Declaratory Relief Action Without Insured Fails

Federal Court Refuses to Confuse Issue of Insurance Limits

Insurance coverage disputes can be resolved by the seeking a court’s order in a declaratory relief action. Both state and federal courts have procedures available for resolving such disputes. However, to provide a useful declaration it is necessary that both parties to the insurance contract are involved in the suit.

In McCormack v. Scottsdale Insurance Company, Slip Copy, 2015 WL 5304112 (E.D.Mich., 9/10/15) the District Court for the Eastern District of Michigan was faced with an unusual dispute that called for an unusual response.

FACTS

The plaintiff, Jonathan McCormack alleged in a lawsuit filed in the Lapeer County, Michigan circuit court that he was injured by employees of Fat Boys Bar & Grill. The Bar apparently had in effect a Comprehensive General Liability Insurance Policy (CGL policy) from Scottsdale Insurance Company. McCormack filed a second action in Lapeer County seeking a declaratory judgment against Scottsdale that the larger of two possible coverage limits ($300,000 versus $25,000) applies to his underlying tort case. However, for reasons known only to the plaintiff, McCormick did not join the Bar as a defendant in the declaratory judgment action.

The Sixth Circuit has “repeatedly held in insurance coverage diversity cases that declaratory judgment actions seeking an advance opinion on indemnity issues are seldom helpful in resolving an ongoing action in another court. It is not one of the purposes of the declaratory judgments act to enable a prospective negligence action defendant to obtain a declaration of non-liability. However, that is not to say that there is a per se rule against exercising jurisdiction in actions involving insurance coverage questions.

Settling the Controversy

In Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 556 (6th Cir.2008), the Sixth Circuit noted that a district court may consider exercising jurisdiction under the Declaratory Judgment Act when it can conclusively resolve a coverage dispute. This factor may favor exercising jurisdiction, for example, when the plaintiff insurer is not a party to the state litigation or there is a legal, and not a factual, dispute in federal court. In an expression of the obvious, the court stated that “It is difficult to see, however, how a coverage dispute can be resolved when the insured is not a party to the case. The question in this action, after all, is how an insurance contract should be interpreted. When one of the contracting parties is absent, the dispute is one-sided.”

Clarifying the Legal Relations

The relevant inquiry is whether the federal judgment will resolve, once and finally, the question of the insurance indemnity obligation of the insurer.  Although a declaratory judgment would clarify the legal relationship between the insurer and the insured pursuant to the insurance contracts, the judgment would not clarify the legal relationship between the parties in the underlying state action.

Once again, there can be no sensible resolution of the legal relationships between an insured and an insurer when both parties are not properly before the Court. It is conceivable that if the insured had notice of this action, it might be bound by a judgment unfavorable to it. For instance, under Michigan’s rather unusual rules of collateral estoppel, an injured person who has knowledge of a declaratory judgment action against his tortfeasor but does not intervene nonetheless is bound by the judgment. Under those rules, this Court’s determination of coverage limits in this case might affect the Bar’s rights under the policy, even in its absence.

The court concluded that it is enough to say that “proceeding with the case in its present posture would complicate, not clarify, the legal relationships of the parties.” Typically, resolving a coverage question in the absence of persons who might be bound by the judgment is disfavored.

Michigan allows insurers to bring declaratory judgment actions in state court. In fact, in this case, the plaintiff brought the declaratory action in state court. This case is only before the District Court because the defendant removed it. The absence of the insured as a party to this case discourages proceeding further with adjudication.

Therefore, the better course in this case is to remand the matter to the state court where the underlying tort case is pending. The same court can resolve insurance coverage questions with all necessary parties present and a complete record can be made.

ZALMA OPINION

Playing games with a court over insurance coverage is contumacious. It would have been simple for the plaintiff, in state court, to include all the necessary parties in the state court action which would have destroyed complete diversity and avoided this situation entirely.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

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Posted in Zalma on Insurance | Comments Off on Declaratory Relief Action Without Insured Fails

Insurance Claims Expert’s Testimony Limited

Claims Expert Can’t Testify About Law

Some insurance claims expert witnesses attempt to testify about more than the custom and practice of the insurance industry and the standard of care owed by an insurer to its insured. When the expert jumps into testimony about the law and how the jury must rule on the law, the expert invades the province of the court and the trier of fact and must be prevented from so doing. For that reason it is important to file motions in limine to prevent an expert from exceeding the purpose for which an expert is called.

In Bertha N. Romero, Plaintiff, v. Allstate Fire & Casualty Insurance Company, Defendant., Slip Copy, 2015 WL 5321441 (D.Colo., 9/14/2015) the U.S. District Court for the District of Colorado, was asked to rule on a motion In Limine to Preclude Testimony from Plaintiff’s Expert Witness, Lorraine Berns (“Motion to Preclude Berns”) by Defendant Allstate Fire & Casualty Insurance Company (“Allstate”).

BACKGROUND

On November 11, 2011, Ms. Romero was involved in a two vehicle collision at or near the intersection of East Colfax Avenue and North Sable Boulevard in Aurora, Colorado. The other vehicle was operated by Frieda H. Dishroon, who had an insurance policy with liability limits of $50,000. Ms. Romero settled with Ms. Dishroon’s insurance company for the policy limits of $50,000.

At the time of the collision, Plaintiff carried an Allstate automobile insurance policy, and was insured for underinsured motorist (“UIM”) coverage for a total of $25,000. On April 2, 2013, Ms. Romero submitted a $25,000 policy limits demand on Allstate. Allstate has provided her with $5,000 of medical benefits and also offered her $8,500 of additional coverage as UIM benefits. Ms. Romero believes that she suffered injuries that entitled her to additional coverage under her UIM policy, and that Allstate’s explanation of its offer of $8,500 (which changed over time) was unreasonable.

ANALYSIS

Allstate seeks to strike Plaintiff’s expert on bad faith insurance issues, Lorraine Berns, arguing that Ms. Berns lacks the requisite experience to qualify as an expert, her opinions are inadequately supported, and her testimony impermissibly supplants the role of the trial judge by offering legal conclusions. Plaintiff disagrees, and urges the court to allow Ms. Berns to testify, arguing that Allstate’s concerns regarding her qualifications go to the weight, rather than the admissibility, of her opinions. Ms. Romero also contends that while Ms. Berns’ expert report contains legal citations and references, Ms. Berns does not intend to “instruct[ ] the jury on what law applies to this case or what their decision should be,” but does intend to refer to the legal standards in order to explain to the jury the origination of the industry standards.

A trial court is obliged to act as “gatekeeper” of proffered expert testimony for relevance and reliability pursuant to Rules 401 and 702 of the Federal Rules of Evidence. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589–95 (1993). Daubert’s “gatekeeping” requirement applies not only to expert testimony based on scientific knowledge and principles, but also to all other expert testimony premised on “technical” or “other specialized” knowledge. On proper challenge, it is the proponent’s burden to establish the admissibility of the proffered expert testimony at issue.

Expert testimony is not proper when the purpose of testimony is to direct the jury’s understanding of the legal standards upon which their verdict must be based. Therefore, the expert can refer to the law in expressing his opinion, but he may not tell the jury what legal standards must guide their verdict. An expert may not ordinarily state legal conclusions drawn by applying the law to the facts, as such testimony is typically not helpful to the finder of fact.

Even when the court is satisfied that the expert opinion is not an impermissible legal opinion or conclusion the statute requires that any proffered expert testimony be helpful to the trier of fact to understand the evidence or to determine a fact in issue. Fed. Rule Evid. 702(a). In the context of insurance coverage dispute actions, the Tenth Circuit has repeatedly recognized that trial courts have the discretion to exclude expert testimony regarding the “industry standard,” absent an adequate showing of helpfulness to the factfinder.  In North American Specialty Ins. Co. v. Britt Paulk Ins. Agency, Inc., 579 F.3d 1106, 1112 (10th Cir. 2009) the Tenth Circuit held that because a properly instructed jury is generally capable of determining issues involved in cases alleging bad faith denial and investigation of insurance claims, expert testimony seeking to compare the insurance company’s actions to the industry standard may be properly excluded on the ground that it would not assist the trier of fact.

In applying these standards, the court concluded that Ms. Berns is qualified as an expert because she has specialized knowledge of the claims handling field arising from both her direct and subsequent consulting, and Allstate’s argument regarding her qualifications go to the weight, not admissibility, of her opinions. However, the court also concluded that some of her proffered testimony impermissibly veers into legal testimony. For example, Ms. Berns may not testify or explain to the jury what kind of damages or interest to which Ms. Romero may be entitled. She will also not be permitted to testify about Duty of Good Faith and Fair Dealing as reflected in the Colorado model jury instruction. Nor may she refer to specific statutes when concluding that Allstate’s actions were unreasonable.  While Ms. Berns may state that industry standards require insurance companies to follow the controlling law, Ms. Berns must limit her opinions to those based on an industry standard voluntarily observed by the industry separate from controlling law.

For instance, to the extent Ms. Berns’ opinions are based on industry standards separate from controlling law, she may testify that based on her knowledge and experience, it is her opinion that Allstate’s language in its UIM disclosure letter was vague, and it is industry standard that all ambiguities are resolved in favor of the insured. Similarly, Ms. Berns may testify to the industry standards as she describes them on page 9 of her Report, in footnotes 4-6, and page 10, in footnote 12. But Allstate will be permitted to cross-examine Ms. Berns about what actually constitutes “industry standards,” how she learned of such standards, and what specific “industry standard” was violated by Mr. Camacho or Mr. Miller in the adjustment of Ms. Romero’s claim for UIM coverage.

Finally, this court will not permit Ms. Berns to instruct the jury on what conclusion it should reach. Namely, Ms. Berns may not testify that “[b]ased on industry standards Allstate’s delays and denials of payment discussed in my report are unreasonable and evidence of C.R.S. 10-3-1115 Improper denial of claims prohibited and Ms. Romero should be eligible for recovery under C.R.S. 10-3-1116 remedies for unreasonable delay and or denial of benefits.”

ZALMA OPINION

I have testified many times at trial and deposition about the custom and practice of the insurance claims industry and the standard of care. I do not, nor should I, instruct the jury about the law. Rather, I try to help the jury understand why insurance claims people do when faced with an insurance claim and whether the insurer’s action comported with that custom and practice. Although the court may properly exclude testimony seeking to compare the insurance company’s actions to the industry standard on the ground that it would not assist the trier of fact, in my experience, the expert should speak about custom and practice not industry standards.  There is no single industry standard because each claim is unique.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance Claims Expert’s Testimony Limited

Courts Will not Strain to Create an Ambiguity Where None Exists

An Insurer Has the Right to Choose Who and What It Will Insure

Since insurance is nothing more than a contract between an insurer and those the insurer is willing to insure, the insurer has the unquestioned right to decide who, for what, and in what limits it is willing to insure. If the insurer and insured agree on the amount of insurance and the type of coverage no court will change reasonable, clear and unambiguous coverage. Of course, buyers remorse often sets in when a loss occurs, and attempts are often made to try to change the coverage agreed to by the parties.

In Golden Eagle Insurance Corporation v. Penske Truck Leasing Co., L.P., Not Reported in Cal.Rptr.3d, 2015 WL 5320546 (Cal.App. 4 Dist., 9/14/2015) the California Court of Appeal was asked to stretch the limits available to an insured beyond what appeared to be the clear language of the agreement.

FACTS

Golden Eagle Insurance Corporation (Golden Eagle) filed a motion for summary judgment arguing that Penske’s rental agreement provides for coverage up to the $750,000 limit required by the Motor Carriers of Property Permit Act. Penske opposed the motion, arguing that the agreement provides for coverage in accordance with the automobile liability policy required by California’s Financial Responsibility Law. Specifically, these limits are $15,000 per person for bodily injury; $30,000 per occurrence; and $5,000 for property damage (15/30/5 limits).

The trial court denied Golden Eagle’s motion and ruled that Penske’s coverage was limited to the 15/30/5 limits of a basic automobile liability insurance contract.

Golden Eagle insured X–ACT Finish & Trim Inc. (X–ACT) under a policy effective January 27, 2012 to January 27, 2013. Under this policy, the coverage limit for bodily injury or property damage caused by an accident was $1 million.

This coverage limit applied to “[a]ny ‘Auto,’ “ including vehicles X–ACT owned and rented.
On August 16, 2012, X–ACT rented a 26–foot flatbed truck from Penske. Under its standard rental agreement, Penske rents to its customers either household rentals or commercial rentals. When the vehicle is a household rental, Penske provides its Liability Insurance (as defined in the agreement) free of charge. For commercial rentals, the rental agreement states that “[l]iability insurance is required,” and requires the customer to choose between purchasing Penske’s Liability Insurance or “providing its own coverage.”

X–ACT rented the flatbed truck as a commercial rental and elected to purchase Penske’s Liability Insurance for $20 a day. About a week later, one of X–ACT’s employees was involved in an accident with another vehicle while driving the flatbed truck. Five individuals who were injured in the accident sued X–ACT, its employee, and Penske for personal injury damages in excess of $50,000 per person. Penske accepted X–ACT’s tender of the lawsuit and its defense, but took the position that its coverage was limited to the 15/30/5 limits required for automobile liability insurance under the Vehicle Code. Penske denied any obligation to act as X–ACT’s primary insurer to provide coverage above those limits.

In response to Penske’s position, Golden Eagle filed a declaratory relief action seeking a judgment that Penske is obligated to provide X–ACT “with primary coverage for the damages alleged in the personal injury action … up to a combined single limit of $750,000” citing to a statute that requires carriers of property to carry limits of $750,000.

DISCUSSION

The sole issue before the Court of Appeal was the scope of insurance coverage Penske agreed to provide X–ACT, a commercial rental customer, under its rental agreement. Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs its interpretation.  Such intent is to be inferred, if possible, solely from the written provisions of the contract. If contractual language is clear and explicit, it governs. If the language “remains problematic,” it must be read in the sense that satisfies the insured’s objectively reasonable expectations.

The language this case turns on is the definition of liability insurance in Penske’s standard rental agreement (Liability Insurance provision). If a customer renting a commercial rental elects to purchase the Penske coverage, the Liability Insurance provision states: “Penske agrees to provide liability protection for Customer and any Authorized Operator, and not others, subject to any limitations herein, in accordance with the standard provisions of a basic automobile liability insurance policy as required in the jurisdiction in which the Vehicle is operated, against liability for bodily injury, including death, and property damage arising from use of Vehicle as permitted by the Rental Agreement, with limits as required by the state financial responsibility law or other applicable statute.”

The plain terms of this provision establish that Penske is promising to provide a basic “automobile liability insurance policy” with the limits required by California’s Financial Responsibility Law.   The 15/30/5 limits are the minimum statutorily required limits for an automobile liability policy. Because Penske’s Liability Insurance provision promises only a “basic automobile liability insurance policy … with limits as required by [California’s] financial responsibility law,” the Court of Appeal concluded that it is clear that Penske only agreed to provide X–ACT with the 15/30/5 limits.

Nothing in the Liability Insurance provision or any other part of the rental agreement mentions a “commercial motor vehicle,” a “commercial vehicle liability insurance policy,” a “motor carrier of property,” or the “Motor Carriers of Property Permit Act.” The Court of Appeal refused to read such references into the provision to trump the clear existing reference to basic automobile liability insurance.

Furthermore, it makes no difference to our analysis whether Penske knew or should have known that the flatbed truck was a “commercial motor vehicle” or X–ACT was a “motor carrier of property” as those terms are defined in the Motor Carriers of Property Permit Act. Penske is under no legal obligation to provide its customers with the coverage limit that the Motor Carriers of Property Permit Act might impose on them.

Penske is free to contract with its customers to provide insurance with the coverage limits of its choosing.

An insurer has a right to limit the policy coverage in plain and understandable language, and is at liberty to limit the character and extent of the risk it undertakes to assume. Courts may not rewrite the insurance contract or force a conclusion to exact liability where none was contemplated.

The Court of Appeal decided it must adhere to the settled rule that courts will not strain to create an ambiguity where none exists.  The phrase “basic automobile liability insurance policy” is clear, and therefore the proposition that Penske intended to provide a commercial motor vehicle liability policy must fail.

ZALMA OPINION

It cannot be said often enough that a court has no right to change the wording of an insurance agreement that is clear and unambiguous. Courts, and litigants, must understand that an insurer has an unquestioned right and obligation to choose who it will insure, the terms and conditions of what it will insure, and the limits of its liability. Otherwise insurance will have no meaning and will become a contract without certainty.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Courts Will not Strain to Create an Ambiguity Where None Exists

Insurance Shouldn’t Be Mentioned To Jury

Keep it Short & Sweet & You Can Still Do It

In a tort trial it is improper to mention insurance or lack of it because the information might prejudice the jury in its deliberations. If it feels the defendant has no insurance it might render a smaller judgment while if it thinks the defendant is insured it might award a larger amount. Although this presumes that the jury will not be fair it is probably an accurate statement of what really happens in a jury room.

In Shegrud v. Eeg, Not Reported in N.W.2d, 2015 WL 5196020 (Minn.App.,9/8/2015) the Minnesota Court of Appeal was asked to deal with such a problem and in a Solomon-like decision, looked at the facts and the law to reach a fair result for all parties.

FACTS

The negligence action arose from a multicar collision that resulted from brushfire smoke that obscured roadway visibility near Greenbush, Minnesota. Erin Shegrud, a passenger in one of the cars, sustained injuries and sued various drivers and the farmers who lit the fire. A jury found the farmers 10% responsible for the collision and awarded Shegrud damages for past medical expenses and past pain but not for past wage-loss or any future losses.

Garner Eeg farms land near Greenbush, and on a September day in 2011 he burned brush along roads adjacent to his fields. He monitored the fires from a distance. The wind shifted and blew smoke across a road.

Dorothy and Odeen Anderson drove through the smoke slowly. Christa Blumer drove into the smoke behind the Andersons. The haze became heavy, and she momentarily saw a silhouette of the Andersons’ car just in front of her, so she stopped in the “complete whiteout.” Patrick Sullivan drove next into the smoke. Erin Shegrud was a passenger in his van. Sullivan had noticed the smoke from about three miles back and saw that it originated in a burning field. He suddenly saw Blumer’s car only 10 or 15 feet ahead of him. Sullivan’s van struck Blumer’s car at 35 to 40 miles per hour. Shegrud, who was sitting in the backseat, was thrown to the front of the van. She suffered injuries to her left side, including a fractured hip.

Shegrud missed six months of work immediately after the collision and seven weeks of work after her second surgery two years later. Payroll records created by Shegrud’s employer established without dispute that Shegrud received no wages or 401k contributions from the employer during these absences.

DECISION

Shegrud seeks a new trial. She argues that the jury acted out of prejudice and that the evidence required it to award greater damages. She also maintains that the farmers’ attorney engaged in several instances of attorney misconduct.

Shegrud convincingly argued that she is entitled to more damages than those awarded by the jury. She argues that the evidence required the jury to award damages for lost wages, for her upcoming surgery to remove the screw in her pelvis, and for future pain and suffering.

The jury verdict informed the court that Shegrud is entitled to an award for lost wages. The undisputed evidence established that Shegrud missed almost eight months of work and received no wages during the two treatment periods.

Shegrud’s appeal on this issue of future medical expenses faces another dispositive obstacle. Even if the jury had received compelling and unchallenged evidence that Shegrud experienced significant ongoing pain, still we would not remand for the district court to address the medical cost of remedying the pain if the jury received no compelling evidence defining that cost. Shegrud had the burden of proving “the reasonable certainty of [medical] expense by a fair preponderance of the evidence.” Kwapien v. Starr, 400 N.W.2d 179, 184 (Minn.App.1987). To meet that burden, she had to “present some evidence of what the expenses will be.” She could not rely on the jury to speculate about the cost. But Shegrud never informed the jury how much the screw-removal surgery or any other future medical treatment would cost. She gave the jury no evidence even estimating the cost. She did present the jury with bills from her two prior surgeries, but she offered no evidence allowing the jury to find that the cost of the prior fracture-repair surgery or the cost of the hip-replacement surgery bears any relationship to the cost of the potential screw-removal surgery or any other medical care.

Only by inappropriately speculating could the jury have concluded that each of these surgeries cost the same as the others. So even if the evidence had established that Shegrud would certainly undergo the additional surgery (and it did not), the jury had no basis on which it could have awarded damages to cover the cost of the surgery. For all of these reasons we cannot say that the verdict denying damages for future pain and medical expenses is infirm. The district court’s refusal to grant a new trial on damages for these expenses therefore does not reflect an abuse of discretion.

PREJUDICE

Shegrud first complains that the farmers’ counsel prejudiced her case to the jury by asserting that Eeg and his farming associates would be personally obligated to pay any damages awarded to Shegrud. Reference to insurance can be improper.  And a statement that a defendant would have to pay damages may suggest a lack of insurance coverage. Even if a plausible proper strategy existed, the statement may have nonetheless improperly implied that the Eegs lacked insurance coverage and would suffer personally from any award.

Questions of prejudicial misconduct with respect to insurance coverage disclosure are peculiarly within the discretion of the trial court who was in a better position to judge than the appellate court, the impact of statements made to or in the presence of the jury. The district court was aware that the allegedly improper statement was brief in the context of the entire trial and closing argument. The statement was not so clearly prejudicial that the court could say that the district court acted outside its discretion by refusing to grant a new trial based on it.

The jury assigned most of the fault to Sullivan, Shegrud’s driver, which is consistent with the fact that Sullivan had noticed the smoke from a great distance away and, rather than reduce to a safe speed consistent with the apparent visibility deficit, he drove into the plume nearly blindly and at such a high speed that he was still moving at 35 to 40 miles per hour when he struck Blumer’s car.

Shegrud next contends that Eeg’s attorney mentioned settlement several other times to suggest that Shegrud had already been compensated for her injuries. All of these references are brief, and none draws attention to compensation.

On balance, it is clear to us that the district court properly managed the trial and that the only discernable and reversible error is its failure to recognize the inconsistency between the jury’s award for past medical costs and its failure to award damages for past lost wages that necessarily and certainly resulted from the circumstances that required those medical costs.

Because the verdict necessarily indicates that the jury found that Shegrud is entitled to lost wages while she recovered from her surgeries, the court reversed in part and remanded for the district court to award damages for lost wages that the jury’s special verdict failed to include.

ZALMA OPINION

Since, with respect to the lack of propriety of insurance coverage disclosure are peculiarly within the discretion of the trial court, the impact of statements made to or in the presence of the jury stands within the reasonable discretion of the trial court. The district court was aware that the allegedly improper statement was brief in the context of the entire trial and closing argument, and properly concluded that the judge did not err. Counsel, if he or she treds lightly, can get the information wanted before the jury but if he or she is aggressive, the trial judge will stop him or her.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance Shouldn’t Be Mentioned To Jury

Zalma’s Insurance Fraud Letter – September 15, 2015

Why Do Prosecutors Claim There is Hard Fraud vs. Soft Fraud

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

The current issue of ZIFL reports on:

1.    Hard Fraud v. Soft Fraud
2.    Proformative Academy
3.    Fraud by Insurers
4.    Upcoming Webinar by Barry Zalma: Insurance Claims 101
5.    For Fun – The Flying Carpet
6.    New From Barry Zalma
a.    Insurance Law
b.    Insurance Fraud and Weapons to Defeat Fraud
c.    Getting the Whole Truth
d.    Random Thoughts on Insurance – Vol. III

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

Proformative Academy

Multiple Continuing Education Presentations

I have created for Proformative Academy a webinar called “Insurance Fraud – An Overview” that is available at  http://www.proformative.com/courses/insurance-fraud-prevention with a 10% Discount for my friends and clients who sign up and enter the discount code: Zalma10.

Also available are “How to Read & Understand an Insurance Policy” at http://www.proformative.com/courses/how-to-read-understand-business-insurance-policies  and “How to Successfully Present a Commercial Property Insurance Claim” at http://www.proformative.com/courses/how-successfully-present-commercial-property-insurance-claim and What To Do When Your Company Gets Sued – And How to Prepare.

Continuing Education Credit is available for many, including Certified Fraud Examiners ,with 1.5 CPE Credits, in Fraud Prevention and Deterrence.

I hope you find them interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    Fraudulently Obtained Workers’ Compensation Policy – September 14, 2015
•    Insurance Coverage Trial Orders – September 11, 2015
•    When Does the Mediation Privilege End? – September 10, 2015
•    Buyers Remorse Doesn’t Get You More Coverage – September 9, 2015
•    What the Heck is a Bumbershoot Policy? – September 8, 2015
•    Duty to Report Promptly Is a Condition Precedent – September 7, 2015
•    Theft Is Not “Property Damage” – September 4, 2015
•    Keep it Simple, Stupid – September 4, 2015
•    Fail to Read Your NFIP Policy at Your Own Peril – September 3, 2015
•    INSURANCE CLAIMS 101 – A Webinar by Barry Zalma – September 2, 2015
•    Does a D & O Policy Have a Duty to Defend? – September 2, 2015
•    How to Limit Discovery in a Bad Faith Suit – August 31, 2015
•    Why a Structured Settlement Must Be Enforced – August 28, 2015
•    Danger – Don’t Let a Claims Made Policy Lapse – August 27, 2015
•    Insurance Claims Expert’s Testimony Limited – August 27, 2015
•    Insurance Fraud & Weapons to Defeat Fraud – August 26, 2015
•    Is Reliance & Materiality Required to Rescind Marine Insurance? – August 26, 2015
•    Insured Must Be Named In Policy To Obtain Coverage – August 25, 2015
•    Why You Can Assign A Claim After Loss – August 24, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

“Insurance Law”

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

How to Determine the Proper Measure of Damage to Real and Personal Property

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

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

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

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

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

Barry Zalma

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

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

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

 

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – September 15, 2015

Fraudulently Obtained Workers’ Compensation Policy

Rescission Fails Because It Was Brought in Wrong Court

Rescission is an ancient equitable remedy that allow, with regard to insurance, an insurer to void a policy from its inception, if the insured lies when the policy is obtained. To confirm the propriety of a rescission an insurer must seek the approval of the appropriate court with jurisdiction over the issue.

In Merchants Ins. Group v. Spicer, — N.E.3d —-, 2015 WL 5227444 (Mass.App.Ct., 9/9/2015) the insurer, by default judgment, obtained an order declaring its workers’ compensation policy void from its inception because of lies in the application for insurance. The central question presented to the Massachusetts Court of Appeal, was whether an insurer may bring an action in Superior Court to retroactively void a workers’ compensation policy while an injured employee’s claim under that policy is pending in the Department of Industrial Accidents (DIA).

After obtaining a judgment in its favor a judge of the Superior Court reopened the case at the request of the employee and the Workers’ Compensation Trust Fund (Fund) and dismissed Merchants’ complaint, without prejudice, for lack of subject matter jurisdiction.

BACKGROUND

Joel Estaban Perez was seriously injured while working for Kevin Spicer, doing business as Uptown Landscaping (Spicer). Perez sought workers’ compensation benefits under a policy issued by Merchants to Spicer, and Merchants contested the claim. After an informal conference, a DIA administrative judge ordered Merchants to pay Perez weekly temporary total incapacity benefits pending an evidentiary hearing on the merits.

While Perez’s DIA case was awaiting the formal hearing, Merchants successfully moved to join the Fund as a party to the DIA case. At about the same time, Merchants also filed a complaint in Superior Court naming Spicer and Perez as defendants. In that complaint, Merchants sought rescission of two insurance policies (a workers’ compensation policy and a general liability policy) that it had issued to Spicer, on the ground that Spicer had made material misrepresentations in applying for the policies. Merchants also sought a judgment declaring that the policies were void ab initio (from inception) and that it had no duty to defend or indemnify Spicer in connection with Perez’s pending claim for workers’ compensation benefits.

