The Danger Of Withdrawing Defense

Breach Duty to Defend and Lose Right to Attack the Settlement

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Two insurance carriers that provided consecutive coverage to a mutual insured asked the Texas Court of Appeal whether Audubon Insurance Company (Audubon) should receive contribution and reimbursement from Great American Lloyds Insurance Company (GALIC) for defense and settlement costs Audubon incurred as the result of GALIC’s breach of its duty to defend and indemnify their mutual insured. In Great American Lloyds Insurance Company v. Audubon Insurance Company, No. 05-11-00021-CV (Tex.App. Dist.5 08/06/2012) the Texas Court of Appeal resolved the dispute.

Background

Holigan Family Investment, Inc., a homebuilder, purchased two policies of commercial general liability insurance from GALIC providing coverage from July 1, 1995, through July 1, 1996, and from July 1, 1996, through July 1, 1997. Audubon and other insurance companies provided consecutive commercial general liability coverage to the homebuilder from July 1, 1997, through April 1, 2002.

In December 2001, David and Marilyn DeShields (the homeowners) sued the homebuilder in Harris County alleging that the homebuilder negligently constructed their home. They also sued their own homeowners insurance carrier, Prudential Property and Casualty, alleging negligent claims handling. The homeowners alleged that the exterior balcony of their home was constructed in a defective manner and allowed water to enter the home. They also alleged that although the homebuilder attempted to make repairs, it did so in a negligent manner. Additionally, the homeowners alleged that the HVAC system was negligently installed and resulted in intermittent condensation that dripped outside the pan onto the attic floor. And they alleged that as a result of the negligence of the homebuilder, its employees, and its contractors, toxic mold grew in the walls of the home, potentially exposing the homeowners and their child to biohazardous organisms.

GALIC, Audubon, and the other insurers agreed to defend the homebuilder against the homeowners’ claims. GALIC agreed to pay one-third of the defense costs. About a year later, however, GALIC withdrew its agreement to contribute to the homebuilder’s defense costs. It concluded that, based on discovery in the lawsuit, the earliest date any damage occurred was around March 30, 1998, which was outside its policy period, and that it did not have a duty to defend or indemnify the homebuilder. Audubon and the other insurers continued to defend the homebuilder. Prudential settled the homeowners’ claims against it, and the homeowners nonsuited the Harris County lawsuit.

The homeowners re-filed their lawsuit against the homebuilder in Dallas County; Prudential intervened. Audubon and the other insurers continued to represent the homebuilder and ultimately settled the case with the homeowners and Prudential. Audubon then sued GALIC for contribution and reimbursement of defense and settlement costs. Audubon contended that GALIC breached its contract with the homebuilder by withdrawing its defense and refusing to indemnify the homebuilder.

GALIC’s Motion for Summary Judgment

GALIC contends it did not have a duty to defend the homebuilder. An insurer’s duty to defend arises when a third party sues the insured on allegations that potentially state a cause of action within the terms of the policy, without regard to the truth or falsity of the allegations. The duty to defend in Texas is determined under the “eight corners rule” – that is, by examining the allegations in the underlying pleadings and the language of the insurance policy.

Injury or Damage During the Policy Period

The petition in the underlying lawsuit alleged that the balcony was negligently constructed and allowed water to penetrate the home, and that the HVAC system was negligently installed and allowed water to drip onto the attic floor. The petition did not allege when the home was built, when the homebuilder attempted to make repairs, or when the damage occurred. The petition alleged that the homebuilder and its employees and contractors were negligent.

GALIC argued that the issue is not whether the homeowners alleged a specific date the property damage or bodily injury occurred, “but whether under the ‘eight corners’ rule, a duty to defend is triggered where the underlying pleadings contain absolutely no allegations regarding the timing or dates of anything, including construction, repairs, or when the alleged damage or injuries occurred.” Audubon responded that GALIC owed a duty to defend because the allegations in the petition did not show that the claim clearly was not covered.

