrow. Baxter asserted that it redacted from the Shapiro Memos and emails only material that is protected by the Illinois attorney-client privilege. AXA responds by arguing that the attorney-client privilege does not cover Baxter’s communications with Dechert, its defense counsel in the underlying Second Generation Litigation, under settled Illinois law, and the fact that Baxter’s insurance coverage counsel was involved in those communications for the purpose of providing insurance coverage analysis related to the underlying claims in the lawsuit Dechert was defending does not change the analysis.

In Waste Management, Incorporated v. International Surplus Lines Insurance Company, 579 N.E.2d 322 (Ill. 1991), the Illinois Supreme Court held that, in this situation, the attorney-client privilege had no application to the withheld portions of the underlying litigation file. The Illinois Supreme Court first ruled that the insureds’ contractual duty to cooperate with their insurers, contained in their insurance policies, rendered any expectation of privilege unreasonable with respect to the communications and that the insureds and the insurers had a common interest in defeating or settling the underlying litigation and the communications were of a kind reasonably calculated to protect or to further those common interests.

Right of Counsel to Communicate with Clients About All Issues

As a practical matter, attorneys may communicate with their clients about both issues related to the underlying litigation and issues related to insurance coverage. That is so even when parties hire separate coverage counsel. The Waste Management court did not address communications made for the purpose of both the underlying claims and the insurance issues. Courts have continued to assess the nature of the communication at issue. Under this approach, if the communication contains only protected coverage analysis, it may be withheld; if it contains in part protected coverage analysis, that information may be redacted.

The Court reviewed, in camera, the Shapiro Memos and the cover emails. The Memos discuss extensively the underlying litigation, i.e., the Second Generation Litigation. Much of the content of the Memos have nothing to do with coverage. Baxter redacted almost entirely two separate sections both titled “Insurance” and three lines in the “Germany and Italy” section. The final set of redactions is spread throughout the last third of the Memos, which discusses alternative settlement proposals for the Second Generation Litigation. As this description indicates, Baxter has not redacted text on a sweeping, unprincipled basis. The targeted nature of its redactions supported Baxter’s contention that it was trying to distinguish between coverage analysis and other matters.

The Court’s review of the redacted text indicated that Baxter succeeded in that effort. The redacted portions present Mr. Shapiro’s analysis of what coverage Baxter may or may not have from its insurers for the Second Generation Litigation and how Baxter may or may not be able to ensure in the future that its insurers meet their coverage obligations. The mere fact that an attorney, who is serving to some extent in the defense of the underlying action, is involved in the communication or discussion of insurance coverage analysis does not necessarily have a determinative effect.

The Court found, as a result, that Waste Management does not mandate the production of the Shapiro Memos and the cover emails.

The Federal Work Product Doctrine

The parties’ dispute over the federal work product doctrine also is confined to one issue. Baxter claimed that the work product doctrine protects the sought-after portions of the Shapiro Memos and the cover emails. AXA responded, arguing that the Memos and the emails are not federally-protected work product because they were not prepared in anticipation of litigation.

The record before the Court indicates that, as of 2005, when the Shapiro Memos were written and distributed, Baxter had an articulable claim against AXA that reasonably was likely to lead to litigation. That claim, arising from its insurers’ continued refusal to acknowledge or defend the tort claims in the Second Generation Litigation, was the primary reason for the coverage analysis in the Shapiro Memos and the cover emails.

The Court found, therefore, that the work product doctrine protects the Shapiro Memos and the cover emails because they were prepared at a time when Baxter reasonably anticipated the possibility of litigation with AXA concerning its coverage obligation for the claims raised in the Second Generation Litigation.

Therefore, AXA’s Motion to Compel Baxter to Produce All Communications with Dechert was denied.

ZALMA OPINION

When an insured has a dispute over coverage with his, hers, or its insurer or an insurer has a dispute over the applicability of coverage to a particular factual situation, it is reasonable to retain an insurance coverage lawyer to opine on the applicability of coverage and how to deal with the dispute to obtain the most coverage for defense or indemnity available or to determine there is no coverage available. The opinions from the coverage lawyer are written to allow the client to make a proper decision. It is private and not available to the opponents to use against the coverage lawyer’s client.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Mysterious Disappearance Exclusion Effective

Insured Must Produce Physical Evidence of Loss

Insurance policies invariably contain a condition that requires the insured to produce a sworn statement in proof of loss that establishes a first party loss due to a peril insured against and not specifically excluded. People insured, who have not read, let alone understood the policy, believe that all they have to do is make a claim and the insurer must pay.

In First Class Tire Shredders, Inc. v. Employers…, Slip Copy, United States District Court, E.D. Michigan, Southern Division 2016 WL 7242143  (12/15/2016) the USDC in Michigan disabused an insured of that thought. In an insurance coverage dispute both parties moved for summary judgment. The plaintiff argues that the property insurance policy (insuring “contractors’ equipment” against theft, among other things) issued to it by the defendant covered a one-off, custom-built car crusher that disappeared from a storage location, and the defendant’s refusal to pay the loss breaches the insurance contract. The defendant argues that the policy’s “missing property” exclusion absolves it from having to pay for the loss.

FACTS

First Class Tire Shredders, Inc. operates a facility in Flint, Michigan. The plaintiff’s main business is collecting and shredding used tires. The owner of First Class Tire Shredders, Harry Powell, started the company more than 20 years ago. In 2008, Powell constructed a mobile car crusher of his own design that was built onto a 50-foot semi-truck trailer. The crusher took about a year to build, and it originally was built by Powell for use by First Class Homes. When it was finished, the crusher measured approximately 50 feet long and stood 17 feet tall.