Neither Spicer nor Perez put up any resistance. Spicer never appeared in the action, and on June 28, 2013, a default judgment entered against him along the lines requested by Merchants. Perez answered Merchants’ complaint but did not oppose its motion for summary judgment. On August 23, 2013, a judgment entered against Perez, declaring that both of the policies issued by Merchants to Spicer were void ab initio and rescinded, and that Merchants had no obligation to defend, indemnify, or pay any sums on account of any claims or actions arising out of Perez’s injuries, including the pending DIA case.

With the declaratory judgment in hand, Merchants went before the administrative judge assigned to the Perez matter and moved that it be dismissed from the DIA case. The administrative judge denied the motion and scheduled formal hearing. Merchants then filed a second Superior Court action, requesting that the DIA and the administrative judge be enjoined from going forward with “any proceedings” against Merchants in Perez’s workers’ compensation case. In response, Perez filed a motion in the first Superior Court action, seeking relief from the declaratory judgment in favor of Merchants, on the ground that the court had been without jurisdiction to entertain Merchants’ complaint.

At the hearing on the motion for relief from judgment, Perez and the Fund requested that the case be dismissed because Merchants had failed to exhaust its administrative remedies, and, hence, the court lacked subject matter jurisdiction to adjudicate its claims. The motion judge agreed; she vacated prior orders and judgments in the case and ordered the entry of a new, final judgment dismissing Merchants’ complaint without prejudice.

DISCUSSION

The exhaustion rule (or doctrine) has long been a part of our system of jurisprudence. Like its closely-related counterpart, the primary jurisdiction doctrine, the exhaustion rule promotes proper relationships and sensible coordination of work between courts and administrative agencies that are charged with regulatory responsibilities. Application of the exhaustion rule to any particular case requires not only an understanding of its purposes, but also of the particular administrative scheme involved.

There are four procedural steps in the adjudicatory process of a contested workers’ compensation claim. Judicial review of a final decision of the reviewing board is had in the court of appeal, not the Superior Court. The Superior Court is a proper forum only if a party seeks to enforce an order of the reviewing board—a situation not presented to the appellate court since the insurer avoided the four administrative remedies required by Massachusetts statutes.

In this case, Perez and Merchants reached only the conference stage at the DIA, which resulted in an order for temporary benefits. Thus, the administrative proceedings were far from exhausted when Merchants elected to file its complaint in court.

DIA’S JURISDICTION OVER COVERAGE DISPUTES

If a dispute over a claim is based on issues of insurance coverage, the DIA has full power to decide such questions of coverage and the parties have no right to try out the issue in a separate proceeding in court. Among the coverage issues commonly addressed in the DIA are those relating to the requirements a statute for (voluntarily issued policies), and a statute (for assigned risk policies), which regulate how an insurer may “cancel or otherwise terminate” its policy. The equitable remedy of rescission is embraced by the phrase “otherwise terminate,” and, therefore, the propriety and availability of rescission is a matter for the DIA to adjudicate.

EXHAUSTION

Massachusetts courts have long adhered to the rule that in the absence of a statutory directive to the contrary, the administrative remedies should be exhausted before resort to the courts. It is undisputed that Merchants did not exhaust its administrative remedies before resorting to the courts

Merchants’ contention that the administrative remedies available under the act are not the same as those available in a declaratory judgment action is unavailing. The remedies available to Merchants at the DIA were not inadequate. It was entitled to argue in the workers’ compensation case that it had no obligation to pay benefits to Perez because the policy had been obtained by Spicer’s fraud. What it could not do was to file a Superior Court case as a means to avoid the administrative process.

ZALMA OPINION

Rescission is a remedy available to any insurer that issued a policy based upon a misrepresentation or concealment of material fact or by fraud, which, when proved causes the policy to be void from its inception and treated as if it was never issued. The insurer in this case tried a short-cut by going to the superior court rather than the DIA that administers workers’ compensation in Massachusetts. By so doing the fraud was allowed to succeed temporarily where it could have been avoided if the insurer sought rescission from the DIA.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fraudulently Obtained Workers’ Compensation Policy

Insurance Coverage Trial Orders

Be Prepared For Trial As Soon as Possible

Because more than 90% of civil lawsuits settle trial lawyers, and their clients, fail to prepare for trial until the last moment to save legal fees in a case that will probably never see a trial court. Of course, Murphy’s Law applies, and when a lawyer relies on a case settling before trial, that is that case that will not settle and will go to trial without adequate preparation.

BACKGROUND

In Mid-Continent Cas. Co. v. BFH Mining, Ltd., Slip Copy, 2015 WL 5178118 (S.D.Tex. 9/3/15) the District Court for the Southern District of Texas, had denied motions for summary judgment and was faced with pre-trial orders trying to get the ability to present evidence that was generated after the discovery cut-off and limit the evidence the parties may submit.

In an insurance coverage case between Plaintiff Mid–Continent Casualty Company (“Mid–Continent”) and Defendant BFH Mining, Ltd. (“BFH”) is before the Court on three remaining pretrial issues:

(1)   the language to be used to instruct the jury on the “expected or intended injury” exclusion;

(2)   the effect of the “legally obligated to pay as damages” language in the Policy; and

(3)   the admissibility of a videotape of the property offered by BFH.

BFH is a Texas limited partnership. William Harrison, a partner in BFH, also owns Cathexis Holdings DE, LLC (“Cathexis”). Mid–Continent issued an insurance policy (the “Policy”) to BFH covering BFH’s Middleton Ranch located in Fort Bend County, Texas (the “Property”).

On October 21, 2012, Francois Bellon, a potential client of Cathexis, was at the BFH property. While there, he was injured in an accident involving a Polaris RZR all-terrain vehicle (“ATV”) owned by BFH and driven by Sahil Gujral, a Cathexis employee.
Bellon filed a lawsuit against Cathexis, BFH, and Gujral. BFH settled with Bellon for $1,000,000.00, the Policy limits under the Mid–Continent insurance policy.

Mid–Continent filed this lawsuit on April 2, 2014, seeking a declaratory judgment that it has no duty under the Policy to indemnify BFH. Mid–Continent argues both that there is no coverage under the Policy and that two exclusions in the Policy apply. On May 27, 2014, in response to Mid–Continent’s Amended Complaint BFH filed a Counterclaim alleging that Mid–Continent breached its contract with BFH, violated the Texas Prompt Payment of Claims Act, violated the Texas Insurance Code, and breached the duty of good faith and fair dealing. The Court has bifurcated the coverage issues from the extra-contractual claims.

EXPECTED OR INTENDED INJURY EXCLUSION

The Policy excludes coverage for bodily injury “expected or intended from the standpoint of the insured.” Mid–Continent argues that BFH, by and through Harrison, could have expected Bellon’s injury to occur. In support of this argument, Mid–Continent asserts that Harrison knew that Gujral did not have a driver’s license, knew that the ATV had experienced roll-overs before the day Bellon was injured, and knew that the safety net on the ATV had been removed.

The Court will instruct the jury as follows: “The ‘expected or intended’ injury exclusion only excludes an injury which the insured intended, not one which the insured caused, however intentional the injury-producing act. What makes injuries or damages expected or intended are the knowledge and intent of the insured. It is not enough that an insured was warned that damages might ensue from its actions, or that, once warned, an insured decided to take a calculated risk and proceed as before. Recovery will be barred only if BFH intended Bellon’s injury, or if his injury was expected by BFH because it knew that the injury was highly probable because it was the natural and expected result of BFH’s actions.”

The jury interrogatory will remain “Were Bellon’s injuries expected or intended by the insured (BFH)?”

“LEGALLY OBLIGATED TO PAY” REQUIREMENT

The Texas Supreme Court has held that “an insurer may escape liability on the basis of a settlement-without-consent exclusion only when the insurer is actually prejudiced” by the settlement. BFH may satisfy its burden to prove coverage exists under the Policy by demonstrating that Mid–Continent did not suffer actual prejudice from BFH’s settlement with Bellon. The jury interrogatory will ask whether BFH has proven by a preponderance of the evidence that Mid–Continent was not actually prejudiced by the settlement between BFH and Bellon.

VIDEOTAPE OF PROPERTY

BFH seeks to introduce a recently recorded videotape of the Property. The Court has reviewed the videotape, which was created after the close of discovery. BFH concedes that the videotape was recorded several years after Bellon was injured. Moreover, the videotape was recorded at a different time of year. Therefore, the Court finds that the proffered videotape has only minimal probative value regarding the Property as it existed at the time of Bellon’s injury. That limited probative value is substantially outweighed by the danger of unfair prejudice to Mid–Continent and could mislead the jury. As a result, the videotape is excluded pursuant to Federal Rule of Evidence 403.

ZALMA OPINION

If BFH had obtained a video tape shortly after the accident or, at least, in the same location at the same time of the year with the same weather conditions, the tape would have been admissible and the other side would have the right to discover the video. Similarly, the other two rulings should have been established with discovery well before the trial so that the court could consider their requests with a basis in fact and evidence.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance Coverage Trial Orders

When Does the Mediation Privilege End?

Privileges Can’t Be Waived in Error

Lawyers, just like everyone else, make mistakes. They have been known to make mistakes out loud to a judge. What happens when a lawyer makes a mistake in open court is that actions must be taken in court to cure the error. Such an effort becomes expensive and requires a great deal of work by other lawyers.

In Silicon Storage Technology, Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA, Slip Copy, 2015 WL 5168696 (N.D.Cal., 9/3/15) a lawyer repeatedly stated that documents dated after a specific date would be produced when, applying the strict language of a California statute, he was wrong. The documents were not produced and motions were filed in the District Court for the Northern District of California, was asked to compel production and make the lawyer fulfill the promises he made in error.

BACKGROUND

Silicon Storage sued about the applicability of an insurance policy to the settlement of a trade secret misappropriation lawsuit.  Specifically, National Union issued a $10 million primary executive and organization liability insurance policy to SST, which provided coverage in excess of a $150,000 self-insured retention for the “wrongful acts” of SST’s individual directors and officers.  XL issued an insurance policy to SST providing an additional $10 million in insurance in excess of the policy issued by National Union.

Xicor LLC (“Xicor”) filed a lawsuit against two former SST employees–one a former SST founder and executive, and the second a former SST employee–in Santa Clara County Superior Court, alleging that the two former SST employees misappropriated trade secrets and breached confidentiality agreements when they left the employ of Xicor to work at SST (“Trade Secret Litigation”). Around the time of the Trade Secret Litigation, Xicor and SST were also engaged in separate patent litigation. After Xicor initiated the Trade Secret Litigation, SST agreed to indemnify both of the former SST employees for the costs of defending against the suit, and SST subsequently notified the insurers of the Trade Secret Litigation.  National Union agreed to pay for the cost of defending against the Trade Secret Litigation and, after SST exhausted the $150,000 self-insured retention, paid certain costs of defending the suit.

Xicor, SST, and the former SST employees participated in a mediation session at which National Union was present but XL was not. Xicor and SST did not settle the Trade Secret Litigation at mediation, but shortly after mediation Xicor made a settlement demand of $20 million to SST and the two former SST employees. SST conveyed the demand to the Insurers and requested that they fund the settlement, but the Insurers declined to do so. SST and Xicor continued to negotiate the terms of a settlement and on August 31, 2012, SST and Xicor entered into a $20 million settlement agreement which resulted in the dismissal of the Trade Secret Litigation.  According to the Insurers, concurrently with the settlement of the Trade Secret Litigation, Xicor and SST also agreed to settle the separate patent litigation between Xicor and SST.

After settlement of the Trade Secret Litigation, SST sought insurance coverage for the cost of the settlement from the Insurers, but the Insurers refused. The Insurers contended, among other things, that the $20 million settlement of the Trade Secret Litigation was interrelated with the settlement of the patent litigation between Xicor and SST such that at least some of the $20 million should be allocated to the settlement of the patent dispute.

On May 15, 2015, National Union filed a motion to compel production of documents not subject to protection under a mediation or joint defense privilege (“Motion to Compel”), which XL joined on May 18, 2015. In the Motion to Compel, the Insurers argued in relevant part that SST improperly withheld documents on the grounds that such documents were protected by California’s mediation privilege. The Insurers noted that at the July 9, 2014 Case Management Conference (CMC), “SST’s counsel … agreed that SST would produce documents from after the August 15, 2012 mediation” that resulted in the settlement of the Trade Secret Litigation.

SST argued that SST’s counsel was mistaken when counsel stated at the July 9, 2014 CMC that California’s mediation privilege did not apply to “communications occurring in the 10–day period after the August 15, 2012 mediation.”  Rather SST argued that pursuant to California’s mediation confidentiality statutes, the mediation privilege applied to “communications during any period within 10 days after a mediation unless the parties agree in writing to terminate the mediation.”  According to SST, to the extent counsel said at the CMC that communications which occurred after the August 15, 2012 mediation were not privileged, “SST’s counsel was referring to an on-the-record settlement demand letter that was provided to the Insurers at the time and produced in this litigation.”

Magistrate Judge Grewal issued an Order Granting–in–Part Motions to Compel. In the Order re: Motions to Compel, Judge Grewal ruled in relevant part that the Insurers were “not entitled to production of certain documents that were properly withheld under California’s mediation privilege.”

LEGAL STANDARD

At the July 9, 2014 CMC, counsel for SST represented to the Court at least three times that SST did not claim the mediation privilege extended to communications which occurred after the August 15, 2012 mediation session. Based on these representations of SST’s counsel, the Court issued a Case Management Order which stated in relevant part that “[a]ny settlement demands and related documents between August 16, 2012 and August 31, 2012 are not privileged and must be produced.”

Accordingly, the CMO provided that SST must produce any “related documents” to the settlement demands from between August 16, 2012 to August 31, 2012, which would include “post-mediation communications.”

Applicability of the Mediation Privilege

SST’s argument that, despite what SST’s counsel said repeatedly at the CMC, certain communications which occurred after the August 15, 2012 mediation are privileged.

For purposes of confidentiality, “a mediation ends when any one of the following conditions is satisfied: ¶ (1) The parties execute a written settlement agreement that fully resolves the dispute. ¶ (2) An oral agreement that fully resolves the dispute is reached in accordance with Section 1118. ¶ (3) The mediator provides the mediation participants with a writing signed by the mediator that states that the mediation is terminated, or words to that effect, which shall be consistent with Section 1121. ¶ (4) A party provides the mediator and the other mediation participants with a writing stating that the mediation is terminated, or words to that effect, which shall be consistent with Section 1121. In a mediation involving more than two parties, the mediation may continue as to the remaining parties or be terminated in accordance with this section. ¶ (5) For 10 calendar days, there is no communication between the mediator and any of the parties to the mediation relating to the dispute. The mediator and the parties may shorten or extend this time by agreement.” [Cal. Evid.Code § 1125(a).]

For the reasons stated above the Court finds that the mediation privilege applies to writings (or other communications as described in § 1119) through August 27, 2012, provided that no other condition described in § 1125(a) terminated the mediation.

Whether Counsel for SST Waived the Mediation Privilege at the CMC

Pursuant to the mediation confidentiality statutes, the mediation privilege does not protect material from disclosure if either of the following conditions is satisfied: “(1) All persons who conduct or otherwise participate in the mediation expressly agree in writing, or orally … to disclosure of the communication, document, or writing. ¶ (2) The communication, document, or writing was prepared by or on behalf of fewer than all the mediation participants, those participants expressly agree in writing, or orally … to its disclosure, and the communication, document, or writing does not disclose anything said or done or any admission made in the course of the mediation.” [Cal. Evid.Code § 1122(a)].

The language of section 1122 unambiguously requires express waiver, and a court may not imply additional exemptions unless there is a clear legislative intent to the contrary. Accordingly, to the extent the statements of SST’s counsel at the CMC could be construed as a waiver of the mediation privilege, the waiver was ineffective.

CONCLUSION

For the reasons stated above, the Court granted SST’s Motion because the mediation privilege applies to writings (or other communications as described in § 1119) through August 27, 2012, provided that no other condition described in § 1125(a) terminated the mediation.

ZALMA OPINION

Most lawsuits are resolved by settlement, usually with the assistance of an experienced and effective mediator. The underlying case settled shortly after mediation and the insurers, who seek to limit their exposure to the part of the underlying litigation that was covered, were prevented by the California mediation privilege from obtaining that information. To avoid this problem the insurers should have participated in the mediation so that they could receive all of the information needed. The privilege ends 10 days after the close of the mediation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Does the Mediation Privilege End?

Buyers Remorse Doesn’t Get You More Coverage

When an Agent Fulfills His Obligation About UM/UIM Coverage

Almost every state has a law that requires auto insurance companies to offer uninsured motorist (UM) coverage and Underinsured Motorist (UIM) coverage to their insureds. The insured, to save money, can refuse or reduce the available coverage. The agent is required to advise the insured that if they wish to refuse UM/UIM coverage they must sign a form created by the state refusing coverage.

In Hague v. Bill Houston Ins. Agency, Not Reported in P.3d, 2015 WL 5209254 (Ariz.App. Div. 1, 09/08/2015) the Arizona Court of Appeal was faced with a case of Buyers Remorse when an insured sued their insurance agents because the UM/UIM coverage they had purchased was, in their opinion, inadequate and that had they been properly advised they would have acquired adequate coverages.

FACTS

After her husband Christopher died as the result of a motor vehicle accident, Christine Hague (“Hague”) filed a lawsuit individually and on behalf of their sons, MacAllister and Aiden Hague, against two independent State Farm insurance agents—the Bill Houston Insurance Agency, Inc. (“the Houston Agency”) and Brian Stevens (“Stevens”)  (collectively, “Defendants”)—alleging each had fallen below the applicable standard of care by failing to properly advise her of the benefits of purchasing uninsured motorist UM/UIM coverage.

Before Hague settled in Arizona, she lived in New York, and her mother, Jacqueline Polak (“Polak”), typically purchased automobile insurance for her through a State Farm insurance agent. In December 2000, Hague and Christopher moved from New York to Arizona, and they married in May 2001. At the time of the move, Hague owned a 1995 Saturn and a 1973 International Scout Jeep. After relocating to Arizona, Hague continued to almost exclusively rely on Polak for help regarding her insurance needs, although on a few occasions Hague handled details such as changing her address without Polak’s help.

In March 2001, Hague went to the Houston Agency, an independent State Farm insurance agent located in Scottsdale, where she purchased automobile insurance policies for the Saturn and the Jeep, each with $25,000/$50,000 liability and UM coverage limits; Hague expressly rejected UIM coverage. Hague later replaced the Saturn with a 2000 Ford Expedition, and in September 2001, Polak and Hague went to the Houston Agency, where they obtained $100,000/$300,000 liability coverage limits on the Ford, continued the $25,000/$50,000 liability coverage limits on the Jeep, and purchased $100,000/$300,000 UM coverage limits for both vehicles, but declined UIM coverage as to each vehicle.

In April 2005, Polak, on behalf of herself and Hague, purchased insurance for a 2004 Yamaha 600 CC motorcycle she had given to Christopher. The Yamaha insurance had liability and UM/UIM coverage limits set equally at $100,000/$300,000.

In June 2005, Bill Houston retired and closed the Houston Agency, and Mike Kish (“Kish”), a State Farm agency field executive, was assigned as the temporary servicing agent for Hague and Polak. In October 2005, insurance on the Yamaha was renewed through Kish, with liability and UM/UIM coverage limits again set equally at $100,000/$300,000.

On December 12, 2005, Polak increased the liability coverage limits of all three vehicles—the Yamaha, Ford, and Jeep—from $100,000/$300,000 to $500,000/ $500,000, but she did not increase the UM/UIM coverage limits on the vehicles. Instead, on December 20, 2005, Hague signed an “Acknowledgement of Coverage Selection or Rejection” form expressly rejecting the opportunity to increase the UM/UIM coverage limits on the Jeep, and on January 10, 2006, Polak signed Selection/Rejection forms acknowledging her decision to increase the liability coverage limits for the Yamaha and Lord policies to $500,000/$500,000, but rejecting the opportunity to increase the UM/UIM coverage limits on those policies.

On April 2, 2008, Christopher died when the Yamaha motorcycle he was operating collided with the back (rear passenger-side portion) of a van making a left turn at an intersection. Immediately before the accident, Christopher was observed weaving through traffic by making multiple lane changes at a high rate of speed while traveling northbound on Scottsdale Road. At the time of the collision, he was traveling approximately eighty-five miles per hour in a posted forty-five mile-per-hour speed zone, and witnesses observed the motorcycle traveling on one wheel shortly before impact. After Christopher’s death, the van driver’s insurance company, without formally acknowledging any fault on the part of its insured, paid its liability limit of $100,000, and State Farm paid its UIM limit of $100,000.

On March 29, 2010, Hague filed a complaint, alleging the insurance proceeds she received were insufficient to fully compensate her for Christopher’s death, and the Houston Agency and Stevens had fallen below the necessary standard of care in acting as her insurance agents because they had failed to recommend the Yamaha’s UM/UIM coverage limits be increased to equal its liability coverage limits.

Defendants maintained (1) they had fulfilled the statutory duty of offering, in writing, UM/UIM coverage with limits not less than the liability limits of the policy; (2) under Tallent v. National General Insurance Co., 185 Ariz. 266, 268, 915 P.2d 665, 667 (1996), no duty existed for them to provide a further explanation of UIM coverage; (3) any duty of the insurance agents did not go beyond that of the principal insurance company (State Farm); and (4) even assuming Defendants had such duties, those duties were not breached.

The matter proceeded to a jury trial on Hague’s claim against Stevens. The trial court entered a signed judgment in favor of Defendants.

ANALYSIS

Hague argues the trial court erred in granting summary judgment in favor of the Houston Agency.  In Arizona, every insurer writing automobile liability or motor vehicle liability policies must offer in writing to the named insureds UM/UIM coverage with limits not less than the bodily injury liability limits of the policy.  However, our supreme court has consistently rejected imposing a duty on insurers to further explain UM/UIM coverage to prospective purchasers of that coverage.

Persons who hold themselves out to the public as possessing special knowledge, skill, or expertise must perform their activities in a manner commensurate with the standard of their profession; otherwise, they may be held liable under ordinary tort principles of negligence for damage caused by their failure to adhere to the standard.

Even were a heightened standard of care proposed by the plaintiffs to apply, summary judgment was appropriate because, as recognized by the trial court, the undisputed material facts demonstrate the Houston Agency met that standard when it sold the initial Yamaha policy to Polak in April 2005. Hague’s core allegation against the Houston Agency is that Polak would have purchased UM/UIM insurance with coverage limits equal to the liability coverage limits had Polak and Hague been properly advised about the protections afforded by UM/UIM coverages. In fact, however, that is exactly what Polak did when she purchased the Yamaha policy with identical $100,000/ $300,000 liability and UM/UIM coverage limits.

Moreover, even were the court to conclude the Houston Agency earlier breached the applicable standard of care through the alleged statements of its agent. Hague and Polak obviously knew enough about the nature and value of UM/UIM insurance coverage to purchase a significant amount of that coverage (in an amount equal to or greater than their liability coverage limits) under their vehicles’ policies. Because Hague cannot demonstrate that any breach of the standard of care by the Houston Agency—no matter the standard—caused her damage, the trial court did not err in granting summary judgment in favor of the Houston Agency or abuse its discretion in denying Hague’s motion for a new trial.

For the foregoing reasons, we affirm summary judgment in favor of the Houston Agency and the trial court’s denial of Hague’s motion for a new trial as to the Houston Agency.

ZALMA OPINION

This is a classic case of sour grapes. The insured bought insurance on the motorcycle with the same limits for their liability to third persons as they maintained for UM/UIM coverage. That they had different limits for other vehicles and followed advice regarding limits did not reflect a failure of the obligation of the agent but showed inconsistancy by the insured who appeared to buy insurance based upon the least amount of premium. The grapes were not sour the insured simply got exactly what they asked the agent to procure.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Buyers Remorse Doesn’t Get You More Coverage

What the Heck is a Bumbershoot Policy?

Excess Insurance Limited to Its Terms

Every insurance dispute attempts to find, or create, an ambiguity in a policy to defeat what might necessarily be a clear and unambiguous language of the policy. It is always the duty of an insured to prove that coverage falls within a policy’s insuring agreement before the insurer is required to prove the applicability of an exclusion.

In Cash v. Liberty Ins. Underwriters, Inc., — Fed.Appx. —-, 2015 WL 5172868 (C.A.5 (La.) 9/4/2015) the district court ruled that the policy at issue provided coverage and ordered the insurance company to reimburse the insured for the full settlement amount resulting from the underlying suit, in addition to attorney’s fees, costs and interest. All other pending claims were dismissed.

Facts

In 2003, Union Oil Company of California (“Unocal”) retained Shaw Global Energy Services, Inc. (“Shaw”) to provide painting and sandblasting on a fixed platform located on the outer continental shelf off the coast of Louisiana. The Shaw employees were housed in an adjacent platform to the fixed platform where they provided labor for Unocal. They were transported from the housing platform to Unocal’s platform on the M/V LYTAL ANDRE, a vessel owned by Lytal Enterprises (“Lytal”).

On August 11, 2003, Michael Cash (“Cash”), an employee of Shaw, sustained severe injuries while being transferred by crane from a platform to a supply vessel. The crane operator who was transporting Cash during the time of the incident was an employee of Max Welders, Inc. (“Max Welders”). On August 6, 2004, Cash filed suit in federal district court against Max Welders, Max Welders’ primary insurer, Lexington Insurance Company (“Lexington”), and Max Welders’ marine excess insurer, Liberty Insurance Underwriters, Inc. (“Liberty”).

During the time of the incident, Liberty had issued to Max Welders a “Marine Excess (‘Bumbershoot’) Liability Policy” (“Bumbershoot Policy”). The policy was effective June 1, 2003 through June 1, 2004. The general purpose of the Bumbershoot Policy was to provide certain specified coverage in excess of Max Welders’ other primary insurance policies.

Max Welders submitted notice to Liberty that Cash’s claim might exceed the limits of its primary liability insurance policy. On February 10, 2009, Liberty advised Max Welders it was declining coverage for Cash’s injuries, on the basis of the exclusion involving the use of platforms (“the Platform Exclusion”).  Liberty sent a Notice of Declination of Coverage to Max Welders, stating that the incident involving Cash fell within the parameters of the Platform Exclusion since he sustained direct or indirect bodily injury while using or operating the platform.

Shortly thereafter Max Welders brought a cross-claim against Liberty seeking judgment that Liberty: (1) waived any right to contest coverage and/or raise exclusions under the Bumbershoot Policy; (2) violated duties owed to Max Welders pursuant to La. R.S. 22:1892 and La. R.S. 22:1973; (3) “breached its agreement to provide insurance to Max Welders, Inc. and breached its duties in bad faith”; and (4) violated the Louisiana Unfair Trade Practices Act. Through an amended cross-claim, Max Welders added a detrimental reliance claim against Liberty and further sought judgment that no exclusions in the Bumbershoot Policy applied to this matter.

In September 2009, Max Welders entered into a settlement agreement with Cash for a total of $1.45 million.

The primary issue in dispute was whether the Platform Exclusion applied thereby precluding coverage, and more specifically, whether the term “use” included the activities of Max Welders’ employees—including the crane operator’s transporting of Cash—on the Unocal platform.