The homeowners here filed the underlying lawsuit in 2001 and alleged bodily injuries and property damages in the “past.” Construing the allegations liberally in favor of the insured, the Court of Appeal concluded that GALIC owed a duty to defend the homebuilder and the trial court did not err by denying GALIC’s traditional motion for summary judgment on that basis. See Nat’l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) (per curiam) (stating “in case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insured’s favor”) (quoting Heyden Newport Chem., 387 S.W.2d at 26); Gehan Homes, 146 S.W.3d at 846. Policy Exclusion for “Damage to Your Work”

GALIC also argues that it did not have a duty to defend because the homeowners’ allegations against the homebuilder for faulty workmanship fall within the exclusion for “damage to your work.” Additionally, the homeowners amended their petition in the Dallas County lawsuit to included the HVAC contractor as a defendant. Construing the petition liberally in favor of the insured, we conclude that the allegations were sufficient to claim that subcontractors may have performed the work and, as a result, the exclusion for “damage to your work” did not apply to preclude GALIC’s duty to defend.

GALIC’s policies covered the policy periods from 1995 to 1997, and Audubon’s policies covered the policy periods from 1997 to 1998. Although the “other insurance” provisions of GALIC’s and Audubon’s policies their respective insuring agreements state that they cover only “bodily injury” and “property damage” that occurs during the policy period. Because the policies are for different policy periods, by necessity the policies do not cover the same injury or damage and there is no other valid and collectible insurance that is available to the insured. GALIC and Audubon are, therefore, not co-primary insurers.

When an insurer breaches its duties to defend and indemnify its insured, however, the insurer may not collaterally attack the settlement by litigating the reasonableness of the agreement.

The evidence here showed that property damage occurred during the insurers’ respective policy periods and that the insurers, except GALIC, agreed to defend and indemnify their mutual insured against the homeowners’ claims. Because GALIC wrongfully refused to defend and indemnify its mutual insured, The Court of Appeal concluded that GA;OC is precluded from litigating whether Audubon allocated the loss among the policies.

ZALMA OPINION

This is a warning to all insurers faced with a claim for defense in a four-corners or eight-corners state like Texas. If an insurer refuses to defend and the court later finds it was wrong it will not only be required to pay its obligation but it will be unable to argue about any settlements reached by the insured or the insured’s other insurers. It seems best, where there is any question of the need to defend is to do so under a full reservation of rights and if, after the case is over, to seek reimbursement from the insured. Otherwise the insurer is gambling that it will have no control over the defense, the cost of defense, or any settlement made by the insured with the third party.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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CONDITIONS PRECEDENT CONTROL

No Right to Benefits for Failure to Fulfill Condition

 

Zalma on Insurance in top 50

On September 20, 2005, the plaintiff/appellant, Daniel Shaw (hereinafter “Shaw”), was involved in a one-vehicle car accident. On September 27, 2007, Shaw filed a lawsuit against Nationwide Insurance and Robert Steinbach & Associates (hereinafter “Nationwide”). Shaw sought benefits for no fault/personal injury protection (hereinafter “PIP”), personal injury, pain and suffering, lost wages, automobile replacement, and slander.

At a bench trial held on February 14, 2011, the trial court granted Nationwide’s motion for a directed verdict as to Shaw’s claims for slander, pain and suffering, and lost wages. The court denied the motion as to Shaw’s remaining claims for PIP, personal injury, and property damage. After trial, the court reserved decision and the parties submitted post-trial memoranda.

By decision dated May 9, 2011, the trial court entered judgment in favor of Nationwide. In its nineteen-page decision, the court concluded that Shaw had not met his burden of proof to establish Nationwide’s liability under theories of breach of contract for claims under the PIP or physical damage clauses of the automobile insurance policy. Shaw appealed the trial court’s decision to the Superior Court. After the parties’ submitted briefs, the Superior Court in an eighteen-page memorandum opinion affirmed the judgment of the trial court. In its conclusion, the Superior Court stated:

Shaw was not entitled to compensation for his personal injury claims because he failed to comply with all conditions precedent to Nationwide’s performance. The Court also finds no error in the …  finding that Shaw’s policy did not include coverage for his property loss.