Defendant Employers Mutual Casualty Company (EMC) issued a business insurance policy to First Class Tire Shredders, effective from July 3, 2011 through July 3, 2012, which insured against, among other things, “direct physical loss” of “contractors’ equipment,” including certain items listed on a schedule attached to the policy. The crusher was listed on a schedule of covered items as “Mobile Car Crusher,” with a scheduled value of $100,000. The policy states that it covers “scheduled equipment” that is subject to a “direct physical loss caused by a covered peril,” including “contractors’ equipment,” unless the “property is excluded or subject to limitations.” The policy also includes a “missing property” exclusion, which states: “’We’ do not pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property.”

At some point, the crusher was moved from the First Class commercial property to a storage yard at Junk Iron & Metal, which is a salvage business operated by Powell’s friend, Donald Sampson. The crusher was stored there for several years.

On June 1, 2012, Powell sent one of his employees, Rex Moore, to retrieve the crusher from the Junk Iron facility. However, when Moore arrived, he could not find the crusher in the area where it had been kept (apparently in a space beside Sampson’s residence on the lot). Moore noted that a new gravel parking lot had been constructed in the area where the crusher was stored. He searched the salvage yard and two adjacent storage facilities also operated by Sampson, but could not find the crusher anywhere.

On June 1, 2012, Powell submitted a claim to EMC for the missing crusher, claiming a loss for the full scheduled value of $100,000. EMC responded and asked for certain documents evidencing the ownership interest in the crusher, such as a proof of title or registration for the trailer, any tax returns disclosing ownership of the crusher as a business asset, and any other invoices or documents related to its acquisition or ownership. EMC also asked Powell to submit a signed statement in proof of loss in support of his claim. Powell then submitted a number of documents, which EMC determined were not satisfactory to show that the First Class Tire Shredders, Inc. entity owned or had spent any funds to build or acquire the crusher, or that the insurable value of the crusher, if any, was as much as Powell claimed. EMC also asserts that Powell never has produced any “physical evidence” to show what happened to the crusher, and that the loss therefore is excluded under the “missing property” provision.

ANALYSIS

The plaintiff’s claim is for breach of contract under Michigan law.  The allocation of the burdens of proof in a case involving the breach of an insurance contract is well settled under Michigan law. The insured bears the burden of establishing coverage under the policy and the insurer’s breach.

The parties do not dispute that a valid contract of insurance was in force when the plaintiff submitted its claim, that the policy at least nominally covered the crusher, and that — if the exclusion and misrepresentation defenses did not apply — the loss of the crusher due to theft would be a covered peril under the policy.

The term “physical evidence” is not defined in the policy, and the cases do not elaborate on the term. But the common dictionary understanding is that it is the species of evidence that “itself plays a direct part in the incident in question,” as in “real evidence.” Where the language of the writing is not ambiguous the construction is a question of law for the court on a consideration of the entire instrument.

Because there is no physical evidence showing what happened to the car crusher, the unambiguous insurance policy language allows defendant EMC to refuse to pay for its “unexplained or mysterious disappearance.” Because the “missing property” exclusion is triggered by the absence in the record of physical evidence of what happened to the car crusher, the defendant is entitled to summary judgment on the plaintiff’s breach of contract claim.

The undisputed facts in the record establish that the defendant has carried its burden of showing that the “missing property” exclusion applies to absolve the defendant from paying for the loss claimed by the plaintiff in its complaint.

ZALMA OPINION

For a machine 50 feet long and 17 feet tall mounted on a 50 foot long trainer to be removed from a storage lot would require a powerful tractor and, if stolen, would require a great deal of time and the ability to remove it from a locked and fenced storage facility. No such evidence was presented. The machine was there for years and then was not. There was no physical evidence that it was stolen or otherwise damaged or destroyed. The insured failed to prove its loss.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Zalma’s Insurance Fraud Letter – December 15, 2016

Merry Christmas

and a

Happy Hannukah

 

ZIFL publishes this story at Christmas time every year.

     I hope you like it again


Christmas & Insurance Fraud

Every Insurance Adjuster Must Be Trained About Fraud

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

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


 The Current Issue Contains the Following

  • Christmas and Insurance Fraud
  • Whenever There is a Conviction of a Fraud Perpetrator Insurer Must Demand Restitution
  • Illumeo Continuing Education
  • Is This Insurance Fraud?
  • New from Barry Zalma
    • “Insurance Law”
  • Supreme Court Upholds Rigsby Sisters Whistleblower Suit
  • Barry Zalma Speaks at Your Request
  • Zenefits In More Trouble
  • E-Books from Barry Zalma
    • Insurance Fraud and Weapons to Defeat Fraud 
    • “Getting the Whole Truth”
    • “Random Thoughts on Insurance – Vol. IV”
  • NICB Uncovers Warns of Electronics Used in Auto Thefts
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to its Clients
  • Say It Isn’t So – Judge Guilty of Insurance Fraud
  • Books from the American Bar Association
    • The Insurance Fraud Deskbook
    • Diminution in Value Damages
  • Efforts to Defeat Art Fraud Increased.
  • Zalma’s Insurance Fraud Letter
  • The Legend.
  • Criminal Acts
  • Legal Disclaimer

Zalma’s Insurance Fraud Letter


ZALMA INSURANCE CONSULTANTS


THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.
Check in every day for a case summary at http://zalma.com/blog


I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

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

Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.


Regards,

Barry Zalma
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