The district found that the Bumbershoot Policy’s language was ambiguous because the term “use” was subject to more than one meaning. The district court reasoned that there was uncertainty as to how broadly the Platform Exclusion should be read within the context of the entire policy and its declared purpose. The district court, after hearing extrinsic evidence, concluded that the parties’ intent when entering into the Bumbershoot Policy was to provide Max Welders with insurance coverage for liability arising out of the operations it conducted as an offshore oilfield contractor, which clearly included activities on platforms. In the district court’s view, to apply the broadest definition of “use” and “operation” as urged by Liberty would lead to an absurd result, because virtually no coverage would be available for Max Welders’ work activities.

The district court found that Max Welders’ incidental use of the platform—to transfer a service contractor from the platform to a vessel—would not trigger the application of the Platform Exclusion because the platform’s true intended use was for the purpose of extracting energy. In September 2014, the district court entered a final judgment ordering Liberty to reimburse Max Welders for the total amount of its contribution to the settlement with Cash of $400,000.

Analysis

The words of a contract must be given their generally prevailing meaning and words of art and technical terms must be given their technical meaning when the contract involves a technical matter.  When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation is required to determine the parties’ intent.

In Louisiana, parol or extrinsic evidence is generally inadmissible to vary the terms of a written contract unless there is ambiguity in the written expression of the parties’ common intent.  It is the burden of the insured to prove the incident falls within the policy’s terms, and the insurer bears the burden of proving the applicability of an exclusionary clause within a policy. If the insurer cannot unambiguously show an exclusion applies, the Policy must be construed in favor of coverage.

Liberty argued that the term “use” as provided in the Platform Exclusion is unambiguous and excludes coverage.

The Fifth Circuit found that the policy exclusion at issue applies in this case to exclude coverage. The term “use” as contained in the Platform Exclusion is not ambiguous.  It is clear from the plain language of the policy that the parties intended to exclude platforms from coverage. If the parties had intended for the use or operation of the platforms to be covered under the policy, they could have drafted the contractual language that way or omitted the term “platform” from the exclusions section, but they did not.

Moreover, it is clear from the record that the actions of Max Welders in this case—moving Shaw employees between the platform and the vessels to perform their job duties—clearly involved the use of the platform. Further, the platform as it was used by Max Welders was not merely a location for the crane and therefore incidental to the damage that occurred there.

Without doubt, the platform was being used by the crane operator to transport Shaw employees in connection with the work they were doing for Unocal. Although it may be true, as the district court concluded, that one intended use of a platform is to extract energy, it is also possible that platforms can have more than one use in connection with that intended purpose—as was the case here.

Therefore, the Fifth Circuit concluded that the district court erred in finding that Liberty owed coverage to Max Welders under the Bumbershoot Policy.

For the foregoing reasons, the portion of the district court’s final judgment ordering Liberty to provide coverage under the Bumbershoot Policy to Max Welders, and ordering Liberty to pay to Max Welders reimbursement of $400,000, attorney’s fees, costs and interest, was reversed.

ZALMA OPINION

“Bumbershoot” is nothing more than a fancy name for an umbrella. The policy issued by Liberty to Max Welders was an excess policy that provided limited excess coverage to Max Welders. It clearly and unambiguously excluded coverage for use of an oil platform. By operating a crane to lift employees of others from a vessel to the platform it was using the platform and only by a convoluted interpretation of the word “use” could coverage exist. The district court’s legerdemain changing the meaning of “use” was slapped down properly by the Fifth Circuit.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What the Heck is a Bumbershoot Policy?

Duty to Report Promptly Is a Condition Precedent

When a Late Notice Defense Is Enforceable

The notice requirement of an insurance policy has been weakened  by multiple appellate decisions requiring a showing of prejudice to the rights of the insurer to investigate and control the litigation.

Westfield Insurance Company (“Westfield”) asked the court  to resolve whether it owed a duty to defend and indemnify certain defendants under the terms of an automobile liability insurance policy (“the Policy”) in an action initiated by defendant Jean Pugh on behalf of her minor sons in the Circuit Court of Cook County, Illinois. That action is premised on the negligence of Jean Pugh’s husband, William R. Pugh, when his auto left the road and struck a concrete structure resulting in serious injuries. Westfield issued the Policy to defendant Three Fires Council, Inc. (“Three Fires”).

In the underlying action, Jean Pugh alleges that, on June 6, 2010, William Pugh was returning in his own automobile with his minor sons from an overnight Boy Scout camping trip in Utica, Illinois. NPC was the sponsoring entity for Troop 8, one of the Boy Scout troops operating within Three Fires. The trip was authorized and approved by Three Fires and NPC. William Pugh served as a volunteer activity leader in various capacities for Three Fires and NPC. He was returning camping equipment to NPC when his automobile left the highway, traveled into a ditch and struck a concrete support. The underlying action is based on allegations of negligence by William Pugh and vicarious liability on the part of the named defendants.

Defined terms of the Policy provide that Westfield will pay sums “an insured” must pay as damages caused by an accident and resulting from the ownership, maintenance, or use of a “covered auto.” Loss conditions of the Policy require “prompt notice” to Westfield of any accident and “immediate” delivery of any summons or legal paper concerning a claim or suit.

Westfield contended to the court in Westfield Insurance Company v. Pugh, Slip Copy, 2015 WL 5159885 (N.D.Ill., 9/1/2015) that it owes no duty to defend or indemnify Three Fires, BSA, or NPC because it was not given required notice of the accident or timely notice of the Pugh suit. It was not notified of the original complaint and summons for more than a year after suit was filed which was more than 30 months after the accident.

Alternatively, Westfield contended that it has no duty to defend and there is no coverage because (1) William Pugh is not named as an insured on the Policy; (2) he was not using a “covered auto”—one that Three Fires “owned,” “hired,” or “borrowed;” (3) as the owner of the auto being operated, William Pugh also came within an exception to persons defined as “insured” which is applicable to covered non-owned autos; and (4) William Pugh is not alleged to be liable for the conduct of an insured.

Notice

The underlying accident occurred on June 6, 2010. Three Fires became aware of the event on the following day. It communicated with Old Republic, BSA’s insurer, on June 21, 2010. BSA became aware of the accident, opened a file for investigation and prepared a “Preliminary Report of Serious Injury” on June 8, 2010.

The Pugh complaint was served on March 12, 2012. On January 25, 2013, Three Fires’ risk manager forwarded the complaint to coverage counsel for review. On February 5, 2013, Three Fires was advised by counsel that coverage may exist. A Tender Letter was received by Westfield on April 1, 2013, which provided its first notice of the accident referred to in the Pugh action. This was almost three years after the underlying accident and nearly a year after the underlying lawsuit was filed.

It was the responsibility of Three Fires’ Scout Executive, who chaired Three Fires’ risk management committee, to provide notice to Three Fires’ insurers. Because the accident involved an “unregistered volunteer,” it was not thought that the Policy applied. William Pugh was the owner of the auto he was operating.

NPC Troop 8 filed a tour permit with Three Fires prior to the trip. The campsite from which William Pugh was returning was not owned by Three Fires, BSA, or NPC. Except for the issuance of a tour permit, Three Fires had no contact with the camp-out or Mr. Pugh.

ANALYSIS

An insurance policy’s notice conditions impose valid prerequisites to coverage. Whether the notice was given within a reasonable time depends on the facts and circumstances of each case. Factors to consider are: (1) the language of the condition; (2) the insured’s sophistication in commerce and insurance; (3) the insured’s awareness of an event that may trigger coverage; and (4) the insured’s diligence in ascertaining whether coverage is available; and (5) prejudice to the insurer. If it is determined that the insured did not provide timely notice, absence of prejudice to the insurer will only overcome the lack of timeliness if the insured has a good excuse for delay or the delay was relatively brief.

Notice delays for shorter periods than in this case have been found to preclude coverage. The facts show that Three Fires and BSA are sophisticated in matters of insurance and were aware of events that can give rise to insurance coverage. After the accident, immediate contact was made with Old Republic, BSA’s insurance carrier. Three Fires has a risk management group and had insurance coverage counsel in addition to the attorneys representing it in the Pugh case. BSA opened an investigation of the accident two days after it occurred. In Tex. Prop. & Cas. Ins. Guar. Fund v. BSA, 947 S.W.2d 682, 684–85 (Tex.Ct.App.1997), the court stated: “Boy Scouts operates a risk management program for itself and its more than four hundred local councils throughout the United States…. As part of this risk management program, the Boy Scouts determines how much insurance is needed and how the insurance should be structured.”

Three Fires and BSA are corporate entities with considerable sophistication in insurance matters. They were represented by counsel immediately after being served with the Pugh suit. Representation by counsel has been recognized as evidence of sophistication.
The presence or absence of prejudice may be pertinent when the insured has a good excuse for the delay or the delay was relatively brief. Neither circumstance exists in this case.

There is no valid excuse for the lengthy and unreasonable delay in providing the notice required by the Policy.

Coverage

Three Fires is the named insured on the Policy. By an endorsement, BSA is a “designated insured.”

The Policy’s coverage exception for owners of a covered auto, including any owner or anyone else using an auto with permission is consistent with the usual legal requirement that owners of autos are required to obtain insurance coverage for their own operating liability. Similarly, employees using their own autos (presumably with insurance coverage) are excluded from coverage.

ANALYSIS

The fact that the underlying complaint alleges that William Pugh, a scouting volunteer, is an agent of Three Fires, BSA, or NPC does not bring him within the Policy coverage. It is undisputed that he was operating an automobile he owned at the time of the accident on June 6, 2010 which excludes him and the event from coverage no matter what his exact relationship with any of the defendants was at that time of the accident. Moreover, no facts suggest that, as a volunteer participating in an outing of Troop 8 of NPC, that William Pugh was an agent for any of the business of any insured. A representative of Three Fires referred to him as an “unregistered volunteer.”

Based on the undisputed facts, it is concluded Westfield was not given reasonable notice of the June 6, 2010 accident or of the subsequent filing of suit as required under the terms of the Policy. Alternatively, it is concluded that there is no coverage available to any of the defendants under the terms of the Policy.

ZALMA OPINION

In this case, even without a showing of prejudice, an experienced and sophisticated insured could not support its claim that its three year delay in reporting the claim was not in violation of the notice provision and that the delay did not prejudice the insurer. The argument failed because the insured’s were sophisticated, had their own risk management group and a coverage lawyer. If they were just basic laymen who knew nothing about insurance the notice provision may not have applied but they would have lost anyway because the policy provided no coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Duty to Report Promptly Is a Condition Precedent

Theft Is Not “Property Damage”

A CGL Is Not a Cargo Policy

A Commercial General Liability (CGL) policy is a third party liability insurance policy only insures an insured for risks of loss from third parties claiming damage to their property or bodily injury. In Artisan and Truckers Casualty Company v. Hanover Insurance Company, Slip Copy, 2015 WL 5081458 (N.D.Ill., 8/27/2015) the District Court for the Northern District of Illinois, was asked to provide coverage under a CGL for losses by theft to property in control of the insured.

FACTS

Plaintiff Artisan and Truckers Casualty Company (“Artisan”) filed a complaint for declaratory judgment, asking this Court to find that Artisan does not have a duty to defend and indemnify its insured Alekseya Piskunov, Kateryna Piskunov, Star Way Corporation, and Star Way, Corp. (collectively “Star Way”) in an underlying suit brought against Star Way by Hanover Insurance Company (“Hanover”).

The relevant facts when determining an insurer’s duty to defend in the summary judgment context are those alleged in the underlying complaint that alleged the following:  Hanover insures Access America Transport, Inc. (“Access America”).  Access America entered into a Broker–Carrier agreement with Star Way, and pursuant to that agreement Star Way agreed to transport two Case backhoes belonging to CNH America LLC (“CNH”) to two consignees. Star Way accepted the shipment in Iowa and the backhoes were loaded onto a motor truck. The two backhoes were then reportedly stolen from the premises of Star Way Lines Inc. in Illinois before they could be delivered to the consignees.

Hanover paid CNH for the loss of the backhoes and in exchange for such payment CNH assigned its claims arising out of the loss of the backhoes to Hanover. Hanover then sued Star Way under the Carmack Amendment, 49 U.S.C. § 14706, for the value of the backhoes.

DISCUSSION

The insurance policy at issue (“the policy”) was issued by Artisan to “Star Way Corp.”  In the case before this Court, Artisan claims it has no duty to defend Star Way in the underlying suit because there is no coverage under the policy. Artisan argues that the policy does not provide “cargo coverage” and that at least six exclusions in the Commercial General Liability Endorsement of the policy (“CGL Endorsement”) preclude coverage.

When evaluating an insurer’s motion for summary judgment based on an asserted lack of duty to defend, courts compare the allegations in the underlying complaint with the relevant policy provisions. If the facts alleged in the underlying complaint are within or potentially within policy coverage, the insurer has a duty to defend and cannot prevail on summary judgment. The burden is on the insured to prove that its claim falls within the coverage of an insurance policy. Once the insured has demonstrated coverage, the burden then shifts to the insurer to prove that a limitation or exclusion applies.  When an insurer seeks summary judgment on the basis that an exclusion in the policy precludes coverage, the applicability of the exclusion to the allegations in the underlying complaint must be clear and free from doubt.

Artisan asserts that cargo insurance is a “distinct form of liability insurance” and not part of the policy.  But aside from referring to the exclusions, it makes no argument as to whether the CGL Endorsement covers cargo loss.

The parties’ arguments suggest that both believe it is obvious that theft of the backhoes constitutes “property damage” for purposes of the CGL Endorsement. damages caused by theft were not property damages for the purposes of general liability insurance coverage, reasoning that there is a difference between damage to property and loss of property. In Hanover and Star Way have failed to meet their burden to demonstrate that their claim falls within the CGL Endorsement’s coverage for “property damage.” This alone is sufficient reason to grant Artisan’s motion for summary judgment.

Damage to Your Work Exclusion

The “Damage to Your Work” exclusion (“DTYW exclusion”) precludes coverage for “property damage to your work[,] arising out of it or any part of it …” For purposes of the CGL Endorsement, “your work” means “work or operations performed by you or on your behalf; and materials, parts or equipment furnished in connection with such work or operations.”

CGL insurance policies often include DTYW exclusions because “[t]he risk intended to be insured [by CGL insurance] is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable … The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or complete work is not that for which the damaged person bargained.” State Farm Fire & Cas. Co. v. Tillerson, 777 N.E.2d 986, 992–93 (Ill.App.2002) (internal quotations omitted) (ellipsis in original).

DTYW exclusions tend to arise in cases where the “work” at issue involves “workmanship,”  the word “work” is unambiguous, and the Court must afford it its “plain, ordinary, and popular meaning.” W. Am. Ins. Co. v. Yorkville Nat. Bank, 939 N.E.2d 288, 293 (2010).

Here, the theft of the backhoes arose out of Star Way’s activity directed toward accomplishing the delivery of the backhoes. In addition, the exclusion applies where the damages arise during the course of the insured’s work rather than after the relevant work has been completed. Here the backhoes were stolen before Star Way had completed the relevant job by delivering the backhoes to the consignees; therefore the DTYW exclusion applies to the underlying complaint even if the theft constitutes “property damage.”

Damage to Property

Artisan asserts that the Damage to Property exclusion for “[p]roperty damage to … personal property in the care, custody or control of the insured” applies. Hanover responds that the underlying complaint does not allege that the backhoes were in the exclusive possessory control of Star Way when they were stolen.  Artisan replies that possessory control is apparent from the allegation that Star Way received the backhoes for transport to the consignees.

Under Illinois law, an insured must have “possessory control … at the time of the loss” in order for the property to be deemed in its “care, custody, or control.” Bolanowski v. McKinney, 581 N.E.2d 345, 348 (1991). Illinois courts also note that the possessory control at the time the property is damaged must be “exclusive.” Another person or entity’s limited access to the property does not negate the exclusiveness of the insured’s possessory control. Country Mut. Ins. Co. v. Waldman Mercantile Co., 430 N.E.2d 606, 609 (Ill.App.1981).

Exclusive possessory control is determined by looking at the extent of the insured’s right and power to “access” and “maintain, move, or protect” the property.

It cannot be gleaned from the underlying complaint who among Star Way, Star Way Lines Inc., or any other entity that may have been involved had the predominant authority to access, maintain, move, and protect the backhoes at the time they were stolen. Hanover and Star Way did not establish coverage under the CGL Endorsement, and even if they had, the DTYW and the property exclusions apply to the allegations in the underlying complaint.

As a result the Court granted Artisan’s motion for summary judgment.

ZALMA OPINION

Cargo insurance is a specific type of insurance protecting the insured against the loss of property in his, her or its care custody and control while a CGL does not and specifically excludes such coverage. Trying to stretch a CGL into a cargo policy is asking the court to re-write the policy which it, properly, refused to do.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Theft Is Not “Property Damage”

Keep it Simple, Stupid

Over-Pleading Makes Insurer Acting in Bad Faith Look Good

When an insurer fails to deal fairly and in good faith with its insured it compels its insured to sue to gain the benefits promised by the policy. Sometimes, rather than suing for breach of contract and bad faith lawyers feel compelled to add every conceivable cause of action both contractual, tortious and for violation of statute. By so doing the case becomes complex, difficult to deal with, and gives the defendant insurer the opportunity to move the court to dismiss large portions of the suit and prejudice the trial judge in favor of the insurer.

In Wheeler v. Assurant Specialty Property, Slip Copy, 2015 WL 5117770 (N.D.Ill., 8/28/2015) the District Court for the Northern District of Illinois was faced with just such a complex, multiple cause of action suit, and a motion to dismiss by the insurer.

FACTS

Stephen A. Wheeler sought coverage for alleged damage to his house caused by a windstorm from the providers of his home insurance policy, Defendants Assurant Specialty Property d/b/a Assurant and American Security Insurance Company d/b/a Assurant (collectively, “ASIC”). ASIC determined that only a portion of the claimed damages were caused by the windstorm and denied the majority of Wheeler’s claim.

Wheeler sued alleging breach of contract, vexatious and unreasonable conduct in violation of the Illinois Insurance Code, 215 Ill. Comp. Stat. 5/155, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), 815 Ill. Comp. Stat. 505/1 et seq., fraud, and unjust enrichment.

ASIC asked the court to dismiss Counts I through VI of the complaint.

Wheeler owns property at 1317 E. 50th Street in Chicago, Illinois. Wells Fargo Bank, N.A. (“Wells Fargo Bank”) holds the mortgage for Wheeler’s property. On May 20, 2011, Wells Fargo Bank and Wells Fargo Insurance, Inc. (“Wells Fargo Insurance”) required Wheeler to obtain insurance for the property from ASIC.

On July 11, 2011, a windstorm near Wheeler’s property caused significant damage to the interior and exterior of Wheeler’s house. Wheeler filed a timely claim under his ASIC policy that month. But from then until January 2012, ASIC did little to process Wheeler’s claim and did not hire a professional expert to examine Wheeler’s house. Wheeler promptly contacted ASIC, informing it that he had retained a structural engineer to examine his house. ASIC’s Raymond Parello responded that he also had contacted a structural engineer.

Parello informed Wheeler that ASIC had hired Alan Moersfelder of Kelsey Engineering and Electric Inc. Moersfelder conducted his inspection on April 4 and provided ASIC with a report on April 9. He concluded that it was possible that “much, if not all, of the visible floor, wall, ceiling, and visible structural member damage inside the house is a direct result of the July 10, 2011 weather event” and that it was “very possible that there is additional damage which is not visible.” He further noted that it was “difficult to postulate any man-made or natural event, other than a weather event, that could cause the visible damage to the Wheeler residence, cause the visible damage to the trees in the immediate neighborhood, cause the roof damage which has been repaired, and yet not damage other close proximity buildings.”

Approximately a year later, on March 11, 2013, at ASIC’s request, Wheeler executed a sworn statement in proof of loss regarding the July 11, 2011 damage to his house, claiming $695,943.00 under the policy.  On March 27, Parello notified Wheeler’s counsel that ASIC was reviewing the materials. In an April 24 conversation with Wheeler’s counsel, Parello represented that the amount claimed was greater than ASIC had expected. Wheeler’s counsel suggested that all engineers and contractors meet to expedite the repairs to Wheeler’s house. That meeting occurred on June 7, but no ASIC representative was present. On June 25, ASIC’s Tom Frankino told Wheeler’s counsel that the claim amount was over his authority and that additional inspections were required.

ASIC then, a year after the loss, hired Peter Quinn of Rimkus Consulting to perform the additional inspection, which occurred on July 18. Rimkus Consulting issued its report on August 13, finding that Wheeler’s house suffered no structural damage as a result of the windstorm, although it attributed the damage to the roof that had already been repaired and damage to an upper pane of glass in a third floor bathroom window to the storm.

Rimkus Consulting concluded that “[t]he undulations observed in the floor systems, un-level stairs and localized small areas of surface cracks in the ceilings and walls resulted from one or more of the following items: a) Inadequate support for the transfer of dead and live loads from the roof to foundation piers. b) Construction defects. c) Expected natural deterioration over time.” Based on this report, the opposite of the report prepared by its original engineer a year earlier while damages were visible, ASIC rejected Wheeler’s submitted proof of loss. Because Rimkus Consulting found that a pane of glass in the third floor bathroom window had been damaged as a result of the windstorm and that damage was not included in the previous allowed payment, the adjuster’s estimate was revised to include a supplemental payment of $112.83. This was added to the previous payment of $16,113.87, which had been made on January 17, 2013. ASIC also noted that $992.95 of recoverable depreciation would be available once repairs were complete. Wheeler never accepted any payments for the claimed covered damage, however. His property is now in foreclosure proceedings.

ANALYSIS

Breach of Contract

ASIC argued that the Court must dismiss Wheeler’s breach of contract claim because it sounds in fraud but does not meet the particularity requirements of Rule 9(b). The District Court concluded that ASIC is asking for too much from Wheeler on this claim. Wheeler alleges the existence of an insurance contract that he claims was breached when ASIC refused to fully compensate him for damage he maintains is covered under the policy. This is a classic claim for breach of an insurance policy.

Determining whether conduct is vexatious or unreasonable is a factual question determined by looking at the totality of the circumstances. Here, Wheeler alleges that ASIC acted in bad faith, providing a detailed list of allegations that he contends amount to vexatious and unreasonable conduct. This is sufficient at this stage to allow the damages request to go forward.

ICFA Claim

To state an ICFA claim, Wheeler must allege:

(1) a deceptive or unfair act or practice by ASIC,

(2) ASIC’s intent that Wheeler rely on the deceptive or unfair practice,

(3) the unfair or deceptive practice occurred in the course of conduct involving trade or commerce, and

(4) ASIC’s unfair or deceptive practice caused Wheeler actual damage.

A deceptive practices claim must meet Rule 9(b)’s heightened pleading standard, while an unfair practices claim need not because it is not based on fraud. Wheeler may not take his breach of contract claim and “dress [it] up in the language of fraud” in an attempt to state an ICFA claim.

Courts have found that plaintiffs cannot proceed on ICFA or fraud claims against their insurers where they merely allege that the insurer  failed to pay the claim, made “bad faith” demands for documents, conducted a burdensome investigation, delayed in resolving the claim, rested the denial of the claim on the actions or inactions of  the insured or its agents, and represented in its policy that it would pay valid claims, when in fact it has not paid.

The court concluded that Wheeler’s ICFA claim must be dismissed as Wheeler has not adequately alleged the purported deceptive conduct with particularity as required by Rule 9(b).

For the foregoing reasons, ASIC’s motion to dismiss is granted in part and denied in part. Counts III (fraud), IV (ICFA violation), and V (unjust enrichment) are dismissed without prejudice.

ZALMA OPINION

The conduct of ASIC, ignoring the report of its original expert engineer, failing to resolve the claim with its insured for a year leaving the insured to deal with the damage without assistance, and letting the insured’s home go into foreclosure indicate a classic breach of insurance contract and bad faith. By approving most of the insurer’s motion without prejudice the plaintiff can amend his suit or simply proceed to trial on the breach of contract and bad faith suit, which, if the facts reported could be proved, will result in a high dollar verdict in favor of the insured plaintiff.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Keep it Simple, Stupid

Fail to Read Your NFIP Policy at Your Own Peril

Agent, Read The Policy Before Advising Insured of its Provisions

The National Flood Insurance Program policy is a creature of federal statute and is limited to what it says to protect the federal treasury. In Pittman v. Farmers Fire Ins. Exchange, Slip Copy, 2015 WL 4507607 (W.D.Mo., 7/24/2015) the insureds, by failing to comply with the policy conditions and by having a loss not covered by the policy, lost their suit against the insurer and left them with nothing more than a suit against the agent for misrepresenting the coverage available.

FACTS

Defendant Colby Yoder (“Yoder”), an insurance agent with Defendant Farmers Fire Insurance Exchange (“Farmers”), sold a flood insurance policy to Plaintiffs Catherine Lynn Pittman (“Cathy Pittman”) and Troy Vernon Pittman (collectively, “the Pittmans”). The Pittmans claim Yoder misrepresented that their policy would cover all contents of their basement from flood damage. After floodwaters inundated their basement and ruined the items they kept there, the Pittmans read their policy for the first time and learned that it actually excluded most basement contents.

Yoder sought summary judgment on all claims against him.

In federal court a moving party is entitled to summary judgment if he shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The Pittmans response attached a single affidavit from Cathy Pittman to support their version of the facts, but failed to tie the affidavit to any specific facts they dispute.

This dispute concerns flood insurance, an area governed to some extent by rules quite different from those that would apply in a normal insurance dispute.

Flood insurance policies are not an inherently lucrative product for insurance companies. Floods often evade reliable prediction, recur frequently in some areas, and wreak extensive damage. This led private insurance companies to refuse to offer flood insurance on flood-prone property. Without an adequate flood insurance market serving these areas, the federal government was spending large sums of money on flood disaster aid.  To address this problem, in 1968 Congress enacted the National Flood Insurance Program (“NFIP”). As amended, the NFIP charges the Federal Emergency Management Agency (“FEMA”) with providing unified flood insurance coverage nationwide below actuarial rates.

Private sector property insurance companies may participate in the NFIP as so-called “Write–Your–Own” (“WYO”) companies. The federal governmen pays claims and the WYO companies’ defense costs. The federal government also sets the terms of the policies by requiring the use of the Standard Flood Insurance Policy (“SFIP”), the terms of which cannot be varied without express permission from FEMA.

It is through this program that the Pittmans came to buy a flood insurance policy. The Pittmans owned a single family home in Peculiar, Missouri, on property that abuts a river.
Cathy Pittman contacted Yoder, an insurance agent for Farmers, a WYO company. They discussed the Pittmans purchasing a flood insurance policy. Cathy Pittman specifically told Yoder that she wanted a flood insurance policy to cover the contents of her basement. She detailed the high value possessions she kept in the basement, including furniture, televisions, kitchen appliances, a computer, and hunting supplies.

Because the SFIP was the only flood policy available, Yoder prepared to sell Cathy Pittman that policy. He asked her several questions to complete the SFIP application, including questions about her basement. Yoder said that he could procure a federal flood insurance policy that covered up to $250,000 for the house and $100,000 for its contents. He specifically promised that the policy would cover all of the contents of their home, including items in the basement. Cathy Pittman did not have a copy of the prospective policy in front of her during this conversation. The parties later executed the policy.

In June 2008, the river flooded the Pittmans’ house and damaged some personal property in their basement. Farmers agreed to pay for structural damage and for most of the house’s contents, but refused to pay for most items in the basement. Until this point, the Pittmans had never read their policy. They then learned that their policy, like all SFIPs and pursuant to federal regulations, specifically limited: “Coverage for items of property … in a basement … to the following items, if installed in their functioning locations and, if necessary for operation, connected to a power source: ¶ a. Air conditioning units, portable or window type;  ¶ b. Clothes washers and dryers; and ¶ c. Food freezers, other than walk-in, and food in any freezer.”

Contrary to what Yoder had told Cathy Pittman over the phone, their policy did not cover most of the items in their basement. The Pittmans formally submitted a claim, but Farmers decided that the claim was incomplete per the policy’s terms and so could not be considered timely. They properly executed their proof of loss in July 2012, over four years after the flood well beyond the 60 day requirement of the policy.

ANALYSIS

Yoder moves for summary judgment on all claims pled against him: breach of contract, vexatious refusal to pay, negligent procurement, and negligent misrepresentation. As for the first two claims, since the Pittmans concede in their brief that “actions for breach of contract and vexatious refusal to pay … cannot be asserted against Defendant Yoder” and the Court granted Yoder summary judgment on these claims.

Count II alleges that Yoder negligently failed to procure them insurance that covered the contents of their basement. A negligent procurement claim cannot stand where “there was no insurance that could be purchased insuring against the peril causing the loss.” Russell v. Reliance Ins. Co., 672 S.W.2d 693, 694 (Mo.Ct.App.1984) (emphasis added).

In reaching its goal, the NFIP does not explicitly regulate every aspect of flood insurance. While the NFIP immunizes insurers when they would otherwise be subject to liability, this provision reflects the NFIP’s intent to not create any new indemnification or immunity for casualty agents.

Because Missouri’s negligent misrepresentation tort lies within this undisturbed status quo, the tort does not obstruct any provision of the NFIP. Negligence claims brought under Missouri law for errors and omissions committed by insurance agents during the procurement process do not pose an “obstacle to the accomplishment … of the full purposes and objectives of Congress.”  Therefore, the NFIP does not preempt Count II, so Yoder is not entitled to judgment as a matter of law on the negligent misrepresentation claim.

The Court now turns to the merits of the Pittmans’ claim that Yoder committed negligent misrepresentation by falsely telling them that their flood insurance policy covered all contents of their basement. Negligent misrepresentation requires proof that:

(1)  the speaker supplied information in the course of his business;

(2)  because of the speaker’s failure to exercise reasonable care, the information was false;

(3)  the information was intentionally provided by the speaker for the guidance of limited persons in a particular business transaction;

(4)  the hearer justifiably relied on the information; and

(5)  due to the hearer’s reliance on the information, the hearer suffered a pecuniary loss.

Yoder argues that the Pittmans’ reliance was unjustified as a matter of law, because they could have read their policy at any time before the flood and realized that his prior representations about the policy coverage were incorrect. Whether a party can be liable for negligent misrepresentation when his statements predate the formation of a contradictory contract is a difficult issue, and it is appears to be unresolved under Missouri law. NFIP regulations create the legal fiction that the insurance agent acts for the insured, not the WYO company or the federal government underwriting the flood insurance policy. Therefore, this doctrine does not establish that the Pittmans unreasonably relied on Yoder’s alleged misrepresentations as a matter of law.

Because there is a genuine dispute over facts material to the Pittmans’ negligent misrepresentation claim, the Court must deny summary judgment to Yoder.

ZALMA OPINION

The National Flood Insurance Program policies look like an insurance policy but are, rather, a tightly limited government entitlement providing funds to rebuild a dwelling and replace its contents after a flood that no insurance company is willing to write. The policy wording is strictly enforced. The agent who sold the policy is considered to be a broker, transacting insurance with, but not on behalf of the insurer. If he misrepresents the coverages available and the insured relies on that representation to the insured’s detriment the agent may be held liable for damages resulting from the misrepresentation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fail to Read Your NFIP Policy at Your Own Peril

INSURANCE CLAIMS 101 – A Webinar by Barry Zalma

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Does a D & O Policy Have a Duty to Defend?

D & O Insurer’s Duty Only Arises After Final Judgment

One of the most dangerous positions in business, in my humble opinion, is being a director or officer of a small condominium association. People, not normally involved in business, find themselves acting as a corporate director. Since the other officers of the corporation are also neighbors, disputes arise that make living in a condominium an unbearable situation. Acting as a condominium director or officer is often as difficult as being a person who lends money to a relative.

In John B. Clark, Jr. v. Travelers Casualty Insurance Company of America, Slip Copy, 2015 WL 5096418 (C.D.Cal., 8/28/15) the U.S. District Court for the Central District of California was called upon to deal with the rights of a director of a small condominium association who was sued by the homeowners association for defense expenses incurred defending the suit.

BACKGROUND

The action before the District Court arose from an underlying state action brought by the Sea Court Homeowners Association (the “HOA”) against Clark. Clark and his wife own a condominium unit in a three-unit condominium development known as “Sea Court,” which is located in Manhattan Beach, California. The HOA is an unincorporated non-profit mutual benefit association that was created to manage and maintain the common areas and facilities of Sea Court.  The HOA is governed by a three-member board of directors. From 1995 through March 27, 2014, Clark served as a member of the HOA’s board of directors. From June 8, 2006 through March 20, 2013, Clark served as an officer of the HOA in various capacities, including as president, chief financial officer, and secretary.

On November 26, 2012, Clark, in his capacity as chief financial officer, opened an account in the HOA’s name at Bank of America (the “BofA Account”) to hold the HOA’s funds pending the retention of a new management company for Sea Court. Clark’s actions in opening the BofA Account were ratified by the HOA.  On December 14, 2012, the other two members of the HOA board voted to remove Clark as chief financial officer of the HOA, a removal Clark contends was wrongful.

On February 15, 2013, $5,000 was withdrawn from the BofA Account. Clark, allegedly concerned that the withdrawal was unauthorized, placed a 20-day “hold” on the BofA Account. At some point after the hold was placed, $5,000 was deposited back into the BofA Account. Subsequently, on March 20, 2013, the other members of the HOA voted to remove Clark as secretary of the HOA. Clark contends that this action was illegal.

Clark alleges that on March 21, 2013, Paul F. McCaul (“McCaul”), at the time the chief executive officer of the HOA, purposely commingled his own personal funds with the HOA’s funds in the BofA Account. Clark alleges that he was concerned about the commingling, and that therefore, on March 25, 2013, he divided the money in the BofA Account and issued separate checks disbursing the funds to himself and the other two HOA members.

On April 12, 2013, after subsequent transfers and disputes over the HOA’s funds and maintenance at Sea Court, an action (the “State Action”) was filed in Los Angeles Superior Court on behalf of the HOA against Clark. The operative complaint in the State Action alleges claims against Clark for (1) conversion, (2) injunctive relief regarding bank account, (2) injunctive relief enjoining harassment, (3) fraud and deceit, and (5) intentional interference with prospective economic advantage and contractual relationships. The HOA brought the claims in the State Action against Clark in his individual capacity and allege that Clark was acting solely for his own personal motives when he committed the illegal acts.

The State Action is, at present, still pending.

At the time the State Action was filed, the HOA was insured by Defendant Travelers Casualty Insurance Company of America (“Travelers”). The terms of the policy, as it applies to director and officer liability, are laid out in the “Directors and Officers Liability Owners Associate Claims Made Form” (the “D&O Form”).

The D&O Form does not provide a duty to defend. Rather, it states: “We will not be called to assume charge of the settlement or defense of any claim or ‘suit’ brought or proceeding instituted against you or any insured.’” The D&O Form defines “loss” as “adjudicated damages, settlements and ‘defense expenses,’ ” with some exceptions.

DISCUSSION

Clark moves for partial summary judgment on his first claim for declaratory relief regarding reimbursement of defense expenses. Clark argues that the undisputed facts support finding that the D&O Form provides for the reimbursement of the costs of Clark’s defense in the underlying State Action.

Travelers opposed Clark’s motion, arguing that Clark is not entitled to indemnification of costs because the State Action only includes allegations of actions Clark took when acting in his individual capacity rather than his capacity as a director of the HOA. Travelers further contends that Clark’s request for a declaration is over-broad and unripe.

RIPENESS

The court concluded that given that the underlying State Action is yet unresolved and no final decision has been made regarding the extent and scope of Clark’s liability, Clark’s coverage claim for a declaration regarding his right to reimbursement of defense costs is not yet ripe for decision.

Although, in insurance coverage disputes, the duty to defend is broader than the duty to indemnify. Ultimately, it may turn out that the final judgment in the underlying suit was for damages not covered by the insurance policy. While an insurer has a duty to defend suits which potentially seek covered damages, it has a duty to indemnify only where a judgment has been entered on a theory which is actually (not potentially) covered by the policy.

IS THERE A DUTY TO DEFEND?

In the present action, both parties agree that the D&O Form explicitly disclaims any actual duty to defend on the part of Travelers. Rather, the dispute is over whether the defense costs Clark paid and will continue to pay out-of-pocket are covered by the D&O Form and therefore whether Travelers has a duty to reimburse Clark’s defense costs. The alleged duty to reimburse in this case is more akin to the duty to indemnify than the duty to defend.

Clark alleges that, at a future date (presumably after judgment has been entered in the State Action), Travelers must reimburse Clark for, among other things, his defense costs. Clark contends this is so because the claims in the State Action are covered by the D&O Form. Although the reimbursement issue must be resolved at some point, now is not the time.

The defense costs are part of the overall “loss” amount that is covered under the D&O Form if it turns out that the state court finds that Clark was acting in his capacity as an HOA director when he committed the alleged actions. The D&O Form guarantees that it will indemnify those costs that constitute the covered “loss” under the terms of the insurance policy. Furthermore, the D&O Form provides that recovery under the insurance endorsement “will not be made until your liability or an ‘insured’s’ liability has been … rendered fixed and certain by final judgment; or … admitted by us in writing.”

Accordingly, Travelers only becomes obligated to pay for “loss,” including defense costs, once a final judgment has been entered on the underlying covered suit.

ZALMA OPINION

D & O Insurance is different than other kinds of liability insurance. The D & O policy has no duty to defend. Its duty to indemnify includes not only a judgment against the director or officer but also the money expended by the director or officer to defend himself or herself. As a result the insurer can sit back and do nothing until there is a judgment and pay, if covered, the amount of the judgment plus fees and costs incurred.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

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Zalma’s Insurance Fraud Letter — September 1, 2015

Ethics & The Insurance Fraud Investigation

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

The current issue of ZIFL reports on:

1.    Ethics & the Insurance Fraud Investigation
2.    Proformative Academy
3.    Insurers are Not the Only Victims of Insurance Fraud
4.    New From Barry Zalma
a.    Insurance Law
b.    The Insurance Fraud Deskbook
c.    Diminution of Value Damages
5.    Fraud of Another Kind – CIGNA Unjustly Denies Claims
6.    E-Books from Barry Zalma

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

Proformative Academy

Multiple Continuing Education Presentations

I have created for Proformative Academy a webinar called “Insurance Fraud – An Overview” that is available at  http://www.proformative.com/courses/insurance-fraud-prevention with a 10% Discount for my friends and clients who sign up and enter the discount code: Zalma10.

Also available are “How to Read & Understand an Insurance Policy” at http://www.proformative.com/courses/how-to-read-understand-business-insurance-policies  and “How to Successfully Present a Commercial Property Insurance Claim” at http://www.proformative.com/courses/how-successfully-present-commercial-property-insurance-claim.

Continuing Education Credit is available for many, including Certified Fraud Examiners, with 1.5 CPE Credits, in Fraud Prevention and Deterrence.

I hope you find them interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    How to Limit Discovery in a Bad Faith Suit – August 31, 2015
•    Why a Structured Settlement Must Be Enforced – August 28, 2015
•    Danger – Don’t Let a Claims Made Policy Lapse – August 27, 2015
•    Insurance Claims Expert’s Testimony Limited – August 27, 2015
•    Insurance Fraud & Weapons to Defeat Fraud – August 26, 2015
•    Is Reliance & Materiality Required to Rescind Marine Insurance? – August 26, 2015
•    Insured Must Be Named In Policy To Obtain Coverage – August 25, 2015
•    Why You Can Assign A Claim After Loss – August 24, 2015
•    What is The Trigger for Wrongful Arrest? – August 21, 2015
•    Never Bring a New Theory to Court of Appeal – August 21, 2015
•    How an Easy to Read Policy Made Clear by Definitions – August 20, 2015
•    How an Insurer Can Sue to Recover Excessive Fees From Cumis Counsel – August 19, 2015
•    Can an Insurer Obtain Insured’s Tax Returns? – August 18, 2015
•    Can Insurer Litigate Coverage While Tort Case Pending? – August 17, 2015
•    What is a Claim? – August 14, 2015
•    Why Suit Was Worded to Avoid Coverage for the Defendant – August 13, 2015
•    Courses Available at Discount – August 12, 2015
•    Why is a National Flood Insurance Program Policy Not Insurance? – August 12, 2015
•    When is a Policy of Insurance Made? – August 12, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

“Insurance Law”

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

How to Determine the Proper Measure of Damage to Real and Personal Property

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

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

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

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

The Insurance Fraud Deskbook

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

Barry Zalma

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

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

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

If for some reason the current issue is not attached it will be available for a month at http://www.zalma.com/ZIFL-CURRENT.htm.  If you receive this notice in plain text the attachment is found at the link at the end of the message called “Location.”

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How to Limit Discovery in a Bad Faith Suit

A Plaintiff Can’t See Everything an Insurer Has

Insurance bad faith suits are often contentious and disputes over discovery that fishes for evidence of evil conduct by the insurer. The disputes taken to a trial court, are sometimes irrelevant to the issues raised by the suit or the defenses raised by the insurer. Rather, it seems that the parties seem to wish to make the litigation so difficult and contentious to compel the defendant to enter into settlement talks or otherwise gain an advantage against the other.

In NGOC TRAN  v. CHUBB GROUP OF INSURANCECOMPANIES, et al., Additional Party, Names: Federal Insurance Company, Slip Copy, 2015 WL 5047520 (S.D.Ohio, 8/27/15) Federal Insurance Company’s sought two protective orders (“Defendant’s First Motion for Protective Order”)  (“Defendant’s Second Motion for Protective Order”), while the plaintiff sought an order compelling discovery and to extend discovery dates (“Plaintiff’s Motion to Compel”).

BACKGROUND

In October 2012, plaintiff applied to defendant Federal Insurance Company (“defendant”) for insurance coverage in connection with plaintiff’s jewelry with an appraised value in the amount of $266,825.00 (“the jewelry”). The application included a section entitled “Valuable Articles Profile[,]” which contained certain representations including a specification of the safety precautions taken for maintaining the jewelry. Plaintiff alleges that defendant issued an insurance policy providing coverage to plaintiff for jewelry having an appraised value of $266,825.00 (“the Policy”). The Policy specifically advises, “We do not provide coverage if you or any covered person has intentionally concealed or misrepresented any material fact relating to this policy before or after a loss.”

Plaintiff alleges that, on June 13, 2013, her home was burglarized and that all but four pieces of her jewelry were stolen. Plaintiff further alleges that the remaining four pieces of jewelry were stolen during a second robbery that occurred on October 24, 2013. Plaintiff claims that, although she “fully complied” with the Policy’s requirements, defendant has “wrongfully refused to pay for this insured loss.”

On May 13, 2015, plaintiff noticed the deposition of defendant’s corporate representative. Plaintiff identified the following topics for deposition, which was noticed to take place on June 10, 2015:

[1.] The inception of the insurance contract relationship with the plaintiff;
[2.] The process of review for insurance applications for valuables articles coverage;
[3.] The decision to grant coverage in October of 2012, and renew coverage for the plaintiff in October of 2013, and the status of coverage on both loss dates;
[4.] The investigation by Defendant of the loss of June 13, 2013, and October 24, 2013 by plaintiff;
[5.] The investigation of the sufficiency of the appraisals of the valuable articles insured by plaintiff;
[6.] The history of granting or denial of the valuable article coverages or similar coverage, by the defendant for other applicants, and the reasons for denial of valuable article coverages for any applicants, between October 1, 2009 and October 31, 2012;
[7.] All other matters reasonably related to the issues stated in the complaint.
[8.] It is required that Defendant bring the entire file relating to subject claim including all electronic data and correspondence not previously provided by the Defense.
[9.] It is required that Defendant bring all Correspondence, Emails and Other Documents, relating to any applications for valuable articles coverage, or similar coverage, received for either Chubb Group of Insurance Companies or Federal Insurance Company, between October 1, 2009, and October 31, 2012, including but not limited to, valuable articles profile(s), and personal inland marine application(s), including all information relating to acceptance of application for coverage, or denial of application for coverage.

After defense counsel objected to the scope of this notice, the parties discussed proposed stipulations regarding their dispute. Specifically, plaintiff proposed that the parties stipulate to discovery and the defendants suggested a different stipulation that limited the issues raised by the the defendant that “The parties hereby stipulate and agree that Federal has not, and will not, attempt to rescind or have Federal Insurance Company Policy No. 13969002-01 issued to Ms. Tran declared void ab initio based on the concealment or misrepresentation of any fact in the application of insurance or valuable articles profile submitted by Ms. Tran.” Plaintiff rejected that stipulation.

DISCUSSION

Plaintiff seeks an order compelling production of the documents and a person most knowledgeable to testify about the issuance of the policy and requests for coverage from others. Defendant argued that the disputed discovery is irrelevant to the claims and defenses in this action because it relates only to whether defendant would have issued the Policy to plaintiff had it known the truth at the time of plaintiff’s application – i.e., a matter not at issue in this case.

Based on this record and on defendant’s articulation of its defense, the Court concludes that discovery regarding the “inception of the insurance contract relationship with the plaintiff,” “[t]he process of review for insurance applications for valuable articles coverage,” and defendant’s decision to grant coverage in October 2012 and renew coverage in October 2013 as well as the “history of granting or denial of the valuable article coverages or similar coverage, by the defendant for other applicants, and the reasons for denial of valuable article coverages for any applicants, between October 1, 2009 and October 31, 2012” is of limited, if any, relevance to any party’s claim or defense.

Finally, the Court notes that defendant seeks a protective order as to the records requested in the Marketsource Subpoena directing the witness to bring “[a]ll records for contracts for Federal Insurance Company initiated or processed by Marketsource”). Absent a claim of privilege, a party has no standing to challenge a subpoena to a nonparty. Defendant asserts that information sought by plaintiff in the Marketsource Subpoena seeks “confidential and proprietary business/underwriting information of Federal and confidential personal information of other Federal clients who are not party to this litigation.”

ZALMA OPINION

Rescission is an important defense to an insurer if the policy it issued was based upon misrepresentation or concealment of material facts. In some jurisdictions it is difficult to prove rescission but fairly easy to prove the intentional breach of the condition that limits coverage to any “person [that] has intentionally concealed or misrepresented any material fact relating to this policy before or after a loss.” If Tran lied, either before or after the loss, there is no coverage and by refusing to assert rescission as a defense was able to prevent discovery into Federal’s underwriting. It should give insurers faced with a material misrepresentation or concealment of material fact that can be proved, it should ignore rescission and go forward with the fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Limit Discovery in a Bad Faith Suit

Why a Structured Settlement Must Be Enforced

Annuitant May Not Sell Part of Structured Settlement Annuity

When minors are severely injured in an accident for which an insured person is liable concern for protecting the funds awarded to a minor result in a structured settlement where the insurer buys an annuity to pay out the settlement amount in partial payments growing as the injured party reaches maturity. However, as needs of the minor arise attempts are made to get around the terms of the structured settlement by discounting the payments to a purchaser.

Like the old Popeye comic strips, the annuitant takes a payment today and will pay it back in the future. It is a loan made with a guarantee from the insurer issuing the annuity.

In RSL Funding, LLC v. Alford, — Cal.Rptr.3d —-, 2015 WL 4919874 (Cal.App. 4 Dist., 8/18/2015) the annuitant tried to sell part of an annuity to RSL Funding. State Farm Fire and Casualty Company (State Farm Fire) and State Farm Life Insurance Company (State Farm Life) (collectively, State Farm) appealed the trial court’s approval of an order directing the transfer of structured settlement payments to plaintiff and respondent RSL Funding, LLC ( RSL).

FACTS

In 1994, defendant Felicia Alford, then a minor, by her guardians, settled a personal injury claim against certain insureds of defendant State Farm Fire. The settlement was approved by a court order that provided, “for the best interest of the minor … the proceeds of such settlement be paid and used in the manner hereinafter specifically provided.” Under the settlement, the payor, State Farm Life, was to deliver an annuity providing for guaranteed payments, as follows:

(1)  $10,000 annually from August 11, 2003, through August 11, 2006;

(2)  $50,000 on August 11, 2009;

(3)  $100,000 on August 11, 2016; and

(4)  $151,558.80 on August 11, 2021.

State Farm Fire purchased an annuity contract from State Farm Life, which provides for the periodic payments to be made.

In July 2012, Alford entered into a contract with RSL under which she received $30,000 in exchange for a $50,000 portion of the payment due on August 11, 2016. RSL assigned its payment to Extended Holdings, Ltd. (EHL). The trial court approved the transfer, and State Farm did not contest the transfer. Thus, under the 2012 order, State Farm was required to deliver a $50,000 portion of the August 11, 2016, payment to EHL.

On July 12, 2013, Alford entered into a second contract with RSL in which Alford agreed to assign to RSL $25,000 of the $100,000 payment due on August 11, 2016, and $25,000 of the payment of $151,558.80 due on August 11, 2021, in exchange for a current payment of $22,500. RSL filed a petition for approval of the transfer. State Farm filed an opposition to the petition, asserting, among other grounds, that (1) the proposed transfer would violate a California statute (Ins.Code, § 10139.5, subd. (e)(3)), which provides that an annuity issuer and settlement obligor “may not” be required to divide payments; and (2) the proposed transfer would materially increase State Farm’s burdens and risks.

DISCUSSION

RSL asked the court to apply what it called “settled principles of statutory construction” direct that he court “ordinarily” construe the word “may” as permissive and the word “shall” as mandatory, particularly when a single statute uses both terms. (Tarrant Bell Prop., LLC v. Superior Court (2011) 51 Cal.4th 538, 542, 121 Cal.Rptr.3d 312, 247 P.3d 542.) RSL fails to recognize that a contrary principle of statutory construction governs when the statute, such as section 10139, subdivision (e), uses a negative form of the word “may.”

Where statutory restrictions are couched in negative terms they are usually held to be mandatory. The statute’s use of the words “neither” and “nor” combined with “may be required” clearly indicates the Legislature’s intention to impose a mandatory rule.
Moreover, while the parties have cited no published California case law expressly applying section 10139.3, subdivision (e), and our own research has revealed none, courts in other states have construed similar language in their own statutes to be mandatory. Where there is no California case directly on point, foreign decisions involving similar statutes and similar factual situations are of great value to the California courts.” (Martinez v. Enterprise Rent–A–Car Co. (2004) 119 Cal.App.4th 46, 55, 13 Cal.Rptr.3d 857.)

The court of appeal concluded that the trial court erred in entering an order that requires State Farm to divide payments because the SSPA provides that an annuity issuer may not be required to do so.

RSL argues that State Farm submitted a proposed 2013 order in the same form as the 2012 order (which provided for splitting the Aug. 11, 2016, payment between Alford and EHL) and consented to splitting payments.

State Farm filed a written opposition to the proposed transfer and appeared at hearings on the proposed transfer where it asserted its opposition to payment splitting. At the close of the September 24, 2013, hearing, the trial court stated it would approve the transfer and instructed the parties to work out the form of the order. RSL and State Farm agreed to an order similar to the 2012 order, but RSL did not submit that proposed order to the trial court. State Farm therefore filed an objection to the proposed order, stating that State Farm had not withdrawn its objection to the proposed order, that State Farm disagreed with the trial court’s ruling, and that RSL had misrepresented State Farm’s position by submitting a proposed order that differed from the proposed order to which State Farm had agreed.

It is clear from the record that State Farm never withdrew its objections to the proposed 2013 transfer and never consented to split payments in connection with the 2013 transfer.

Since the court of appeal concluded that the trial court’s order violated section 10139.5, subdivision (e), and State Farm has not forfeited its right to oppose that order, reversal was therefore required.

In addition, State Farm correctly pointed out that such an order would put it in the position of having to rely on another entity to fulfill its contractual obligations to Alford and would expose State Farm to litigation if, for example, RSL or its assignee sought bankruptcy protection.

ZALMA OPINION

People who are the beneficiaries of a structured settlement are bombarded by television advertising promising to allow immediate access to the funds promised by the annuity in the future. The purchasers take, as here, a large portion of the future payment for a small, immediate, cash payment. The statute was enacted to protect the annuitant and make sure the settlement agreed to is paid as agreed. The court of appeal recognized the intent of the insurer and the annuitant and protected her from what she wanted.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why a Structured Settlement Must Be Enforced

Danger – Don’t Let a Claims Made Policy Lapse

Why a Claims Made Policy Requires Claim Be Made During Policy Period

Claims Made and Claims Made and Reported policies contain traps for unwary insureds who do not understand the limitations of that coverage. Unlike “occurrence” based policies if a claim is not made during the effective dates of the policy there is no coverage at all although premium has been paid to the insurer for years.

In The ACT-1 Group, Inc. v. Alternative Care Staffing, Inc., Slip Copy, 2015 WL 4967133 (E.D.Mich., 8/20/2015 Evanston Insurance Company (“Evanston”) and Markel Corporation’s (“Markel”) were sued to provide defense and indemnity to The ACT-1 and filed motions for summary judgment which were ruled upon by the District Court for the Eastern District of Michigan.

Background

On March 6, 2007, Gloria Brown died at the Henry Ford Hospital in Detroit, Michigan while being treated by Alisha Noel, a nurse employed by defendant Alternative Care Systems (“ACS”). The Henry Ford Health System (“HFHS”) contracted with plaintiff, ACT–1 Group, Inc. (“ACT–1”), a staffing company, to provide nursing staff for HFHS hospitals. (ACT–1 then subcontracted with ACS to provide the Henry Ford Hospital with nurses.

On August 21, 2008, the estate of Gloria Brown sued HFHS for medical malpractice, alleging that Noel was negligent in treating Brown (“the Brown litigation”). The Estate of Gloria Brown did not name ACS or Evanston as defendants in that lawsuit.

At some time between January and March of 2010, the Brown litigation settled for $877,243.03. Neither ACS nor Evanston participated in that lawsuit or settlement.

On September 10, 2010, HFHS sued ACT–1 and ACS in Michigan state court for indemnification in the Brown lawsuit. The court entered judgment against ACT–1 and ACS in that suit for $877,247.03. (Dkt. 1–2 at 159.)

ACS’ Insurance Policy

ACS purchased medical malpractice insurance through Evanston. However, ACS financed its insurance premiums through loans from the National Premium Budget Plan (NPBP), and the NPBP cancelled ACS’ insurance policy when ACS failed to make its monthly payments on the loan. ACS’ policy was cancelled effective March 25, 2009. Between March 25, 2009 and June 24, 2009, ACS did not have medical malpractice insurance coverage through Evanston or anyone else.

On June 23, 2009, an application was submitted and confirmed that it was unaware of “any circumstances which may [have] result [ed] in a malpractice claim or suit being made or brought against [ACS] or any of [ACS’] employees.” As a result of the application, ACS began a new Evanston insurance policy on June 24, 2009, with no retroactive coverage. That policy lasted until June 24, 2010.

HFHS Contacts ACS

On September 9, 2008, Paradiso sent a letter to Corner asking her to tell ACS about the Brown litigation. In his deposition, Paradiso referred to this letter as a “notification letter” that contained “no claim request.”

No one at Evanston or on behalf of Evanston had any discussion with the owners of ACS or Corner until Fall 2009.  On September 15, 2009, an insurance broker forwarded the Brown litigation papers, including the May 11, 2009 claim from Paradiso, and a copy of an email from ACT–1’s attorney to the claims services manager at Markel. Two days later, John Foley, the claims manager for Evanston, contacted ACT–1’s attorney for additional information. Foley then assigned the claim to Jagady Blue, senior claims manager for Markel, for handling. Blue searched the record and concluded that no claim was made against ACS during ACS’ policy period that would have triggered coverage. ACS’ policy through Evanston expired on June 24, 2010.

Indemnification Suit

On September 10, 2010, HFHS sued ACT–1 and ACS in Michigan state court for its settlement costs, plus additional costs and fees. On August 5, 2011, that court ordered ACT–1 to indemnify HFHS and entered judgment against ACT–1 for $877,243.03.
ACT–1 sued ACS, Evanston, and Markel on July 15, 2013, claiming that ACS breached its subcontracting agreement by failing to indemnify ACT–1 in the Brown litigation.  ACT–1 also sued Evanston and Markel as a third-party beneficiary under MCL § 600.1405, claiming that Evanston breached its 2008 insurance agreement with ACS by failing to indemnify ACS in the Brown litigation.

Legal Standard

Defendant moves for summary judgment on two grounds: (1) that ACT–1 failed to file a claim with ACS or Evanston during the period of ACS’ insurance coverage and (2) that Markel Corporation is not an insurer.

ACS’ insurance contract provides claims-made coverage, which means that only claims first made during the policy period will be covered. ACS was covered by Evanston insurance from May 28, 2003 to March 25, 2009, under a policy with a retroactive date of May 28, 2003, and from June 24, 2009 to June 24, 2010, with a retroactive date of June 24, 2009. The retroactive dates in the policies bar claims first made against the insured before those dates. Accordingly, plaintiff must show that HFHS first made a claim against it during one of these policy periods.

On May 11, 2009, eight months after sending the first letter, Paradiso sent a second letter to the office manager of ACS. This letter stated that HFHS “ha[s] provided [ACS] with a copy of the Summons and Complaint which [have] been served upon Henry Ford Hospital.” It then conveyed the intent to hold ACS liable for the harm caused by ACS’ employee, Noel, advising ACS that HFHS had decided to apply the contract provision requiring ACT–1 to indemnify and defend HFHS with regards to the claims against Noel. The letter further counseled ACS that “it will be important for ACS to contact Noel and make arrangements for representation.”

However, Paradiso’s letter of May 11, 2009 was sent and received in the three-month period during which ACS lacked Evanston insurance. ACS’ 2008–2009 policy was cancelled on March 25, 2009, and its next policy began on June 24, 2009, with a retroactive date of June 24, 2009. Because ACS first received Paradiso’s insurance claim on May 11, 2009, during the three-month period in which ACS lacked insurance coverage, Evanston is not contractually bound to provide insurance coverage for any restitution related to the Brown litigation that ACS may have to pay.

Because there is insufficient evidence for a reasonable juror to conclude that ACT–1 properly filed an insurance claim against ACS during the period of ACS’ Evanston insurance coverage, summary judgment must be granted.

ZALMA OPINION

Had the insured paid the loan payments its policy would not have been cancelled by the premium finance company it would have had coverage available. Because of the three month lapse in coverage the loss that occurred during the lapse was not covered.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Danger – Don’t Let a Claims Made Policy Lapse

Insurance Claims Expert’s Testimony Limited

Plaintiff’s Bad Faith Expert Exceeded Proper Limits of Testimony

Plaintiffs suing insurance companies find it necessary to retain the services of an expert who will testify that the conduct of an insurer in denying a claim, breached the custom and practice of the industry and the claims handling standards in the jurisdiction set by statute, regulation and claims handling experience. Since the expert seems more knowledgeable than any lay person or insurance company employee the expert’s testimony can prejudice the insurer in favor of the person retaining the expert. It is the obligation of the trial court to limit the expert’s testimony to expert testimony that will be helpful to the trier of fact to understand the evidence or to determine a fact in issue.

In response to an order to prevent an expert from testifying the U.S. District Court for the District of Colorado was asked by the insurer defendant to limit the expert testimony of plaintiffs’ expert because he went too far and stated opinions that were findings of fact and law and some that were outside his expertise. The plaintiffs tried to keep all of his testimony available. The court reached its conclusions in Weldesamuel Gebremedhin, an individual, Terhas Desta, an individual, Abrham Giday, a minor, by and through his guardians and natural parents, Weldesamuel Gebremedhin and Terhas Desta, Plaintiffs, v. American Family Mutual Insurance Company, Defendant, Slip Copy, 2015 WL 4979742 (D.Colo., 8/21/15)

BACKGROUND AND RELEVANT PROCEDURAL HISTORY

This case involves third-party breach-of-contract and bad faith claims arising out of an insurance coverage dispute between Glen and Veronica Turner (the “Turners”) and American Family. The Turners were foster parents insured by an American Family homeowner’s insurance policy in the spring of 2009 while then infant Plaintiff Abrham Giday suffered severe brain injuries while placed under the Turners’ foster care. Abrham Giday and his birth parents (also the Plaintiffs in the instant litigation) subsequently filed suit in a Colorado state court against the Turners (the “underlying litigation”).

The Turners sought a defense and indemnity from American Family under their homeowner’s policy. American Family in turn denied any obligation to provide any coverage in the form of indemnity or a defense, citing that the facts as alleged in the underlying litigation triggered intra-insured bodily injury and business pursuits exclusions in the insurance agreement.

Plaintiffs served the expert report of Garth Allen (“Professor Allen”).  His education, training and experience was sufficient to be allowed to testify as an expert. American Family filed a Motion to strike a wide range of the opinions proffered by Professor Allen. American Family contends that many of Professor Allen’s opinions improperly reach the ultimate issues in this case in contravention of Rules 702 and 704 of the Federal Rules of Evidence, improperly interpret the relevant legal standards and the contract, and improperly seek to instruct the jury of the relevant legal standards and the contract.

ANALYSIS

Even when the court is satisfied that the expert opinion is not an impermissible legal opinion or conclusion. The Tenth Circuit has repeatedly recognized that trial courts have the discretion to exclude expert testimony regarding the “industry standard,” absent an adequate showing of helpfulness to the jury.

In urging the court to deny Defendant’s Motion to Strike, Plaintiffs note that expert testimony in a bad faith action as to relevant industry custom and practice is not per se barred by Rules 702 and 704, and in a number of cases, both within and outside this jurisdiction, has been held to be admissible.

After analysis of the opinions the court noted that in some places, Professor Allen’s opinions can only be described as pronouncements of law. For example, Opinion No. 24 states “I would note that under federal law, payments received by foster parents for a qualified foster care placement agency are not considered income and are not reported on a tax return.” In another example, Opinion No. 28 states “[t]erms undefined in the policy must be given their ordinary meaning and when the terms are incorporated into an exclusion, they must be construed narrowly so as to favor coverage according to insurance industry standards and Colorado case law.”  Professor Allen himself acknowledges that there is “substantial overlap between industry standards and the law because the standard is to never act in violation of the law.”

In addition, many of Professor Allen’s challenged opinions are simply directions to the jury on how to rule that do not even refer to, let alone explain, industry standards. For instance, Opinion No. 20 states “[T]he removal of Giday from his parents’ home by DHS was temporary as a matter of law.”

Moreover, there are two opinions offered by Professor Allen that do not appear based on his expertise, and are therefore, improper and unduly prejudicial. Opinion 39, which states that foster care is “much more likely to be a humanitarian” rather than profit-driven activity, and Opinion 40, which states that Ms. Turner would have informed American Family that she wished to help out young children through such care if American Family had inquired as to her motivations, raise a different issue. The court concluded that Professor Allen cannot testify to challenged Opinions 39-40.

Finally, the court concluded that the majority of the challenged testimony, even assuming that the proffered opinions are considered to go to ultimate issues of fact rather than law, is not helpful to a properly instructed jury. In applying these standards, the court found that Plaintiffs have failed to meet their burden of demonstrating the admissibility and/or the helpfulness of Expert Opinion Nos. 1-6, 9-12, 14, 16-18, 20-25, 27-28, 32-34, 36-37, and 39-40. These challenged opinions were stricken from Professor Allen’s Report.

However, Professor Allen may testify to the following opinions:

Expert Opinions 7 that stated: “Reliance on the Business Pursuits exclusion, like the reliance on the Intra-Insured exclusion, was improper and contrary to insurance industry standards.”

Expert Opinion 8 that stated: “It was unreasonable and contrary to insurance industry standards for American Family to reject, disavow, and thus fail to meet its duty to defend.”

Expert opinion 13 that stated: “American Family acted unreasonably and contrary to insurance industry standards by failing to timely acknowledge and accept its duty to defend.”

Expert opinion 15 that stated: “As a practical matter, liability claims against the insured can seldom be denied in full, including a refusal to defend.”

Expert opinion 19 that stated: “At bottom, the allegations of the Amended Complaint gave rise to the possibility that Giday’s erroneous five-night stay with the Turners did not make him a resident of their household for the purposes of the policy’s Intra-Insured exclusion.”

Expert opinion  26 that stated: “American Family was required, by law and insurance industry standards, to determine if it was possible that Giday was not a resident of the Turner household and provide a defense if that possibility existed.”

Expert opinions 29-31 that stated: “29. If American Family questioned the residency status of Giday, it could have explored beyond the Amended Complaint, not in order to deny the claim, but to find clarification in order to provide a defense; 30. Most importantly, even without any information beyond the operative complaint, American Family was required by law and insurance industry standards, to determine if it was possible that Giday was not a resident of the Turner household and provide a defense if that possibility existed; and 31. Typically, the insurer either must, or out of an abundance of caution should, elect to defend a claim so that more information can be accumulated during the litigation process, information that can then be used to make an informed decision regarding indemnity, including settlement of the claim.”

Expert opinion 35 that said: “Both overlooked the critical issue if Giday’s residency at the time of the denial and during their deposition testimonies.”

Expert opinion 38 that said: “In Colorado, the standard and custom in the insurance industry is to defend almost all tendered claims due to the extraordinary broad nature of the defense obligation and the high cost to the insurers that improperly fail to defend their insured.”

However, even though the court will allow the testimony described, if, with respect to Opinion Nos. 26, 30, and 38, the professor attempts to testify with any reference to “the law” or in the case of No. 38, to “the extraordinary broad nature of the defense obligation,” will be stricken if brought up at trial.

ZALMA OPINION

The court performed its duty as a gate keeper over expert testimony. It limited the testimony of the expert to testimony about the custom and standard in the insurance industry but refused to allow him to testify about the law or any legal opinions. It is the duty of the expert to help the jury or judge to determine facts outside normal understanding. It is wrongful for an expert to try to instruct the jury about the law or opinion on subjects where the expert has no expertise. Bad faith litigants should never allow an expert to exceed the purpose for which he or she was retained.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance Claims Expert’s Testimony Limited

Insurance Fraud & Weapons to Defeat Fraud

A New Book from Barry Zalma

Insurance Fraud & Weapons to Defeat Fraud

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

No one will ever be able to place an exact number on the amount lost to insurance fraud. Everyone who has looked at the issue knows – whether based on their heart, their gut or empirical fact determined from convictions for the crime of insurance fraud – that the number is enormous.

When insurers and governments put on a serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-government-based or funded insurers drops logarithmically.

The e-book contains the full text of the most important insurance fraud cases in over 2000 pages of material essential to every insurance fraud professional.

Posted in Zalma on Insurance | Comments Off on Insurance Fraud & Weapons to Defeat Fraud

Is Reliance & Materiality Required to Rescind Marine Insurance?

The Eighth Circuit Adds to Proof Needed For Rescission of Marine Insurance

Traditionally, any misrepresentation, concealment, or failure to disclose information concerning the sea worthiness of a vessel is sufficient to rescind the policy. The Eighth Circuit, ruling on a case where the trial court granted an insurer summary judgment, was faced with whether the insurer needed to prove it relied upon the concealed facts and if those facts were material, before rescission is appropriate.

In St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., — F.3d —-, 2015 WL 4939878 (C.A.8 (Minn., 8/20/2015) the insurer denyied its insured’s claim for coverage for a barge that sunk during a storm. The insurer brought action against the insured, seeking a declaration that its marine insurance policy was void under the doctrine of uberrimae fidei because the insured failed to disclose material facts in its application for coverage. The United States District Court for the District of Minnesota granted summary judgment in favor of insurer.

Abhe & Svoboda, Inc. (“Abhe”), filed a claim for insurance coverage after a barge sunk.  St. Paul Fire denied Abhe’s claims and then filed suit in the district court seeking a declaration that the policy was void under the doctrine of uberrimae fidei. That doctrine requires that parties to an insurance contract must accord each other the highest degree of good faith. Since Abhe failed to disclose material facts in its application for insurance coverage the trial court granted St. Paul’s motion for summary judgment.

FACTS

Abhe leased two barges from Sterling Equipment, Inc. to assist it in painting a bridge. These barges were “dumb” barges, meaning that they had no motor or means of propulsion and were intended to serve solely as stationary equipment platforms. The barges are SEI–34 and SEI–120.

Abhe purchased a package marine insurance policy from St. Paul Fire. St. Paul Fire did not request that Abhe complete an application for insurance, but instead accepted the application that Abhe provided to its previous insurer in May 2010. On May 3, 2011, Abhe sent St. Paul Fire an updated schedule of vessels, which included SEI–34 as a leased barge with a value of $225,000, reflecting its agreed value on its charter application with Sterling. Abhe did not provide St. Paul Fire with the November 2010 survey of SEI–34, and St. Paul Fire did not attempt to survey any of Abhe’s marine equipment, as it was entitled to do under the policy. St. Paul Fire issued Abhe a Marine Hull and Protection and Indemnity Policy effective July 1, 2011, through July 1, 2012.

On October 29, 2011, a severe nor’easter struck  and SEI–34 sank to the bottom of Narragansett Bay and landed upside down, crushing most of the equipment that was welded to its deck.

St. Paul Fire filed this action in the district court, seeking a declaratory judgment that it had no duty to defend or indemnify Abhe for several reasons.

ANALYSIS

This dispute concerns a marine insurance contract and therefore is governed by the principle of uberrimae fidei, or utmost good faith. This duty of good faith requires the insured to disclose to the insurer all known circumstances that materially affect the risk being insured.  Because the insured is in the best position to know of any facts that may be material to the risk, the insured is obligated to disclose those facts to the insurer, regardless of whether the insurer makes a specific inquiry.

The parties agree that Abhe was required to disclose all material facts to St. Paul Fire, but they dispute whether there is another element to an insurer’s claim that a policy is void for non-disclosure. Abhe argues that an insurer cannot void a policy under the doctrine of uberrimae fidei without showing both that the insured failed to disclose a material fact and that the non-disclosure induced the insurer to issue the policy.

The principal case to address the question directly is Puritan Insurance Co. v. Eagle Steamship Co. S.A., 779 F.2d 866 (2d Cir.1985), which held that reliance is a necessary element of the uberrimae fidei defense.

The insured in Puritan failed to disclose two losses suffered by two of its vessels on its application for insurance.  Even though the insurer had no knowledge of the second loss, the Second Circuit upheld the district court’s finding that while the insured should have disclosed the second loss to the insurers, the insurers “failed to prove that they would not have undertaken the risk had they been fully informed of this loss.” Puritan thus requires that an insurer seeking to void a policy show reliance on an insured’s non-disclosure, regardless of whether the insurer had knowledge of the undisclosed material fact at the time that it decided to issue the policy.

The Eighth Circuit found the Second Circuit’s reasoning persuasive. Before a party can rescind a contract due to the other party’s non-disclosure or misrepresentation, he must show that the misrepresentation induced him to enter the contract. A party is required to show a causal connection between the other party’s omission and the issuing of the contract.

St. Paul Fire’s proposed rule also would create a moral hazard and have the perverse effect of encouraging insurers to assume unreasonable risks and to issue insurance polices that they otherwise would not have issued. Under the rule proposed by St. Paul Fire, if an insurer knows that an applicant for insurance failed to disclose or misrepresented a fact that other prudent insurers may deem to be material, that insurer would have an incentive to issue the policy anyway, collect premiums from the insured, and then use the doctrine of uberrimae fidei to void the policy if an accident occurs and the insured seeks to invoke the policy’s protection.

While most circuits have not explicitly recognized reliance as a distinct element of the uberrimae fidei defense, some courts have applied a subjective test for materiality that asks whether the insurer in fact would have found the omitted information to be material.

Clarity is enhanced by preserving actual reliance and objective materiality as distinct elements. In one of its earliest cases concerning a marine insurer’s uberrimae fidei defense, the Supreme Court applied an objective test for materiality, concluding that “[h]ad [the undisclosed fact] been known, it is reasonable to believe that a prudent underwriter would not have accepted the proposal as made.” Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 509–10, 1 S.Ct. 582, 27 L.Ed. 337 (1883); see also AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 264–65 (3d Cir.2008); and Grande v. St. Paul Fire & Marine Ins. Co., 436 F.3d 277, 282–83 (1st Cir.2006).

St. Paul Fire argues that even if reliance is an element of the defense, there is no genuine issue of fact for trial on whether it relied on Abhe’s failure to disclose the 2010 survey. The insurer argues that its underwriter, Ed King, received, reviewed, and relied upon Abhe’s insurance application before deciding to insure SEI–34. King also testified that the 2010 survey of SEI–34, which indicated a lack of watertight bulkheads and pinholes in the hull, would have been “very important in underwriting [the] risk.” Abhe countered, however, with evidence that in June 2012, King renewed coverage for SEI–120, despite receiving an on-hire survey for that vessel that showed the vessel lacked watertight bulkheads.

The Eighth Circuit concluded that this evidentiary dispute is sufficient to create a genuine issue of material fact as to whether St. Paul Fire relied on Abhe’s failure to disclose SEI–34’s lack of watertight bulkheads in issuing the insurance policy for that barge.

If the case proceeds to trial on the defense of uberrimae fidei, the question of materiality should be submitted to a jury for resolution of disputed issues of fact.

Since reliance is an element of the defense, there are disputed issues of fact as to whether it is satisfied, so the judgment was reversed and returned to the District Court for determination of the factual issues.

ZALMA OPINION

The case relied, not on the defense of uberrimae fidei, but on the failure of evidence to convince the Eighth Circuit that there is an issue of fact to be determined. The insurer’s failure to present evidence from its underwriter that had it known the truth it would either have refused to issue the policy or would have issued the policy on different terms was why trial is required. If the jury believes the insurer rescission will apply. If, on the other hand, it believes the evidence provided by the insured, rescission will not lie because materiality is a necessary element. This is not a change as much as it is an inadequacy of proof.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is Reliance & Materiality Required to Rescind Marine Insurance?

Insured Must Be Named In Policy To Obtain Coverage

Another Failure to Get Insurance Money Instead of Financially Viable Defendant

Insurance is nothing more than a contract. The contract must be read as written. If a person is not named as an insured nor made an insured by a definition, it has no right to the benefits and promises made by an insurance policy.

In Diseworth at Somerby v. Western Nat. Mut. Ins. Co., Not Reported in N.W.2d, 2015 WL 4994600 (Minn.App., 8/24/15) the Minnesota Court of Appeal was faced with an argument that because multiple corporations had similar or identical owners even if not named as an insured on a policy the insurer is required to defend and indemnify a corporation owned by the same people who own the named insureds, and resolved the dispute based on the clear and unambiguous language of the policy.

The appellant, an assignee of defendants in a construction defect suit, lost to an insurer’s motion for summary judgment in the appellant’s attempt to collect on a settlement of the underlying lawsuit against the insured for negligent design, contending that the insured’s policy covered negligent design services.

FACTS

The Somerby Project and the Wensmann Companies

Herbert Wensmann is the owner and CEO of Wensmann Homes, Inc (Homes). Homes had offices in Eagan and was in the business of building single and multi-family residential buildings around the greater Twin Cities area. From 2001 through 2007, respondent Western National Mutual Insurance Company insured Homes pursuant to a commercial general liability (CGL) policy.

In 2001, Herbert Wensmann undertook a project to build residential homes around a golf course in Byron, Minnesota. The residences were titled the Somerby Golf Community and were built in three phases, one of which called for the construction of the appellant Diseworth at Somerby community. The Diseworth community was to consist of 18 luxury townhomes to be constructed between 2003 and 2008. In anticipation of this project, Herbert Wensmann formed the subchapter S corporation Wensmann Homes of Rochester, Inc. (Rochester) in 2002.

Wensmann Holding Company, Inc. and Rochester were not named insureds by respondent, the insurer.  Diseworth contended that the Wensmann entities are all “legal fictions” created and controlled by Herbert Wensmann, and that they all qualify as “insureds” under the CGL policy.

On the contrary Homes and Rochester operated as two separate legal entities. Rochester had a separate office in Byron with its own employees and its own accounting and payroll records. Rochester, not Homes, filed a “Declaration for Planned Community: Diseworth at Somerby” with Olmsted county on September 11, 2002. That document named Rochester as the project owner.

Construction Problems

The first unit at the Diseworth community was completed in June 2003 and construction for the remaining units continued until December 2006. One feature of the Diseworth townhomes was brick arches located under a unit’s back deck. Rochester hired two subcontractors to construct these arches. No detailed specifications were provided and the subcontracted masons did the work based on their previous experience working with the Wensmann affiliates.  The performance standards of the windows, that allegedly leaked, were determined by representatives from Andersen Windows.

Beginning in 2005, Rochester was made aware that some of the brick arches were failing. The masonry subcontractors performed repair work on the arches of two units, and the bill was charged to Rochester. After being notified of the work request on the arches, Tim Houge hired Kent Jones, a structural engineer with Encompass, Inc. (Encompass) to create a design plan for future arches. Jones observed that the arches were getting cracks where the arch met the post.

ANALYSIS

Interpretation of an insurance policy is a question of law. If the language of an insurance contract is unambiguous, it must be given its plain and ordinary meaning. Coverage provisions are construed according to the expectations of the insured. While the insured bears the initial burden of demonstrating coverage, the insurer carries the burden of establishing the applicability of exclusions. Insurance contract exclusions are construed narrowly against the insurer, and, like coverage, in accordance with the expectations of the insured.

Where, as here, both the scope of an insurance policy’s coverage and the enforceability of a Miller–Shugart judgment (where the defendant assigns its rights against an insurer) are at issue, the court analyzes the former prior to the latter. “If there is found to be no coverage for the Miller–Shugart judgment, that ends the matter; there is no recovery against the insurer and the reasonableness of the settlement becomes a moot issue.” Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277, 279 (Minn.1990).

The policy limited its coverage if such services are provided only for work “contracted for or completed by the insured or the insured’s employees.”  (Emphasis added).

First, Homes and Rochester were not part of the same entity.

Rochester was a separately formed corporation and had separate headquarters in Byron. Rochester had separate employees and its own accounting and payroll records. Appellant claims, but was unable to prove, that respondent’s policy names all Wensmann entities as insureds. In fact, the policy only lists Wensmann Homes, Inc., Wensmann Realty, Inc., Wensco, Inc., Wensmann Properties, Inc., Wensmann, Management Co., and Herbert and Elaine Wensmann. Notably absent in the list of those insured is Wensmann Holding Company as well as Rochester. Accordingly, because Rochester is neither directly listed nor insured indirectly through its owner, the Wensmann Holding Company, it cannot qualify as an insured. The policy does not apply because the drafting services were not performed for work “completed by [an] insured.”

Second, even if assuming that Rochester and Homes were both insureds, appellant’s argument still fails because appellant has not shown how the insured’s negligent designs caused the damaged arches and water infiltration.

Exclusion (l)

But even if the court assumed that Homes and Rochester are both insureds, appellant’s claims are still precluded from coverage under exclusion (l). Exclusion (l) of the policy states: “This insurance does not apply to: ¶  l. Damage to your work. ¶ ‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘product-completed operations hazard.’”

“Your work” is defined as “[w]ork or operations performed by [the insured] or on [the insured’s] behalf.”

The district court relied on this exclusion to conclude that any work that Homes may have done on the Diseworth project is not covered under the policy.

But even if Rochester is an insured, then construction of the arches and windows certainly qualified as “[w]ork or operations performed by [insured] or on [insured’s] behalf” because the construction was in fact done by Rochester or on Rochester’s behalf. Apellant’s argument would only be persuasive if Rochester was not an insured. But if Rochester is not an insured, then the design services liability endorsement would not provide coverage and the court did not need to consider whether the exclusion to coverage applies.

ZALMA OPINION

The appellant in this case was taken advantage of by the entities with whom they reached a settlement based upon the right to sue an insurer. Since the construction defects were the responsibility of a corporate entity not a named insured and not an insured by definition, there was no potential for coverage. Further, even if it was an insured, the policy clearly and unambiguously excluded coverage. This case teaches that before entering into an agreement to take a defendant’s right against an insurer the plaintiff should retain the services of a competent insurance coverage lawyer who would have told them, in this case, to not waste their time and money.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Insured Must Be Named In Policy To Obtain Coverage

Why You Can Assign A Claim After Loss

When Does an Insured Loss Occur

The California Supreme Court concluded it had erred in the past and that since an insured loss occurs or happens at the time of injury during the policy period, and well before there might be any judgment or approved settlement for a sum of money. In such a situation the policy is not being assigned – as prohibited by most policies – but the right to defense and indemnity (no longer a contingent event) – is being assigned.

In Fluor Corp. v. Superior Court, — P.3d —-, 2015 WL 4938295 (Cal., 8/20/2015) the California Supreme Court, Cantil-Sakauye, J., held that after injury resulting in loss occurs within the time limits of a policy, an insurer must honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss, overruling by applying the provisions of California Insurance Code Section 530, that provides: “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss … ”

Addressing the point in time at which “injury or damage” that is continuous and occurs during successive policy periods triggers the insurer’s duty to defend under occurrence-based CGL policies, the California Supreme Court explained that the insurer’s duty arises when there is a potential for coverage, and even though there ultimately may be no duty to indemnify.  The Supreme Court rejected the insurer’s position that manifestation (the latest possible trigger time) should be used, and determined that the fourth option was the most appropriate under the words of the CGL policies and the relevant majority-rule cases.

Accordingly, the Supreme Court concluded in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 664, 42 Cal.Rptr.2d 324, 913 P.2d 878 (Montrose ) that bodily injury and property damage that is “continuous or progressively deteriorating” throughout successive policy periods is covered by all insurers’ policies in effect during those periods even though, it acknowledged the injuries at issue in such cases are latent, unknown and unknowable at the time the insurance policies were issued.

In the process of reaching these determinations concerning the trigger of the insurers’ duty to defend, the Supreme Court repeatedly employed and equated the term “loss,” not with a judgment or settlement for a sum of money, as Hartford urged it should do, but as synonymous with occurrence of bodily injury and property damage. In the third party context, the relevant risk is the insured’s act or omission, and the resulting damage, injury, or loss to another, which together form the basis of legal liability.  In State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 145 Cal.Rptr.3d 1, 281 P.3d 1000 (Continental), the Supreme Court extended its analysis and holding in Montrose to cover not only the duty to defend, but also the duty to indemnify.

California Insurance Code Section 520

The recognized rationale for enforcing a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is greater than what it agreed to undertake when issuing a policy. It is undisputed that an insured may not transfer the policy itself to another without the insurer’s consent, and in this sense all parties agree. But the post-loss exception to the general rule restricting assignability, recognized in the many cases discussed earlier and codified in section 520, is itself a venerable rule that arose from experience in the world of commerce.

The general rule permitting post-loss assignment is a good rule—which is why the courts have crafted it over the years even though it appears to contradict the clear text of many insurance policies and the courts’ expressed fidelity to contract language. The post-loss exception to the general rule of restricted insurance assignability is a venerable rule borne of experience and practicality. The post-loss rule prevents an insurer from engaging in unfair or oppressive conduct—namely, precluding assignment of an insured’s right to invoke coverage under a policy attributable to past time periods for which the insured had paid premiums.

Only this interpretation of the statute’s language barring veto of assignment by an insurer honors the clear intent demonstrated by the history of section 520 to avoid any “unjust” or “grossly oppressive” enforcement of a consent-to-assignment clause.  If the insurer were able to prevent its insured from assigning rights to assert such claims unless first reduced to a money judgment or approved settlement, it would effectively exert precisely the type of unjust and oppressive pressure on the insured that the early decisions, California Code Commissioners, and Legislature sought to foreclose.

“Loss” As Used in Section 108

Section 108 provides: “Liability insurance includes: [¶] (a) Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.”

Contrary to Hartford’s view, liability can arise simultaneously with loss and injury—at the same time someone causes a compensable injury—and not only when someone loses a lawsuit. There is no indication from section 108 or section 520, or other related contemporaneous statutes proposed by the California Code Commissioners and enacted by the 1935 California Legislature, that anyone understood the term “loss” as used in section 520 to have the meaning that Hartford proposes now—as arising only upon imposition of liability by entry of a judgment or approved settlement for a sum of money.

The Supreme Court rejected the related suggestion that section 520 is entitled to less judicial respect. In any event, we perceive a simple explanation for any prior relative obscurity or absence of express reliance on section 520 in any published case becayse it appeared generally unnecessary for litigants or courts to cite or rely upon it.

It was not until 2009 that Hartford for the first time asserted that assignment of claims for defense and indemnification coverage under its policies had been improperly made without its consent and hence was ineffective. This conduct further demonstrates that until insurers recently began to disallow and contest such assignments, there was little cause for insureds to think about, much less rely on Section 520 until very recently remained relatively obscure affords no basis to decline to construe and apply it now .

Stare Decisis

Of course, a rule once declared in an appellate decision constitutes a precedent that should normally be followed in cases involving the same problem.  As Witkin observes, however, courts have articulated reasons for overruling a prior decision—among them

(1) that it overlooked an existing statute; and

(2) that it is contrary to the general law as reflected in other cases, including out-of state cases before and after the decision.

In Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 129 Cal.Rptr.2d 828, 62 P.3d 69, a post-loss assignment of rights to invoke coverage under a third party liability policy, the Supreme Court rendered a common law-based holding, concluding that such an assignment is subject to consent by the insurer unless “the benefit has been reduced to a claim for money due or to become due.”

The Supreme Court now concludes that this determination, reached without consideration or analysis of section 520, conflicts with the rule prescribed by that statute. In analogous circumstances the Supreme Court has overruled our own prior authority. (Martin v. Palmer Union Oil Co. (1920) 184 Cal. 386, 389, 193 P. 950; Alferitz v. Borgwardt (1899) 126 Cal. 201, 207–209, 58 P. 460.) In light of section 520, the Henkel decision is overruled to the extent it is inconsistent with this opinion’s analysis.

Conclusion

Insurance Code section 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer—and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. The contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.

ZALMA OPINION

The California Supreme Court in a lengthy and well reasoned decision, corrected an earlier error and now allows an insured, once a claim for damage is presented, to assign the right to claim defense and indemnity to another entity. In this case Flour assigned the right to a new Flour entity that took over its rights and liabilities. Insurance Code Section 520 clearly gives every insurer the right to assign a claim, whether first or third party, and eliminated the right of the insurer to enforce an agreement against such assignment.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

What is The Trigger for Wrongful Arrest?

Insurers Only Obligated to Defend or Indemnify for Losses that Occur During Policy Term

A group of consolidated cases represent a dispute among insurance companies about who ends up paying some or all of a five million-dollar settlement paid on behalf of the City of Elkhart’s civil rights liability to Christopher Parish.

FACTS

The wrongful arrest and prosecution of Mr. Parish caused a deluge of litigation. It began in November 1996, when Parish was charged with armed robbery and attempted murder based on the report of a home invasion and shooting of Michael Kershner. Elkhart Police Department Detective Steve Rezutko was the principal investigating officer. Parish was convicted in June 1998, but in December 2005, an Indiana appellate court overturned the conviction and ordered a new trial, after which the criminal case was dismissed in December 2006.

Parish, wrongly forced to spend eight years in prison, brought a civil action in federal court asserting federal and state law claims for relief. Parish contended that the city and county were liable under the Indiana Tort Claims Act for false arrest, false imprisonment and intentional infliction of emotional harm. Parish’s complaint also alleged that Rezutko falsely implicated him by staging a phony crime scene, fabricating and tampering with evidence, manipulating and coercing witnesses, and giving perjured testimony.

Parish prevailed at trial but the jury’s award of only $73,125 in compensatory damages and $5,000 in punitive damages was “astoundingly low for cases of wrongful conviction.” Parish v. City of Elkhart, 702 F.3d 997, 999 (7th Cir.2012). On appeal, the Seventh Circuit affirmed the jury’s determination of liability but remanded for a new trial on the issue of damages. Parish ultimately settled his suit for a total of $5 million. At the time the case was settled, the sole remaining claim was that Parish’s due process rights were violated by a wrongful conviction.

One of the defendants in this case, National Casualty Company, had issued Elkhart a Law Enforcement Liability policy for the period from 1996 through 2000. The limits of liability under those policies were $1 million. NCC defended Elkhart and Rezutko in the civil case before Judge Lozano but it did so under a reservation of rights. No other insurer contributed to Elkhart’s defense. Ultimately, NCC paid the entire $5 million settlement amount plus all of the cost of the defense. Why NCC paid $5 million when its yearly policy limits were $1 million is a curious question that has no relevance to the pending action.

In this consolidated case, NCC seeks contribution toward the cost of defending the Parish suit and toward the settlement from other insurers who issued policies to Elkhart at various times. This case is greatly complicated by the number of years Mr. Parish’s nightmarish odyssey took to resolve and the number of different insurance companies that insured Elkhart during all those years.

MOTION OF GEMINI AND SWISS RE INTERNATIONAL

In their motion, Gemini and Swiss Re contend that they are entitled to a judgment that their policies provide no coverage for Elkhart because, within the meaning of the policies, the “wrongful act(s)” that caused Parish’s injury did not “occur during the policy period,” and because coverage is defeated by the policies’ exclusion for damages arising from fraudulent and dishonest acts.

The question is what event triggers insurance coverage in a wrongful conviction claim? Is it the date when the bad police behavior occurred and the prosecution was commenced? Or is it the date of exoneration—a date that may be several years down the road as it was in this case—that matters?

There is no Indiana case but there are two recent Illinois cases that have decided that insurance coverage is triggered in a wrongful prosecution claim under Illinois law when the wrongful prosecution is commenced, not when the defendant is exonerated.   Indian Harbor Ins. Co. v. City of Waukegan, ––– N.E.3d ––––, 2015 WL 995093 at *7 (Ill.App. March 6, 2015); St. Paul Fire and Marine Ins. Co. v. City of Zion, 18 N.E.3d 193, 200 (Ill.App.2014).

NCC argues unpersuasively that the Parish complaint “allege[s] wrongful acts that occurred during the Gemini and Swiss Re policy periods.” The most NCC can point to are allegations about Elkhart law enforcement policies that may have continued after Parish’s conviction and into the policy periods, but any continuing Elkhart practices did not cause Parish further injury at that point. The argument “conflates continuing harmful acts with the continuing effects of one harmful act” or earlier harmful acts. Northfield Ins. Co. v. City of Waukegan, 701 F.3d 1124, 1133 (7th Cir.2012).

For all these reasons, the court concluded as a matter of law that the Swiss Re and Gemini policies did not create a duty to defend Elkhart or provide liability coverage for settlement of the Parish matter.

MOTION OF TIG INSURANCE

TIG issued certain excess umbrella insurance policies to Elkhart for the period from June 1, 1997 through March 1, 2000, during which time NCC was Elkhart’s primary Law Enforcement Liability carrier. TIG’s motion for judgment on the pleadings contends that “the only remaining claim in the Underlying Lawsuit at the time of the settlement does not trigger the TIG Excess Policies,” and that the remaining claim did not involve “personal injury” within the meaning of the policies. TIG reasons that at the time of the Parish settlement, the sole remaining claim was for wrongful conviction, and that claim did not accrue until Parish’s exoneration in 2006.

Unlike Swiss Re and Gemini’s coverage based on “wrongful acts,” TIG’s excess policy was “occurrence” based. At bottom, I agree with the Illinois Appellate Court, when it said that what really matters in deciding coverage questions is what the individual insurance policy at issue actually says. In other words, it is the language of the insurance contract that governs coverage, not some blanket judge-made rule

With appropriate definitional substitutions, the TIG policy provides coverage for damages because of malicious prosecution caused by an accident during the policy period. Let’s set aside for the moment the question. The damage from the malicious prosecution was not “caused by” the accrual of the cause of action. There is a “clear majority” of courts that have held that the “tort of malicious prosecution occurs for insurance coverage purposes … when the underlying criminal charges are filed.”

Because an “occurrence” under the TIG policies includes “continuous or repeated exposure to substantially the same general harmful conditions,” a series of related acts of police misconduct (which would include perjured trial testimony or other misconduct after the false charges are brought) constitutes a single occurrence.

The “occurrence” here dates to 1996 when Parish was wrongly charged in violation of his due process rights, and quite simply TIG was not Elkhart’s insurer at that time. In sum, TIG has demonstrated that its policy created no coverage for the settlement of Parish’s § 1983 claim because the “occurrence” that caused Parish’s injury commenced prior to the policy period.

The court concluded that as an umbrella insurer under this policy language, TIG has no obligation with respect to costs of defense, and the parties, knowing that, have not spent time addressing it. The conclusion is bolstered by the strength of my determination that there is no coverage for the settlement itself because the “occurrence” that caused the injury was not within the policy period. TIG’s motion was granted as to both Elkhart’s settlement liability and the costs of defense.

MOTION OF ST. PAUL, NORTHFIELD AND CLARENDON

Defendants St. Paul and Northfield have filed a motion for judgment on the pleadings, in which defendant Clarendon has joined. St. Paul was Elkhart’s primary Law Enforcement Liability carrier for the years 2005, 2006 and 2007, and Clarendon was the excess carrier for those same years. Northfield was Elkhart’s primary carrier in 2003.

All three of these insurers are entitled to judgment as a matter of law concerning the Parish settlement. NCC’s pleading seeks contribution not only to the settlement but also to the costs of Elkhart’s defense. The lack of coverage is sufficiently clear that there is likewise no liability for the costs of defense.

These insurers’ policies were in effect years after Parish was charged and convicted, during time periods when he was incarcerated and the state appellate process finally yielded Parish a victory and the dismissal of the charges. Nothing happened during these policy periods that could be the kind of “injury or damage” covered by these policies. Even the broader duty to defend is not broad enough to support for these insurers a duty to defend (or to share in the cost of defense) against Parish’s civil rights complaint.

ZALMA OPINION

This is an example of really poor claims handling by an insurer who owed defense and indemnity to its insured, paid five times its limit of liability and then tried to get contribution from insurers whose policies were not in effect when the Mr. Parrish was wrongfully charged. An insurer cannot cure its error by suing other insurers.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What is The Trigger for Wrongful Arrest?

Never Bring a New Theory to Court of Appeal

Although Benefits Needed There Can Be No Insurance Coverage Without a Contract

Shawn Halvorson (Halvorson) challenged the summary-judgment dismissal of his declaratory-judgment action involving a dispute over insurance coverage. In Halvorson v. From, Not Reported in N.W.2d, 2015 WL 4877801 (Minn.App., 8/17/2015) the Minnesota Court of Appeal resolved the dispute applying common sense and precedential law.

FACTS

Halvorson was a backseat passenger in a rental vehicle that was involved in a single vehicle roll-over accident. Halvorson allegedly sustained injuries as a result of the accident. Respondent Reliance Leasing Inc. owned the vehicle, respondent National Interstate Insurance Company insured the vehicle, and Kari Dahlgren rented the vehicle under a rental agreement. Kristopher From was driving the vehicle when the accident occurred. The parties dispute whether From had Dahlgren’s permission to drive the vehicle, but no one disputes that From was not listed as an “additional driver” on the rental agreement.

Halvorson commenced a declaratory-judgment action against From, Reliance Leasing, and National Interstate, seeking a declaration that “From was an insured under the motor vehicle insurance policy issued by … National Interstate.” Reliance Leasing and National Interstate moved for summary judgment, arguing that From was not an insured under the terms of the vehicle’s insurance policy and that Halvorson lacked standing to bring the action because he had not obtained a judgment against From and had no rights under the insurance policy. The district court granted the motion and dismissed Halvorson’s complaint, determining that Halvorson lacked standing to bring an action against National Interstate and Reliance Leasing.

DECISION

By the time he arrived at the Court of Appeal, Halvorson acknowledged that he was no longer seeking the declaration requested in his complaint. Instead, Halvorson asserted a novel and untested in the trial court theory involving reparation security insurance coverage. He sought from the Court of Appeal, rather, a declaration that Reliance Leasing “is required by … Minnesota statutes to provide $30,000 in liability coverage” for his injuries.

Unfortunately for his case, Halvorson did not attempt to amend his complaint in district court to request the declaration that he sought from the appellate court, and noting that the trial court based its summary-judgment decision on the relief that Halvorson requested in his complaint.  The Minnesota Court of Appeal, as required by common sense and legal precedent, declined to analyze whether Halvorson was entitled to the declaration that he sought from it because a reviewing court must generally consider only those issues that the record shows were presented and considered by the trial court in deciding the matter before it.

Judgment in favor of the insurer was affirmed since Halvorson left the court with nothing to decide.

ZALMA OPINION

You just can’t make insurance coverage because you need it. There must be a contract between an insurer and an insured. When you fail, without amending your complaint, it is basically ridiculous to ask a court of appeal to consider an issue not raised at the trial court. The plaintiff was injured, probably through no fault of his own, but can’t get an insurance remedy where no insurance coverage exists.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Never Bring a New Theory to Court of Appeal

How an Easy to Read Policy Made Clear by Definitions

Definition Controls Insurance Policy Interpretation

Because insurance law requires insurers to write policies in “easy to read” language modern insurance policies contain multiple definitions to make the “easy to read” policy wording more precise. In Greater Community Bancshares, Inc. v. Federal Ins. Co., — Fed.Appx. —-, 2015 WL 4897467 (C.A.11 (Ga.) 8/18/2015) the Eleventh Circuit was called upon to resolve a dispute over insurance coverage for a bank where the definition of the bank’s “Professional Services” and “Lending Services” limited coverage where the insurer and the trial court concluded there was no coverage for a dispute brought by a bankruptcy trusteee.

Plaintiffs Greater Community Bancshares, Inc. and Greater Community Bank (collectively “GCB”) appeal the district court’s grant of summary judgment in favor of the Defendant Federal Insurance Company (“Federal Insurance”).

BACKGROUND FACTS

Insurance Policy

In 2008, GCB obtained a banker’s professional liability policy from Federal Insurance covering any claim by a customer for a wrongful act while performing “Professional Services.” The policy required Federal Insurance to defend any claim covered under the policy, even if any of the allegations were groundless, false or fraudulent.

Relevant to this appeal, an amendment to the policy defined “Professional Services” to mean “Lending Services.” And “Lending Services” was then defined as “any act performed by an Insured for a Lending Customer of [GCB] in the course of extending or refusing to extend credit or granting or refusing to grant a loan or any transaction in the nature of a loan, including any act of restructure, termination, transfer, repossession or foreclosure.” A lending customer was a “person or entity” to whom “an extension of credit, an agreement to extend credit, or a refusal to extend credit was made or negotiated on behalf of” GCB.

Underlying Bankruptcy Adversary Complaint

In 2010, GCB was named as a defendant in an adversary proceeding filed in the U.S. Bankruptcy Court in the District of Idaho. In the Chapter 7 bankruptcy adversary proceeding, the trustee for Payroll America Inc. (“Payroll America”) sued GCB.

According to the adversary complaint, Payroll America contracted with one of GCB’s bank account holders, Lori Duke d/b/a Data Processing Services (“DPS”), to complete certain payroll transactions, such as withholding taxes and then depositing those tax withholdings with the appropriate government agency. Using the Automated Clearing House (“ACH”) network and the Federal Reserve banking system, DPS collected funds from Payroll America’s client accounts and transferred them to the relevant taxing authority. Pursuant to a written agreement, GCB, the “Sending Bank,” allowed DPS, as the “Third–Party Sender,” to use GCB’s Originating Depository Financial Institution routing number to obtain direct access to the Federal Reserve Bank in Atlanta and perform these payroll functions.

The bankruptcy trustee’s initial complaint sought only an accounting, but subsequent amendments added claims of fraudulent transfers by Payroll America through GCB’s bank. Specifically, the trustee’s second amended complaint alleged that Payroll America had operated a fraudulent scheme similar to a Ponzi scheme that robbed “Peter to pay Paul,” and had used DPS’s money transfers made through GCB’s bank to hide Payroll America’s insolvency and defraud its creditors.

The trustee’s second amended complaint alleged that when Payroll America had “insufficient funds” for some of these ACH money transfers, GCB “paid out” those funds on Payroll America’s behalf, obligating Payroll America to repay GCB for the “advance.” DPS, on GCB’s behalf, then demanded “repayment” from Payroll America to satisfy the “obligation,” which Payroll America did with commingled funds. The second amended complaint alleged that when these insufficient-funds transfers occurred, GCB knew or should have known that Payroll America “was incurring debt to” GCB. The second amended complaint sought, among other things, to recover the full amount of the money transfers from GCB and DPS.

Defendant Federal Insurance’s Refusal to Defend

Federal Insurance denied coverage and refused to defend GCB to the action filed by the bankruptcy trustee. Federal Insurance denied coverage and refused to defend on the basis that the trustee and Payroll America were not GCB’s customers and because the factual allegations in the bankruptcy trustee’s second amended complaint did not involve professional services, i.e., loan servicing or lending services, as defined in the policy.

GCB defended itself in the bankruptcy-adversary proceedings, ultimately winning summary judgment.

Breach of Contract Action

Plaintiff GCB sued Federal Insurance, alleging a breach of its insurance contract under Georgia law. The district court granted Federal Insurance’s motion to dismiss GCB’s amended complaint because the underlying fraud claims in the bankruptcy-adversary proceeding did not fall, or even arguably fall, within the policy’s coverage. The district court concluded that the bankruptcy trustee’s second amended complaint contained no allegations of loan servicing or lending services as defined in the policy, and GCB did not claim that it “in fact gave loans to” Payroll America.

DISCUSSION

Georgia is a four-corners state that determines an insurer’s duty to defend by comparing the language of the policy with the allegations in the underlying complaint against the insured. The ordinary rules of contract construction apply to insurance contracts, and policy terms are given their ordinary and common meaning unless otherwise defined in the contract. If the facts as alleged in the complaint even arguably bring the occurrence within the policy’s coverage, the insurer has a duty to defend the action.

Where the policy requires the insurer to defend groundless, false, or fraudulent claims, the insurer has a duty to defend even where the complaint against the insured sets forth false factual allegations which would bring the claim within the coverage of the policy. For this reason, the insurer has a duty to defend even where the complaint against the insured falsely indicates non-coverage” but the insurer knows of or can ascertain “true facts showing coverage.

When read in context, the debt allegations in the second amended complaint do not refer to the kind of activities that constitute “Lending Services,” as defined in the policy.  The terms “loan” and “extension of credit” do not appear in the second amended complaint. As the district court explained, there are no allegations of a loan agreement, an interest rate, or a term, or any other indications of a conventional bank “loan” or “extension of credit.” As the district court further noted, the “debt” as alleged appears at most to be some form of overdraft protection, rather than a loan.  In any event, GCB’s alleged role as the “Sending Bank” in Payroll America’s ACH money transfers was not a “loan” or the “extension of credit” as those terms are commonly understood.

Moreover, GCB agrees that in fact Payroll America was never GCB’s customer and that GCB did not give a loan or extend credit to Payroll America. In fact, GCB has repeatedly prevailed on this point in the underlying bankruptcy litigation. Georgia law does not require the insurer to defend against the claim.

For these reasons,the Eleventh Circuit affirmed the district court’s order granting summary judgment to Federal Insurance.

ZALMA OPINION

Whether the court applied the four corners rule or allowed extrinsic evidence to determine the existence or non-existence of coverage, the definitions contained in the policy made clear that the policy did not provide coverage for the events that are the subject of the suit. There were no professional or lending services involved.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How an Easy to Read Policy Made Clear by Definitions

How an Insurer Can Sue to Recover Excessive Fees From Cumis Counsel

Bill Padding by Cumis Counsel Can Be Recovered From Cumis Counsel

The advent of requirements that an insurer must pay independent counsel when it reserves its rights and creates a conflict between the insurer and its insured was rife with abuse. Consider United States v. Stites, 56 F.3d 1020 (9th Cir. 05/26/1995), National Union Fire Insurance Co. v. Stites Professional Law Corp., 235 Cal. App. 3d 1718, 1 Cal. Rptr. 2d 570 (Cal.App.Dist.2 10/25/1991) and  Fireman’s Fund Insurance Co. v. Stites, 258 F.3d 1016 (9th Cir. 08/03/2001) where the creator of the Alliance that was a scheme to defraud insurers by creating litigation to require appointment as independent counsel and profit from it. Stites was convicted and served fourteen years.

The Ninth Circuit, in United States v. Stites, concluded: “Stites had been the mastermind of a massive set of breaches of professional responsibility and of the criminal law, the more heinous because Stites was a lawyer and at least twelve other lawyers were his principal confederates in carrying out the fraud. The mentality that sees law as a business was here taken to a reductio ad absurdum — litigation was unconscionably churned to make money for the lawyers. The essence of Stites’s scheme, repeated over and over again, was for Stites to control both sides of suits in which insurance companies were paying for counsel, and to assure that the plaintiffs’ lawyers would not settle until the insurance companies would no longer pay the costs of defendants’ counsel. Stites’s network of lawyers was known as “the Alliance.” According to the jury verdict in this case, Stites’s scams extracted at least $50 million from the insurers in the period 1984 to 1987.” Since Stites, the California Legislature enacted Civil Code Section 2860 to control independent counsel and their relationship to insurers. The abuse was limited by the statute but over-billing and padding of legal bills continued and insurers have sought to remedy the over-billing and padding by arbitration required by Section 2860.

In Hartford Casualty Ins. Co. v. J.R. Marketing, LLC (2015) , Cal.4th, [No. S211645. Aug. 10, 2015.] Justice Cuéllar of the California Supreme Court dealt with a new question not before dealt with when dealing with independent counsel, who must repay the insurer for legal fees paid for work not covered or for padded and over-billed fees when incurred by an insurer when no criminal conduct is involved.

THE HISTORY OF INDEPENDENT COUNSEL

The California Supreme Court has long maintained that if any claims in a third party complaint against a person or entity protected by a commercial general liability (CGL) insurance policy are even potentially covered by the policy, the insurer must provide its insured with a defense to all the claims. (E.g., Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081.) The insurer’s provision of an immediate, complete defense in such a “mixed” action, the Supreme Court has explained, is “prophylactically” necessary, even if outside of the policy’s strict terms, to protect the insured’s litigation rights with respect to the potentially covered claims. (Buss v. Superior Court (1997) 16 Cal.4th 35, 49 (Buss).) Nevertheless, the Supreme Court concluded in Buss that the insured would be unjustly enriched at the insurer’s expense if not ultimately required to bear the cost of litigating those claims for which the insured had never purchased defense or indemnity protection. Accordingly, we held in Buss that the insurer may seek reimbursement from the insured of defense fees and expenses solely attributable to the claims that were clearly outside policy coverage.

The Supreme Court did not consider in Buss the question from whom may a CGL insurer seek reimbursement when:

(1)     the insurer initially refused to defend its insured against a third-party lawsuit;

(2)     compelled by a court order, the insurer subsequently provided independent counsel under a reservation of rights – so-called Cumis counsel (see San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis); fn. 1 see also Civ. Code, § 2860 fn. 2 ) – to defend its insured in the third party suit;

(3)     the court order required the insurer to pay all “reasonable and necessary defense costs,” but expressly preserved the insurer’s right to later challenge and recover payments for “unreasonable and unnecessary” charges by counsel; and

(4)     the insurer now alleges that independent counsel “padded” their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary?

The insurer urges that it may recoup the over-billed amounts directly from Cumis counsel themselves. Cumis counsel respond that, if the insurer has any right at all under the facts of this case to recover over-billed amounts, the insurer’s right runs solely against its insureds. Cumis counsel’s erstwhile clients might then have a right of indemnity from these counsel.

BACKGROUND

In the summer of 2005, appellant Hartford Casualty Insurance Company (Hartford) issued one CGL insurance policy to Noble Locks Enterprises, Inc. (Noble Locks), effective from July 28, 2005, to July 28, 2006, and a second CGL policy to J.R. Marketing, L.L.C. (J.R. Marketing), effective August 18, 2005, to August 18, 2006. In these policies, Hartford promised to defend and indemnify the named insureds, and their members and employees, against certain claims for business-related defamation and disparagement.

In September 2005, an action was filed in Marin County Superior Court against J.R. Marketing, Noble Locks, and several of their employees (the Marin County action). In the Marin County action, certain defendants, apparently represented by the law firm of Squire Sanders (US) LLP (Squire Sanders), filed cross-complaints.

Defense of the Marin County action was tendered to Hartford under the J.R. Marketing and Noble Locks policies. Hartford disclaimed a duty to defend or indemnify the defendants in the Marin County action on the grounds that the acts complained of appeared to have occurred before the policies’ inception dates, and that certain of the defendants appeared not to be covered insureds. Hartford subsequently agreed to defend J.R. Marketing, Noble Locks, and several of the individual defendants in the Marin County action, subject to a reservation of rights.

The trial court in the coverage action entered a summary adjudication order, finding that Hartford had a duty to defend the Marin County action effective on the date the defense was originally tendered. The order also provided that, because of Hartford’s reservation of rights, Hartford must fund Cumis counsel to represent its insureds in the Marin County action. The insureds retained Squire Sanders as Cumis counsel.

The trial court in the coverage action issued an enforcement order directing Hartford to promptly pay all defense invoices submitted to it and to pay all future defense costs in the Marin County action within 30 days of receipt. The order, which was drafted by Squire Sanders and adopted by the court, further stated that Hartford had breached its defense obligations by refusing to provide Cumis counsel until ordered to do so and by thereafter failing to pay counsel’s submitted bills in a timely fashion. The Court of Appeal subsequently affirmed both the summary adjudication and enforcement orders.

Eventually the Marin County action was resolved. The coverage action, stayed during the pendency of the Marin County action, resumed. Hartford thereafter filed a cross-complaint, and then a first amended cross-complaint, against (1) various persons for whom it had allegedly paid defense fees and expenses in the Marin County, Nevada, and Virginia actions, and (2) Squire Sanders. The cross-complaint asserted that Hartford was entitled to recoup from the cross-defendants a significant portion of some $15 million in defense fees and expenses, including some $13.5 million Hartford paid to Squire Sanders pursuant to the enforcement order.

The trial court sustained a demurrer and the Court of Appeal agreed as to Squire Sanders, the court concluded that Hartford’s right to reimbursement, if any, was from its insureds, not directly from Cumis counsel.

The Supreme Court granted Hartford’s petition for review, which raised a narrow question: May an insurer seek reimbursement directly from counsel when, in satisfaction of its duty to fund its insureds’ defense in a third party action against them, the insurer paid bills submitted by the insureds’ independent counsel for the fees and costs of mounting this defense, and has done so in compliance with a court order expressly preserving the insurer’s post-litigation right to recover “unreasonable and unnecessary” amounts billed by counsel?

DISCUSSION

Restitution and the Duty to Defend

When an insured under a standard CGL policy is sued by a third party, the insurer’s contractual duty to defend the insured extends to all claims that are even potentially subject to the policy’s indemnity coverage. Moreover, when the third party suit includes some claims that are potentially covered, and some that are clearly outside the policy’s coverage, the law nonetheless implies the insurer’s duty to defend the entire action.  And unless the insured agrees otherwise, in a case where – because of the insurer’s reservation of rights based on possible non-coverage under the policy – the interests of the insurer and the insured diverge, the insurer must pay reasonable costs for retaining independent counsel by the insured.

Hartford reserved its right to dispute coverage for some or all of the defendants or claims in the Marin County, Nevada, and Virginia actions. Accordingly, Squire Sanders acted as the insureds’ independent counsel in those suits. It did so pursuant to a court order specifying that Hartford must promptly pay Squire Sanders’s bills as and when submitted, but that the firm’s charges must be “reasonable and necessary,” and that, after conclusion of the underlying litigation, Hartford could seek reimbursement of amounts it deemed excessive by this standard. The order did not specify from whom Hartford might obtain any such reimbursement.

Hartford now seeks reimbursement from Squire Sanders based on equitable principles of restitution and unjust enrichment. By charging Hartford for fees and expenses that were unreasonable and unnecessary for the insureds’ defense, Hartford asserts, Squire Sanders unjustly enriched itself at Hartford’s expense and thus owes Hartford restitution for the over-billed amounts.

An individual who has been unjustly enriched at the expense of another may be required to make restitution. (See Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51; see Rest.3d Restitution and Unjust Enrichment, § 1; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 1013, p. 1102.) Restitution is not mandated merely because one person has realized a gain at another’s expense. Rather, the obligation arises when the enrichment obtained lacks any adequate legal basis and thus cannot conscientiously be retained.

As the Supreme Court concluded in Buss, if an insurer were required to absorb the costs of defending claims it clearly never agreed to defend, it is the insured who would gain a direct and unjust enrichment at the insurer’s expense. Hartford alleges that it is counsel who are the unjust beneficiaries of the insurer’s over-payments. As applied here, accepting for the sake of argument (because the case came to the Supreme Court on a demurrer that assumes all facts alleged in the suit are true) that Squire Sanders’s bills were objectively unreasonable and unnecessary to the insured’s defense in the underlying litigation and that they were not incurred for the benefit of the insured, principles of restitution and unjust enrichment dictate that Squire Sanders should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills.

Hartford’s obligation to pay for independent Cumis counsel was not unlimited. Hartford did not voluntarily pay the alleged “unreasonable and unnecessary” overcharges submitted by Squire Sanders out of some self-interest extraneous to the benefit conferred on those counsel. Moreover, any such overpayments were not merely an “incidental” benefit to Squire Sanders, fortuitously received by the firm and beyond its power to refuse. On the contrary, Squire Sanders, under the terms of a court order it obtained (and indeed, drafted), submitted bills to Hartford and obtained payment subject to the express provision that counsel’s bills must be reasonable, and that Hartford could later obtain reimbursement of excessive charges.

By its terms, the statute limits neither the potential “parties to the dispute” (§ 2860, subd. (c)) nor the billing issues that may be raised.

Squire Sanders’s own conduct in the course of this litigation further supports the conclusion that it is not unjust to allow Hartford to pursue its reimbursement action directly against Squire Sanders.  The holding that Hartford may pursue its claim for reimbursement against Squire Sanders stems directly from – and is wholly consistent with – that order. Squire Sanders now attempts to avoid the effects of this order by encouraging the Supreme Court to foist all responsibility for reimbursement onto its erstwhile clients. The Supreme Court refused to accept that invitation. Under the circumstances, allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel.

Under the circumstances of this case, the insurer may seek reimbursement directly from Cumis counsel. If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer’s expense.

ZALMA OPINION

Justice Cuéllar, faced with the work of almost every elite member of the California appellate bar, wrote reasonably to allow the Hartford the opportunity to prove to a trial court that Squire Sanders padded its bills or over-billed Hartford for work not necessarily necessary to defense of Hartford’s insured. If they can prove that Squire Sanders was unjustly enriched they will recover those unjust fees from the lawyers not the innocent insured who had no way to review or control the billing of their Cumis counsel. This is not the criminal conduct of Mr. Stites but the Supreme Court refused to allow padding or over-billing to be foisted upon the innocent insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on How an Insurer Can Sue to Recover Excessive Fees From Cumis Counsel

Can an Insurer Obtain Insured’s Tax Returns?

Tax Returns Can Establish Issue If Allowed in Evidence

Whenever an issue about insurance coverage can be resolved by presentation of the insured’s tax returns, the insured would claim that tax returns are privileged and not subject to discovery by the insurer. That tax returns are private is axiomatic. However, when an insured sues an insurer seeking insurance coverage that can be resolved by information contained in a tax return, the privilege was either waived by the filing of suit or are so essential that they must be produced to prove or disprove the issue.

Defendant Farm Bureau Property and Casualty Insurance Company’s (“Defendant”) moved the District Court to compel production of certain tax records in Awadh v. Farm Bureau Mut. Ins. Co., Not Reported in F.Supp.3d, 2015 WL 4771733 (D.Utah, 8/12/2015).

BACKGROUND

The underlying action arises from an insurance claim for a stolen skid loader. Plaintiffs Naser Awadh and Stacy Awadh (“Plaintiffs”) submitted a claim to Defendant for the value of the skid loader. Defendant determined that the skid loader was property of the Plaintiffs’ business, and thus subject to a $2,500 business property coverage limitation.

Plaintiffs, on the other hand, claimed that the skid loader was personal property purchased in 2004, and that they are entitled to insurance coverage for the full value of the skid loader.

Defendant served requests for production of documents on Plaintiffs, including requests for business tax returns and schedules for the years 2004 through 2011, the period from acquisition of the skid loader until Plantiffs submitted their insurance claim. Defendant believes that these records are relevant because they show whether Plaintiffs treated the skid loader as a personal or business asset in the tax records; whether Plaintiffs claimed the stolen skid loader as a business loss; and Plaintiffs’ stated value of the asset.
Plaintiffs objected to the request, but eventually produced just eight pages of tax documents relating to a few of the years in question. Plaintiffs did not produce any schedules for 2007, 2009, and 2010 and did not produce any records at all for years 2004, 2005, 2006, 2008, or 2011. Plaintiffs claim that they do not have any additional tax records for the years in question. Defendant contends that if Plaintiffs do not have the records, the records can be obtained from the Internal Revenue Service (the “IRS”), provided Plaintiffs give the appropriate authorization. The tax records were obviously important since, if they were depreciated as an asset in a business tax return the $2,500 limit would apply and if not, it might be evident that the skid loader was personal property without a small limit.

Defendant made a good faith attempt to obtain production of the tax records from Plaintiffs without the court’s involvement, but was forced to file the current motion to compel production after the parties were unable to reach agreement.

ANALYSIS

The court finds Defendant’s request for production of the tax documents relevant and proper. Plaintiffs’ tax records appear highly relevant to claims and defenses in the case, and the requested documents appear likely to be admissible at trial or “reasonably calculated to lead to the discovery of admissible evidence.” Fed.R.Civ.P. 26(b)(1). The crux of the underlying action appears to be (1) whether the skid loader was personal or business property, and thus subject to their respective coverage limits. Further, Defendant controls the documents in that Defendant either has possession of the documents or has the ability to authorize release of the documents by the IRS.

Within ten (10) days of the date of this order, Plaintiffs are ordered to produce all personal and/or business tax returns and schedules for the years 2004 through 2011 in their possession, custody, or control, including copies of tax returns and schedules held by Plaintiffs’ accountants, attorneys, or other professionals. Plaintiffs’ production shall include an affidavit verifying whether the documents produced include full copies of all returns and schedules for the requested years. If Plaintiff’s affidavit states that they cannot produce full copies of all returns and schedules for the years in question, Defendant may prepare for Plaintiffs’ signatures any paperwork required by the IRS for release of the tax records. Plaintiffs shall sign and return the authorization paperwork within five days of receipt of the authorization paperwork from Defendant. If necessary, Plaintiffs shall cooperate with Defendant and perform any other actions reasonably necessary for Defendant to be able to obtain the tax records from the IRS.

All tax documents produced by Plaintiffs and/or the IRS shall be subject to the provisions of the Standard Protective Order provided for under civil rule 26–2(a) of the Rules of Practice for the United States District Court for the District of Utah. DUCivR 26–2(a)(1), App’x. XV.

The court ordered: “The tax records shall be designated “CONFIDENTIAL INFORMATION–ATTORNEYS’ EYES ONLY” pursuant to the Standard Protective Order. The produced tax records shall not be disclosed to anyone other than attorneys or attorneys’ professional consultants, and may only be used for purposes of this litigation. Parties shall comply with all requirements regarding the treatment of confidential information under the Standard Protective Order.”

ZALMA OPINION

Tax returns are presumably reliable documents since they are submitted to the IRS under oath and false statements on tax returns are subject to both civil and criminal penalties. When, as here, a tax return can resolve the key issue in the case, the only reason the plaintiffs seem to be attempting to conceal the tax returns is because they prove the skid loader was business property. When the documents are produced the issue will be resolved and the case will be subject to summary judgment by the plaintiff or the defendant.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can an Insurer Obtain Insured’s Tax Returns?

Can Insurer Litigate Coverage While Tort Case Pending?

Declaratory Relief Must Go Forward

Insurers faced with a lawsuit claiming its insured caused damages (other than bodily injury of property damage) to a plaintiff intentionally will often result in a declaratory relief action to support a decision to refuse to defend or indemnity the insured. When the issues between the insurer vs. the insured are different from the issues raised in the tort action, the insurer tries to go forward and get a ruling while the insured tries to stop the declaratory relief action so it can force the insurer to participate in settlement talks and pay for the insured’s defense.

The covenant of good faith and fair dealing, used by many plaintiffs to compel an insurer to provide coverage that it did not agree to, remains a mutual duty. An insured who fails to act in good faith to its insurer breaches the material implied covenant of good faith.

Homeowners Property & Casualty Insurance Company, Inc. (the insurer), asked the Florida Court of Appeal to reverse a circuit court order that stayed its declaratory judgment action on insurance coverage pending resolution of an underlying tort action filed against the insured, because it deprived the insurer of the benefits of the contract. In Homeowners Property & Cas. Ins. Co., Inc. v. Hurchalla, — So.3d —-, 2015 WL 4747551 (Fla.App. 4 Dist., 8/12/15) the Florida Court of Appeal resolved the dispute.

FACTS

Respondents Lake Point Phase I, LLC and Lake Point Phase II, LLC (collectively, Lake Point) sued Margaret Hurchalla (Margaret), the South Florida Water Management District (SFWMD) and Martin County, seeking injunctive relief and damages. Lake Point claimed that Margaret intentionally made false statements that caused the other defendants to void contracts they had with Lake Point. Lake Point sought injunctive relief and economic damages against Margaret.

The insurer provided a defense under a reservation of rights but later withdrew its defense. It then filed a complaint for declaratory judgment, alleging that, based on the homeowner’s insurance policy, it is not required to defend or indemnify Margaret in the tort action. The insurer argued that the intentional acts alleged in the tort action are excluded from coverage and that Lake Point has not claimed bodily injury or property damage caused by an “occurrence” that triggers coverage under the homeowner’s policy.

After the denial of its motion for summary judgment, the insurer noticed Margaret for deposition. In response, she moved for protective order and to abate the declaratory judgment action pending resolution of the underlying tort action. She argued that litigation of the disputed issues on insurance coverage may prejudice her defense of the tort action. Lake Point is a party in both cases, and she claimed that discovery may force her to disclose defense strategy.

The insurer opposed abatement or stay of the coverage action, arguing that the two actions were mutually exclusive and that expeditious resolution of the coverage action would promote settlement of the tort case. After hearing argument, the trial court granted the motion to abate the coverage action and stayed discovery.

A STAY IS DIFFERENT THAN AN ABATEMENT

Courts often have used the terms “stay” and “abate” interchangeably, but they are not the same. The granting of a stay of one action in favor of another is reviewed for an abuse of discretion, but the propriety of abatement can be determined as a matter of law. While abatement requires complete identity of parties and causes of action a stay should require substantial similarity of parties and actions.

The circuit court’s order in this case is properly characterized as having entered a stay, rather than abatement, as the two actions do not have the same parties and causes of action.

In the declaratory judgment action, the insurer is the plaintiff, and is not a party in the tort action. James Hurchalla is a party defendant in the declaratory judgment action but not a party in the tort action. The trial court effectively postponed the declaratory relief action.

ANALYSIS

In Higgins v. State Farm Fire and Cas. Co., 894 So.2d 5 (Fla .2004), the Florida Supreme Court identified factors a court should consider in determining whether to stay a coverage action pending resolution of an underlying tort action.

(1) whether the two actions are mutually exclusive;

(2) whether proceeding to a decision on the indemnity issue will promote settlement and avoid the problem of collusive actions between the claimant and the insured in order to create coverage where there is none; and

(3) whether the insured has resources independent of insurance, so that it would be immaterial to the claimant whether the insured’s conduct was covered or not covered by the indemnity insurance.

The tort action and the declaratory relief action are mutually exclusive. All of Lake Point’s claims against Margaret are outside of the scope of the policy. The disputed facts in the coverage action, relating to coverage by estoppel, are separate and distinct from the issues in the tort case. As for the second factor, a determination of whether the insurer has a duty to defend Margaret and indemnify her from Lake Point’s claims likely will promote settlement of the tort claim.

In addition, a decision on coverage also will avoid the potential for collusion between Margaret and Lake Point to create coverage where none exists.  The insurer explains that Lake Point could attempt to re-plead its tortious interference claim to omit the allegations of intentional, knowing acts by Margaret causing harm, damage or injury, so as to give rise to potential insurance coverage.

The Court of Appeal agreed with the insurer that Margaret has not shown how discovery in the coverage action could prejudice her defense in the tort action. The insurer has agreed that it will not seek attorney-client privileged communications. Any other prejudice can be avoided by allowing Margaret to raise objections to any specific discovery that would reveal her defense strategy.

The Court of Appeal concluded that the circuit court departed from the essential requirements of law in staying the coverage action pending resolution of the underlying tort action and, therefore, granted the petition and quashed the order.

ZALMA OPINION

Few members of the public like insurance companies. Some judges feel the same. Insurance companies are simply not a favored party in litigation. By staying the declaratory relief action and the right to depose the insured who was seeking coverage, the trial court abused its discretion by postponing the right of the insurer to seek declaratory relief. The stay allowed the insured and the plaintiff in the underlying action to set up the insurer for a major judgment and deprived it of the right to defend itself and protect its rights and that is why the stay was voided.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Can Insurer Litigate Coverage While Tort Case Pending?

Zalma’s Insurance Fraud Letter – August 15, 2015

How There Can Be No Coverage for Fraud

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

The current issue of ZIFL reports on:

1.    No Coverage for Defense of Suit Alleging Only Fraud
2.    Insurance Company Can Is a Victim of Insurance Fraud
3.    New From Barry Zalma
a.    Insurance Law
b.    The Insurance Fraud Deskbook
c.    Diminution of Value Damages
4.    Can an Insurance Company be a Victim of Fraud?
5.    E-Books from Barry Zalma
6.    California Funds Workers’ Compensation Fraud Fight

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

PROFORMATIVE ACADEMY

“INSURANCE FRAUD – AN OVERVIEW”

A Continuing Education Presentation

I have created for Proformative Academy a webinar called “Insurance Fraud – An Overview” that is available at  http://www.proformative.com/courses/insurance-fraud-prevention with a 10% Discount for my friends and clients who sign up and enter the discount code: Zalma10.

Insurance Fraud is estimated to take between $80 and $300 billion a year from the property and casualty insurance industry, raising the prices each person pays for insurance by more than $300 a year. It explains to those attending what insurance fraud is, various methods by which insurance fraud is perpetrated, and the various weapons provided by statutory law, legal precedent and professional claims handling to work to reduce the amount stolen by fraud perpetrators. It explains the use of red flags or indicators of insurance fraud and the use of an insurance company Special Investigation Unit (SIU) to gather the evidence necessary to assist in the defeat of insurance fraud.

Continuing Education Credit is available for many, including Certified Fraud Examiners, with 1.5 CPE Credits, in Fraud Prevention and Deterrence.

How to Read & Understand Business Insurance Policies

No business can operate profitably without insurance to protect it against contingent or unknown catastrophic losses. By spreading the risk among many businesses, insurers can charge reasonable sums to protect against losses to the business or its real and personal property. In this course you will listen to an internationally recognized insurance coverage lawyer, author, consultant and expert witness explain why and how an insurance policy provides protection for the business. A business person with the ability to read and understand the insurance policies they acquire has an advantage over every other business person who cannot read and understand a such policies.

Continuing Education Credit available for many, including Certified Fraud Examiners with 1.5 CPE Credits, in Fraud Prevention and Deterrence. I hope you find it interesting and informative.

http://www.proformative.com/courses/how-to-read-understand-business-insurance-policies

I hope you find it interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    What is a Claim? – August 14, 2015
•    Why Suit Was Worded to Avoid Coverage for the Defendant – August 13, 2015
•    Courses Available at Discount – August 12, 2015
•    Why is a National Flood Insurance Program Policy Not Insurance? – August 12, 2015
•    When is a Policy of Insurance Made? – August 12, 2015
•    How a Court Changed Parties Positions to Do Justice August 10, 2015
•    Why A Claimant Can Not be a Third Party Beneficiary of an Insurance Policy – August 7, 2015
•    How to Lose Coverage as an Additional Insured – August 6, 2015
•    Why it’s Important to Select A Forum – August 5, 2015
•    Why There is an Examination Under Oath – August 4, 2015
•    Why Failure To Read Policy Hurts Both Insured and Insurer – August 3, 2015
•    Insurance Fraud – An Overview – July 31, 2015
•    How to Lose A Judgment by Taking an Assignment – July 31, 2015
•    A Horse is a Horse, of Course – July 30, 2015
•    No Nonsense Application of Plain Meaning of Exclusion – July 29, 2015
•    How to Defeat an Arson for Profit Attempt – July 28, 2015
•    Crime Doesn’t Pay – July 27, 2015
•    Insurance & The Absolute Litigation Privilege – July 24, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Insurance Law

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

How to Determine the Proper Measure of Damage to Real and Personal Property

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

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

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

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

The Insurance Fraud Deskbook

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

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – August 15, 2015

What is a Claim?

Demand for Money Is A Claim

Claims made liability insurance policies are different from other liability insurance policies. A claims made policy only provides coverage for a claim made during the policy period. Because insurers believe that the word “claim” is clear, unambiguous and understood throughout the country, it is often a term not defined by the policy. As a result litigation often arises over the meaning of the word “claim” and how it applies to the interpretation, duties and obligations of the insured and the insurer.

In Ritrama, Inc. v. HDI-Gerling America Ins. Co., — F.3d —-, 2015 WL 4730916 (C.A.8 (Minn.) 8/11/2015) the Eighth Circuit Court of Appeal was faced with an argument over the meaning of the word “claim” in a claims made policy.

FACTS

Ritrama, Inc. (“Ritrama”) appealed the trial court’s decision that Ritrama’s general liability insurer, HDI–Gerling America Insurance Co. (“Gerling”), does not have a duty to defend Ritrama in a defective-product action filed against it by Burlington Graphics Systems (“Burlington”).

Ritrama manufactures pressure-sensitive flexible films and cast vinyl films for various applications, including for vehicle graphics products. Over a number of years, Burlington—Ritrama’s former customer—purchased more than $8 million worth of cast vinyl film products from Ritrama to manufacture graphic decals for customers in the recreational vehicle (“RV”) industry.

No later than early 2008, Burlington reported to Ritrama that RV owners were experiencing issues with the graphics. In one of its early emails, Burlington informed Ritrama that it was “not going to let [quality issues] just pass by” and that if Ritrama failed to take corrective action, it would seek an alternate supplier.  On July 8, 2008, Patrick McCormack, a manager for Ritrama, met with Burlington’s President, Mark Edwards, to discuss the product failures.

On September 9, 2008, Burlington sent Ritrama a spreadsheet detailing three claims for monetary damages based on the product failures, which totaled $53,219.37. McCormack responded to the spreadsheet by explaining that his “group went over the claim summary and [he] left Mark [Edwards] a voicemail with some questions,” which included: “What is [Burlington’s] expectation of Ritrama on this claim? Is there a certain percentage split you have in mind? When we settle on what the split will be, will this be it? Our intention is to close this out with [Burlington] and have nothing else waiting in the balance (so-to-say).” (Emphasis added)

In early 2009, Ritrama purchased a commercial general liability insurance policy from Gerling (the “Policy”). The Policy provided coverage only for claims made between March 31, 2009, and March 31, 2010. As relevant to this appeal, the policy included the following terms: “A claim by a person or organization seeking damages will be deemed to have been made at the earlier of the following times: ¶ (1) When notice of such claim is received and recorded by any insured or by us, whichever comes first; … All claims for damages because of ‘property damage’ causing loss to the same person or organization will be deemed to have been made at the time the first of those claims is made against any insured.”

On July 17, 2009, Ritrama advised its insurance agent of its issues with Burlington. The same day, the insurance agent sent a “notice of occurrence” to Gerling. Ritrama argues that the notice was not an acknowledgment of a claim, but merely a notification of a “customer having problems.” On January 6, 2011, Burlington sent a letter through its litigation counsel to Ritrama more formally demanding payment and threatening litigation. After Ritrama failed to meet Burlington’s demands Burlington brought suit against Ritrama in federal court. On June 14, 2011, Gerling denied coverage and refused to defend Ritrama in its liability suit.

ISSUES

Ritrama raises three issues on appeal: the district court erred in (1) adopting too broad a definition of “claim” for the Policy; (2) finding the term unambiguous; and (3) granting summary judgment in favor of Gerling because whether Burlington made a claim under the Policy was a disputed factual issue.

ANALYSIS

The insurance policy does not define the term “claim,” so the court employs ordinary contract interpretation principles to determine the meaning the parties ascribed to the term. The trial court found the term unambiguous with the following definition: “an assertion by a third party that the insured may be liable to it for damages within the risks covered by the Policy.”

First, the definition adopted by the district court is entirely consistent with dictionary definitions, including Black’s Law Dictionary. Two listed definitions—“[t]he assertion of an existing right” and “[a] demand for money or property to which one asserts a right”—are much more on point and consistent with the district court’s definition.

Second, the district court’s definition is also consistent with the Policy as a whole. Ritrama believes the term “claim” should carry a similar meaning to “suit” because the terms are used “side-by-side,” but the Policy specifically defines the term “suit” and does not define the term “claim”—suggesting they carry different meanings within the Policy.

Third, the district court’s definition is not contrary to the primary purpose of claims-made insurance policies to only cover claims submitted during the policy period. Under such a policy, “coverage is provided if the error or omission is discovered and brought to the insurer’s attention during the term of the policy.”  A chief purpose of claims-made policies is to allow the insurer to accurately fix its potential liabilities. Adopting the district court’s definition in no way undermines this purpose. To the contrary, it reaffirms the purpose of such policies by recognizing that, absent policy language to the contrary, a claim is submitted when a demand has been made or when the claim is “brought to the insurer’s attention”— not when an unnecessarily formalistic procedure for making a claim has been followed. As such, an insured cannot take advantage of such a policy when it receives a clear demand for relief and then purchases a claims-made insurance policy before a third-party can put the stamp on its written demand letter from its attorney.

Fourth, the Eighth Circuit refused to believe the district court’s definition is inconsistent with Eighth Circuit and Minnesota law. The Eighth Circuit and Minnesota courts have likewise made clear that the focus of whether a claim has been made is whether a demand for relief has been made. Although a mere request for information is generally insufficient to constitute a claim, a demand for relief generally constitutes a claim.

Generally speaking, a “claim” in a liability policy is considered to be an assertion by a third-party to the effect that the insured has caused the claimant damages through some acts or omissions and that the claimant intends to hold the insured responsible for all or a portion of the damages so caused.

Ritrama argued there was no communication from Burlington which could be considered a claim within the definition above. The Eighth Circuit agreed with the district court that explicitly held that the spreadsheet sent from Burlington to Ritrama in September 2008 constituted a list of demands for damages in spreadsheet form.  At the July 2008 meeting in which Burlington and Ritrama met to discuss the product failures and damages that were accruing, Burlington informed Ritrama it would be compiling and submitting a summary of the re-work expenses it had incurred based on the product failures. True to its word, on September 9, 2008, Burlington sent Ritrama a spreadsheet with the specific total of how much monetary damages it had sustained thus far.

There is no reasonable way to interpret the spreadsheet as anything other than a demand for relief. Indeed, this is precisely how Ritrama itself understood the communication. In response to the spreadsheet, Ritrama acknowledged “the original $53k claim that was submitted to [it],” and asked Burlington about its “expectation as to how much Ritrama should share in this claim ” (emphasis added by the court).

A month later, Ritrama reached out to Burlington again with a settlement proposal of 50% for the “claim value [of] $53,219.37” communicated thus far and stated that it would “consider this claim closed” (emphasis added).

ZALMA OPINION

As the plaintiffs’ bar loves to explain insurance is a business of utmost good faith. That duty is defeated when a person, knowing a claim has been presented and demands made upon it, buys an insurance policy to cover that risk without telling the insurer about when applying for the insurance. Ritrama tried to gain coverage wrongfully and in bad faith. It knew there was a claim pending when it bought a claims made policy. The claim happened before the inception date of the policy. Doing so is like buying a fire insurance policy at 3:00 p.m. to be effective that day at 12:01 because the house burned down at 10:00 a.m. Ritrama intentionally misrepresented or concealed a material fact.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on What is a Claim?

Why Suit Was Worded to Avoid Coverage for the Defendant

The Danger of the Eight Corners Rule

The Eight Corners rule applied in states like Louisiana, limits analysis of the coverage issue to the four corners of the law suit and the four corners of the policy. It prevents the court from considering extrinsic evidence that might allow coverage or allow insurers to refuse coverage when if the true facts were known would have a different result.

In Haygood v. Dies, — So.3d —-, 2015 WL 4748136 (La.App. 2 Cir.), 49,972 (La.App. 2 Cir. 8/12/15) a dentist and a member of the state regulatory board for dentistry was sued with others for actions taken by the board concerning the plaintiff and his dental practice. The allegations of the claim were that the Dr. Herman O. Blackwood, III (“Dr.Blackwood”) acted in concert with others in a conspiracy to slander or defame the character of the plaintiff. Following the dentist’s claim for insurance coverage from his homeowner’s insurance, the insurer intervened in the action seeking a declaratory judgment that no coverage or duty to defend was owed under the policy. The trial court rendered judgment on a motion for summary judgment in favor of the insurer which is now appealed.

FACTS

This lawsuit is based on the investigation and disciplinary proceeding against Dr. Ryan Haygood, where Dr. Haygood’s dental license was initially revoked by the Louisiana State Board of Dentistry (“Dental Board”). The Dental Board began investigating Dr. Haygood and ultimately filed charges against him after receiving formal complaints from patients and other dentists that Dr. Haygood was recommending treatment plans after over-diagnosing or unnecessarily diagnosing patients with periodontal disease.  The Dental Board found that Dr. Haygood had violated the Dental Practice Act and revoked his dental license and levied fines against him.

Dr. Haygood appealed the Dental Board’s decision and the appellate court found that the Dental Board’s independent counsel participated in the administrative hearing in dual roles as prosecutor and adjudicator in violation of Dr. Haygood’s due process rights.

After the appeal court’s ruling, Dr. Haygood and his limited liability company filed this suit for damages in 2011, naming the Dental Board and others as defendants.  Dr. Haygood supplemented his petition to add Dr.Blackwood, as a defendant. Dr. Haygood claims that Dr. Blackwood, with others, caused him damage through actions that were initiated by the Dental Board, resulting in the disciplinary hearing.

Dr. Blackwood gave notice of the lawsuit to Encompass Insurance Company of America (“Encompass”), his homeowner’s insurance provider, seeking defense and indemnity. Encompass refused to defend and sought declaratory relief. The trial court issued a judgment granting Encompass’ motion and denying Dr. Blackwood’s motion, finding that the homeowner’s policy did not provide coverage for the claims asserted against Dr. Blackwood and that Encompass had no duty to defend and indemnify Dr. Blackwood.

LAW

An insurance policy should be interpreted by using ordinary contract principles. Interpretation of a contract is the determination of the common intent of the parties. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. To determine if the an insurer owes the insured a duty to defend, the court is confined to the “eight corners” of the allegation and the insurance policy.

THE “EIGHT CORNERS” REVIEW

Following the so-called “eight corners” analysis, the parties’ opposing motions for summary judgment rest on the petition’s factual allegations against Dr. Blackwood and the contractual provisions for coverage under the Encompass policy. In Dr. Haygood’s initial petition, the following charge is made against the executive director of the Dental Board and other dentists/defendants:

Dr. Haygood claimed that the defendants knowingly and intentionally deprived Dr. Haygood of his right to a fair and impartial hearing; presented knowingly false or exaggerated claims, provided evidence obtained through unlawful means; and took other actions which deprived Dr. Haygood of the right and privilege to conduct his livelihood as a licensed dentist in the State of Louisiana.

The suit alleged, among other things that Dr. Blackwood has actively sought to conceal both the existence of the conspiracy and his role in it by providing false testimony in this action as recently as January 2013 regarding his actions that materially supported the illegal action taken against Dr. Haygood.

THE POLICY

The provisions of the Encompass policy that detail coverage are listed as follows:

“Liability Coverage—Losses We Do Not Cover …

“4. Personal injury does not apply to:

“(a)     Injury caused by a violation of a law or by, or with the knowledge or the expressed or implied consent of the covered person; …

“(c)     Civic or public activities performed for pay by any covered person;

“(d)     Injury arising out of:

“(1)     oral or written publication of material, if done by or at the direction of any covered person with knowledge of its falsity.”

DISCUSSION

Dr. Blackwood appealed and asserted that the coconspirator claims against him in conjunction with the actions of certain defendants who were not members of the Dental Board are not unambiguously excluded from coverage under the policy.

Dr. Haygood’s suit is brought against the executive director of the Dental Board, members of the Board, and other dentists with practices in the Shreveport and Bossier City area. The petition asserts that the Dental Board investigated and charged Dr. Haygood with defrauding his patients by improper diagnoses of periodontal disease. The allegations are that those charges were totally unfounded and presented by knowingly false or exaggerated claims. Thus, the investigations were “sham” actions conducted against Dr. Haygood by his competition and the members of the Board, including Dr. Blackwood. All of the charges directed at Dr. Blackwood are framed in terms of a conspiracy between Dr. Blackwood, other members of the Dental Board, and possibly some of the other dentists named as defendants, yet not members of the Board.

Dr. Haygood’s allegations against Dr. Blackwood amount to a claim for libel, slander, or defamation of character, which is defined to be “personal injury” in the Encompass policy. Nevertheless, we do not find that any publication of the alleged defamatory statements against Dr. Haygood is stated to have occurred by Dr. Blackwood’s mere negligence. Dr. Blackwood’s alleged actions as a member of the Dental Board are not stated to rest upon false information upon which Dr. Blackwood negligently relied without knowledge of the falsity. Instead, the allegations are that Dr. Blackwood and the Dental Board members intentionally presented false and exaggerated claims.

The distinction between a negligent defamation of one’s character and an intentional one is clearly recognized when the tortfeasor is charged to have acted in a conspiracy with others to commit the willful act. Torts committed by conspiratorial actors are intentional. Dr. Blackwood is not sued in this action as an independent actor who slandered or defamed Dr. Haygood. He is sued as one of the conspirators who agreed to commit an intentional or willful act.

Under Louisiana law, while a contract of insurance may extend to cover the insured’s negligent slander, libel or defamation of character, public policy forbids a person from insuring against his own intentional acts. The “personal injury” coverage in the Encompass policy recognizes this public policy and provides in exclusions that the publication of defamatory material with the insured’s knowledge of its falsity is an excluded intentional tort.

Accordingly,  intentional slander and defamation through a deliberate conspiracy among the defendants are charged and, therefore Encompass was correct when it refused to defend or indemnify Dr. Blackwood.

ZALMA OPINION

If the plaintiff wanted money from Dr. Blackwood’s insurer he could have alleged that Dr. Blackwood acted negligently. If he wanted to punish Dr. Blackwood and make him pay from his own pocket to defend the suit. Artful pleading in an eight corners state like Louisiana allows the suit – whether successful or not – to punish the defendant. If it was filed in an extrinsic evidence state evidence could show Dr. Blackwood’s negligence and he would receive a defense paid for by his insurer. Also, coverage may exist in Dr. Blackwood’s errors and omissions policy or from the dental board.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why Suit Was Worded to Avoid Coverage for the Defendant

Courses Available at Discount

I have course(s) live on Proformative, which just launched, and you can save 10% on a quarterly or annual subscription if you follow my link to the platform. If it’s your first course on Proformative, you can take advantage of the same discount everyone else has right now, which is to try the platform by taking their first course for free on the site. But the 10% discount  will be good for you to enroll with at any time, now or in the future.
10% Discount code is: Zalma10
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Why is a National Flood Insurance Program Policy Not Insurance?

Fulfill the Condition Strictly or Get Nothing

Contrary to what it is called the National Flood Insurance Program is not insurance. It is, rather, a government funded entitlement that can only pay claims by dipping into the treasury of the United States. As a result, unlike insurance policies, federal courts strictly construe the language of the National Flood Insurance policy. In the majority of state jurisdictions substantial compliance with the proof of loss requirement is all that is necessary while Flood policies are strictly construed.

The proper inquiry in determining substantial compliance with a proof-of-loss condition in an insurance policy is whether the proof of loss fulfilled its three intended purposes: (1) allowing insurer an opportunity to investigate the loss; (2) allowing insurer to estimate its rights and liabilities; and (3) preventing fraud. [Bowlers’ Alley, Inc. V. Cincinnati Ins. Co., — F.Supp.3d —-, 2015 WL 3540039 (E.D.Mich.). “A substantial compliance with the provision requiring a sworn proof of loss, resulting in the insurer being able to adequately investigate the claim and estimate its liabilities, is all that is required.” [Greenbrier Hotel Corp. v. Lexington Ins. Co., Slip Copy, 2015 WL 691450 (S.D.W.Va., 2/18/15)

However, in Ferraro v. Liberty Mut. Fire Ins. Co., — F.3d —-, 2015 WL 4666106 (C.A.5 (La.) 8/6/2015) Ron and Patricia Ferraro sued Liberty Mutual to recover flood-insurance proceeds after their house was damaged by Hurricane Isaac. The Ferraros submitted an original signed, sworn proof of loss with the handwritten note “Will send supplement later.” They later sought payment from Liberty Mutual for the supplemental amount without providing a second proof of loss.

The district court granted summary judgment for Liberty Mutual, holding that a second sworn proof of loss is necessary to support a claim under the National Flood Insurance Program.

BACKGROUND

The Ferraros own a house in LaPlace, Louisiana. They purchased a Standard Flood Insurance Policy (SFIP) from Liberty Mutual via the National Flood Insurance Program’s (NFIP) Write–Your–Own (WYO) program. The policy was in place on August 29, 2012, after Hurricane Isaac made landfall on Louisiana.

The Ferraros’ home suffered damage, and they filed a claim for benefits with Liberty Mutual. Liberty Mutual dispatched an independent adjuster, who recommended payment of $103,826.83 and prepared a proof-of-loss form in that amount. The Ferraros signed the proof of loss and handwrote on the form: “Will send supplement later.” Liberty Mutual paid the Ferraros the full amount claimed by the proof-of-loss form.

The Ferraros then hired Dan Onofrey, a public adjuster, to evaluate the damage on their home. Onofrey issued a report valuing the Ferraros’ loss at $320,436.55. Surprisingly, since a licensed public adjuster is expected to know the requirements of the NFIP, the Ferraros only submitted Onofrey’s report to Liberty Mutual. They did not submit a second signed, sworn proof-of-loss form. Liberty Mutual made no further payments to the Ferraros.

For claims relating to Hurricane Isaac, policyholders were required to provide a complete, signed, sworn-to proof of loss within 240 days of the loss (extended by FEMA from the standard 60 days).

The district court granted summary judgment, noting that the NFIP requires strict compliance and holding that the Ferraros’ failure to provide a second proof of loss to accompany Onofrey’s loss valuation barred their suit.

DISCUSSION

Congress created the NFIP to provide flood-insurance coverage at affordable rates. The program, which is operated by the Federal Emergency Management Agency (FEMA), draws funds from the federal treasury. Homeowners can purchase an SFIP policy directly from FEMA or through private insurers, which serve as WYO providers and are fiscal agents of the United States.

Because the NFIP puts at stake the government’s money its regulations are subject to sovereign immunity. Although WYO insurers administer SFIP policies, payments made pursuant to such policies are “a direct charge on the public treasury.”   Gowland v. Aetna, 143 F.3d 951, 955 (5th Cir.1998) The provisions of an insurance policy issued pursuant to a federal program must be strictly construed and enforced.

The central issue in this case is the interpretation of the proof-of-loss requirement in Article VII of the SFIP.

The regulations make strict compliance with the proof-of-loss requirement a condition precedent to suit. “You may not sue us to recover money under this policy unless you have complied with all the requirements of the policy. … This requirement applies to any claim that you may have under this policy and to any dispute that you may have arising out of the handling of any claim under the policy.” 44 C.F.R. pt. 61, app. A(1) art. VII(R) (emphasis added). An insured’s failure to provide a complete, sworn proof of loss statement, as required by the flood insurance policy, relieves the federal insurer’s obligation to pay what otherwise might be a valid claim.

The Ferraros argue that they discharged their proof-of-loss obligation when they filed a signed, sworn statement claiming $103,826.83 in damages and advised Liberty Mutual that a supplement would follow. They contend that they seek only additional benefits (for a total of $320,436.55) and not a wholly separate, “materially different” claim. “The policy at issue,” they assert, “does not require the Ferraros to submit supplementary proof of loss forms to sue for additional payments for previously perfected claims.”

Whether an insured must submit an additional proof of loss to recover an additional amount on a preexisting claim is a question of first impression in the Fifth Circuit. However,  Gunter v. Farmers Ins. Co., 736 F.3d 768 (8th Cir.2013), provides strong persuasive authority for the conclusion that a second proof of loss is indeed required.

It does not matter that the estimate from [the insured’s] adjuster was submitted at the same time and along with compliant proof-of-loss forms claiming undisputed sums because, under the plain terms of the SFIP, [the insured] still had to sign and swear to the amount in that estimate, which he did not do.

SFIP is clear that statements by an adjuster are provided only as a courtesy, and the proof of loss is the signed and sworn final statement of the insured as to how much damage is claimed.  Failure to provide a proof of loss for any supplemental amount is a bar to recovery.

The Fifth Circuit found persuasive the reasoning of other Circuits and applied the same principles to the suit filed by the Ferraros that an insured’s failure to strictly comply with the SFIP’s provisions—including the proof-of-loss requirement—relieves the federal insurer’s obligation to pay the non-compliant claim.

Because the Ferraros’ additional claim for $320,436.55 was neither signed nor sworn-to, it cannot serve as a proof of loss under the plain terms of the SFIP.

The Fifth Circuit held that a second proof of loss was necessary for the Ferraros to perfect their claim. Therefore, the district court properly granted summary judgment for Liberty Mutual.

ZALMA OPINION

Insurance policies issued by insurers not part of the NFIP also contain similar proof of loss conditions. However, they are not strictly construed because substantial compliance is enough when the money expended belongs to a profit making insurer while a NFIP policy  impacts money from the Treasury.

It seems to me that contract terms agreed to at the time the contract is made should be enforced if they are clear and unambiguous. Courts that extend the sixty day proof of loss requirement if there is evidence of “substantial compliance” are saying that the contract term is unimportant and need not be enforced except where money from the Treasury is involved. The language is the same and the contracts should be enforced the same.

A Government funded “insurance” program should never be more equal than a private insurance program.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why is a National Flood Insurance Program Policy Not Insurance?

When is a Policy of Insurance Made?

Acceptance of Offer Effects Insurance

Insurance, like every other contract, is formed when there is an offer made, that offer is accepted, and consideration (payment or a promise to pay premium) is given.

In a diversity action, a federal court must apply the choice-of-law rules of the forum state. The parties agree that Florida’s rule of lex loci contractus governs the Court’s choice-of-law determination in this contract dispute. This rule provides that the law of the jurisdiction where the contract was executed governs the rights and liabilities of the parties in determining an issue of insurance coverage. In Sun Capital Partners, Inc. v. Twin City Fire Insurance Company, Inc., Slip Copy, 2015 WL 4648617 (S.D.Fla., 8/5/15) the District Court for the Southern District of Florida was asked to apply Florida law while the insurers concluded the contracts were effected in New York and its law should apply.

THE ISSUE

The determination of where a contract was effected is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done. The parties take differing views on where the “last act” necessary to complete Plaintiff’s insurance contracts occurred. Stressing the Eleventh Circuit’s reliance on “communication of the acceptance,” Defendant argued that the last act necessary to create a contract was the insurers’ agents’ communication of acceptance of Plaintiff’s agent’s order to bind coverage. Because acceptance was communicated from New York (to one of Plaintiff’s agents who was also in New York), Defendant argues that New York law applies. On the other hand, Plaintiff argues that the last act was the delivery of the subject policies to Plaintiff at its place of business in Florida.

FACTS: COMMUNICATION OF ACCEPTANCE

Plaintiff Sun Capital assigned the duty of purchasing its insurance policies to its national insurance broker, Marsh Inc. Underwriting for the excess policy (Twin City) was handled by the Hartford. Underwriting for the primary policy (Houston Casualty Company) was handed by Professional Indemnity Agency, Inc.

The circumstances surrounding the excess policy (Twin City) appear in the record first. On December 28, 2007, Raymond Ash, a Marsh agent located in New York, emailed Ho–Tay Ma, a Hartford agent located in New York, as follows: “Thanks for all your help with this account. Please consider this e-mail as the formal order to bind coverage for Sun Capital’s renewal GPL coverage as follows: [discussing applicable limits, period, and terms]…. Please forward the formal binders or confirmation of binding as soon as possible.” From his New York office, Mr. Ma responded to Mr. Ash’s email as follows: “Based upon the information provided regarding the above captioned account, we are pleased to provide you with the following Binder for Insurance on behalf of Twin City Fire Insurance Company.” Apparently, Mr. Ma emailed a copy of the binder to Mr. Ash in New York, as well as to two Marsh agents located in Florida.

The binding of the primary policy (Houston Casualty Company) was handled the same manner. On December 28, 2007, Jennifer Hickox, a Professional Indemnity agent, emailed Mr. Ash as follows: “In accordance with your instructions, we are binding Private Equity Professional Insurance as follows [listing applicable limits, period, and terms].”

Ms. Hickox was a Vice President for Professional Indemnity, and her business address was listed in her email as in Mount Kisco, New York. Ms. Hickox’s email does not indicate that it was sent to anyone other than Mr. Ash in New York.

These documents show that both Plaintiff’s primary and excess insurance policies were executed in materially similar ways.

Plaintiff’s agent, March Inc., emailed the insurer’s agent an offer to purchase insurance by submitting a “formal order to bind coverage.” Next, the insurer’s agent accepted that offer and issued a binder for coverage from an office in New York. This acceptance was effective at the time—and at the place—where it was dispatched, i.e., New York.

The insurer’s agent’s acceptance of Plaintiff’s agent’s offer to purchase insurance was the last act necessary to complete the insurance contract. The fact that only binders were initially exchanged, and not the actual policies, does not alter the conclusion that Plaintiff’s agent offered to purchase insurance coverage, specifying the terms of the policy, and the insurer’s agent issued an acceptance based on those terms.

CONCLUSION

Based on the foregoing, the Court concluded that the last act necessary to create an insurance contract occurred in New York when the insurers’ agents accepted Plaintiff’s agent formal offer to bind coverage.

Whatever merit might exist for the adoption of a rule in Florida that the locus contractus of an insurance policy always be the place where it is delivered, as it stands now, the determination of where a contract was executed is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done.

Where the facts indicate that a fully consummated contract existed prior to delivery of the policy, the last act for contract formation may be found prior to delivery and the court concluded that the contract was formed when the offer was accepted and a binder ordered.

ZALMA OPINION

A binder is evidence of an insurance policy to be delivered at a later date. The issuance of a binder means there is a contract and that is why the court chose New York law for the case. In Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, 345 F.3d 154 (2d Cir. 09/26/2003) the Second Circuit concluded that a binder is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance.

Thus, a binder is a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. While not all of the terms of the insurance contract will be set forth in the binder, a binder is nevertheless a fully enforceable present contract of insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When is a Policy of Insurance Made?

We’re Back

My ISP’s server went down and I could post nothing for two days.

I will post articles tomorrow.

Sorry I had nothing for you today.

 

Posted in Zalma on Insurance | 4 Comments

How a Court Changed Parties Positions to Do Justice

MCS-90 Requires Coverage for Any Vehicle Used by the Insured

Courts dealing with insurance issues often find that a logical and simple technical defense can avoid the entire lawsuit. Others believe, as did the District Court of the Northern District of Alabama, in Fowler v. Canal Ins. Co., Slip Copy, 2015 WL 4656474 (N.D.Ala., 8/6/2015), that it is the duty of the court to resolve disputes and dispense justice.

FACTUAL BACKGROUND

The Fowler declaratory judgment action concerns insurance coverage issues relating to a traffic accident. Plaintiffs Larry and Julie Fowler and their two children were traveling in a pickup truck when their truck collided with a 1999 Kenworth tractor-trailer truck. Defendant Gannon Derek Sanders was driving the tractor-trailer truck. Mr. and Mrs. Fowler and their two children sustained injuries in the accident. The Fowlers allege that defendant Todd Hauling, Inc. owned the tractor-trailer that Mr. Sanders was operating and that defendant Gerald Todd owns Todd Hauling.

Defendant Canal Insurance Company issued a commercial automobile insurance policy to Todd Hauling. The Fowlers allege that the Canal policy provides coverage for specifically described vehicles, and the 1999 Kenworth involved in the accident is not among the vehicles listed in the policy. The Fowlers also contend that the Canal policy provides coverage for specifically described drivers, and Mr. Sanders is not among the drivers identified in the policy.

Despite these allegations, the Fowlers assert that Canal must provide coverage to Todd Hauling, Mr. Todd, and Mr. Sanders for any claims that the Fowlers assert against the three parties concerning the traffic accident because Canal’s policy includes an MCS–90 Endorsement.

The Endorsement, required under the Motor Carrier Act of 1980, makes the insurer liable to third parties for any liability resulting from the negligent use of any motor vehicle by the insured, even if the vehicle is not covered under the insurance policy.

The Fowlers originally filed this declaratory judgment action seeking a declaration of the rights and obligations under a Commercial Automobile Policy issued by Canal to Todd Hauling. Todd Hauling, Mr. Sanders, and Mr. Todd filed a cross-claim against Canal. The cross-claim plaintiffs seek a declaration that Canal has a duty under the policy that it issued to Todd Hauling to provide a defense in the Fowlers’ underlying state court action.
Canal filed a motion to dismiss.

DISCUSSION

Canal’s Motion to Dismiss

Canal argues that the Court should dismiss the Fowlers’ claims against the company because the Fowlers are not insureds under Todd Hauling’s policy, and under Alabama law, an injured party may not file a direct action against an insurer until the injured party secures a judgment against the insured. Under Alabama’s Direct Action statute, an “injured party … can bring an action against the insurer only after he has recovered a judgment against the insured and only if the insured was covered against the loss or damage at the time the injured party’s right of action arose against the insured tortfeasor.” Maness v. Ala. Farm Bureau Mut. Cas. Ins. Co., 416 So.2d 979, 981–82 (Ala.1982) (citing Ala.Code § 27–23–1, et seq. (1975)).

If the Fowlers’ claim against Canal was the only claim in this action and if the Court were to find that the Fowlers’ claim was an impermissible direct action, the Court would grant Canal’s motion to dismiss. Here, though, in their cross-claim, defendants/cross-claim plaintiffs Todd Hauling, Mr. Todd, and Mr. Sanders have demanded coverage under the Canal policy for the Fowlers’ underlying state court action. Consequently, the Court realigned the parties in this action to reflect their interests in the litigation.

The Court concluded, therefore, that regardless of the the allegations in the complaint and cross-claims, that Todd Hauling, Mr. Todd, and Mr. Sanders are plaintiffs in this declaratory judgment action, and the Court regards Canal and the Fowlers as defendants in this declaratory judgment action.

Federal courts are required to realign the parties in an action to reflect their interests in the litigation. That was done.

ZALMA OPINION

It took the Fowlers lawsuit to wake up Todd Hauling, Mr. Todd and Mr. Sanders that their insurance company was not treating them fairly. As a result of the suit brought by the Fowlers, who clearly were not insured by Canal and who had no right to sue it directly, convinced Todd Hauling, Mr. Todd and Mr. Sanders to join the suit against Canal. As a result, although standing alone the Fowlers suit should have been dismissed, the court realigned the parties to put them in a position where justice could be done.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How a Court Changed Parties Positions to Do Justice

Why A Claimant Can Not be a Third Party Beneficiary of an Insurance Policy

An Insurer Can Only Act in Bad Faith to Its Insured

A third party claimant whose damage was remediated by the insurers for the tortfeasor causing injury to their property sued the insurers for bad faith because, in the plaintiff’s opinion, they did not act fast enough or generous enough. Proving that no good deed goes unpunished, the plaintiffs, claiming to be third party beneficiaries of the third parties’ insurers, sued the insurers for bad faith and sought tort damages against the insurer. In Ross v. Lowitz, — A.3d —-, 2015 WL 4643775 (N.J., 8/6/2015) the New Jersey Supreme Court was called upon to resolve the dispute and determine if the plaintiffs had standing to sue the insurers.

FACTS

John and Pamela Ross, who allege that their residence was damaged by the migration of home heating oil from a leaking underground oil storage tank sued the owners of the property where the underground storage tank. Plaintiffs also sued the insurers who provided homeowners’ coverage to the former owners of the neighboring property, asserting a claim for breach of the implied covenant of good faith and fair dealing, in addition to claims for nuisance and trespass.

After plaintiffs instituted their action and following their filing of an order to show cause, two of the defendant insurers conducted a remediation of the contamination on plaintiffs’ property. The trial court granted summary judgment dismissing plaintiffs’ claims against the defendant property owners and their insurers. The Appellate Division affirmed that determination.

Plaintiffs claimed that they were third-party beneficiaries of the insurance contracts between the insurers and their insureds, and alleged that the insurers violated the covenant of good faith and fair dealing. Plaintiffs sought remediation, damages for the alleged loss of the use of their home, and damages for the alleged diminution in the value of their property.

The trial court granted all defendants’ summary judgment motions. With respect to State Farm and NJM, the trial court held that because plaintiffs were not parties to the insurance contracts at issue, they had no standing to recover the policy proceeds, and that public policy did not mandate that a third party be deemed the intended beneficiary of the insurance company’s contractual duty to its insured to act in good faith with respect to a settlement.

State Farm and NJM argued successfully that in the absence of an assignment of rights under their contracts with their insured, or an intent on the part of the parties to the contract to designate plaintiffs as third-party beneficiaries of the contract, plaintiffs may not pursue a bad faith claim against the insurers. They contend that plaintiffs had no “special relationship” with the insurers that would justify the imposition of liability for a breach of the covenant of good faith and fair dealing. State Farm also counters plaintiffs’ contention that in the absence of a direct claim, no party will be responsible for the damage to their home.

ANALYSIS

As a general rule, an individual or entity that is “a stranger to an insurance policy has no right to recover the policy proceeds.” Gen. Accident Ins. Co. v. N.Y. Marine & Gen. Ins. Co., 320 N.J.Super. 546, 553–54 (App.Div.1999) (citing Biasi v. Allstate Ins. Co., 104 N.J.Super. 155, 159–60 (App.Div.), certif. denied, 53 N.J. 511 (1969)). In the absence of an assignment, plaintiffs assert that they are third-party beneficiaries to the insurance contracts executed by Lowitz and her insurers, State Farm and NJM, and that the insurers breached that duty by delaying the remediation of plaintiffs’ residence.

When a court determines the existence of “third-party beneficiary” status, the determining factor as to the rights of a third party beneficiary is the intention of the parties who actually made the contract. Thus, the real test is whether the contracting parties intended that a third party should receive a benefit which might be enforced in the courts; and the fact that such a benefit exists, or that the third party is named, is merely evidence of this intention. If there is no intent to recognize the third party’s right to contract performance, then the third person is only an incidental beneficiary and has no contractual standing.

An insurer’s duty of good faith and fair dealing, however, has never been applied in New Jersey to recognize a bad-faith claim by an individual or entity that is not the insured or an assignee of the insured’s contract rights. The right of the assured to recover against the insurer for its failure to exercise good faith in settling a claim within the limits of a liability policy is predicated upon the potential damage to the assured in being subjected to a judgment in excess of her policy limits and the consequent subjection of her assets to the satisfaction of such judgment. The damage is peculiarly to the assured by reason of a breach of an implied condition of the policy contract. The injured third party is a stranger in that sense.

It is a fundamental premise of contract law that a third party is deemed to be a beneficiary of a contract only if the contracting parties so intended when they entered into their agreement. Here, there is no suggestion in the record that the parties to the insurance contracts at issue had any intention to make plaintiffs, then the neighbors of the insured, a third-party beneficiary of their agreements. Nor does the migration of oil from Lowitz’s property to plaintiffs’ residence retroactively confer third-party beneficiary status on plaintiffs. The insurers’ duty of good faith and fair dealing in this case extended to their insured, not to plaintiffs.

There is, in short, no basis for plaintiffs’ bad-faith claims against State Farm and NJM, as insurers of Lowitz in this case.

ZALMA OPINION

Everyone who is damaged looks to the deep pocket of insurance companies to make them whole or to profit, by means of punitive damages, from the tort action. In this case the plaintiffs tried to get damages from the insurers of the people who damaged the plaintiffs’ property. In bringing this action the plaintiffs failed to accept the fact that insurance is a contract of personal indemnity. Since there was no evidence that the insurance was taken out to benefit anyone other than those named in the policy. The tort of bad faith was created to protect persons insured against bad acts by their insurers not failing to give third party claimants what they want.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at 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.

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

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

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