Shaw appealed the Superior Court’s decision to the Delaware Supreme Court in  Daniel Shaw v. Nationwide Insurance Co. and Robert Steinbach & Associates, No. 9, 2012 (Del. 07/31/2012) that concluded that the factual findings of the trial court were supported by the record and were the product of an orderly and logical reasoning process.

ZALMA OPINION

In an amazingly brief opinion the Delaware Supreme Court stated the rule of law everyone must follow when presenting a claim to an insurance company: Fulfill the conditions precedent to receipt of indemnity. Because the plaintiff failed to prove he had fulfilled the conditions precedent to receiving the benefits promised by the policy he deprived himself of the benefits sought. He has no one to blame than himself.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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The Danger of a Covenant Not to Execute

MALICIOUS LAWYER LOSES COVERAGE

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Lawyers who filed and maintained a maliciously prosecuted; when sued for malicious prosecution, the lawyers entered into a settlement with the injured party for a $4.5 million verdict that could only be executed against the lawyers’ legal malpractice policy.

In doing so it avoided a lengthy litigation and the danger of being required to pay a judgment. In John Shiddell, et al v. the Bar Plan Mutual, et al, No. WD74462 (Mo.App. W.D. 07/31/2012) the Missouri Court of Appeal refused to compel an insurer to pay for the malicious conduct of its insured. The injured party took nothing and the malicious lawyers walked free of the judgment for its malicious conduct.

FACTS

John E. Shiddell, John G. Shiddell, Rosalie Shiddell, and Anchor Insurance Agency Inc. (“Appellants”) appealed from a judgment entered in the Circuit Court of Jackson County granting summary judgment in favor of The Bar Plan Mutual Insurance Company (“The Bar Plan”). Pursuant to a settlement agreement, Appellants obtained a $4.5 million judgment against The Bar Plan’s insured, Dysart Taylor Lay Cotter & McMonigle, P.C. (“Dysart Taylor”), in an action for malicious prosecution, and Appellants challenged The Bar Plan’s denial of coverage to Dysart Taylor for that judgment based upon a policy exclusion.

The Shiddells are the owners of the Anchor Insurance Company. In 1998, one of their customers, Alpha Omega Express, Inc., asked John G. Shiddell to add a company for which it performed contract work, Airborne Express, Inc., to Alpha Omega’s business automobile policy with Cameron Mutual Insurance Company. Shiddell conveyed that request to Cameron Mutual which agreed and issued the appropriate certificates of insurance.

On April 4, 2002, David Dodson filed suit against Alpha Omega and Airborne Express claiming that one of their drivers had negligently caused an automobile accident that had left him paralyzed. Cameron Mutual hired Dysart Taylor to examine whether there was a way to avoid coverage for the accident. Kent Bevan, the attorney working on the case, examined the suit and the policy and determined that there was coverage.

Without any knowledge of any facts to support the claim, in an effort to get Appellant’s E & O insurance carrier to contribute to pay a portion of Dodson’s claim, Bevan filed suit against Appellants, on behalf of Cameron Mutual, alleging that they had forged the document adding Airborne Express as an additional insured to the Cameron Mutual policy after the Dodson accident. After litigating the case for about two years, long after Bevan was made aware that the claim was baseless, when the E & O carrier refused an offer of mediation, Bevan dismissed the action against Appellants.

After the case was dismissed, Appellants filed a malicious prosecution action against Dysart Taylor and Bevan. Dysart Taylor and Bevan sought coverage under a legal malpractice insurance policy they had with The Bar Plan. The Bar Plan offered to defend the case under a reservation of rights but noted that the policy excluded coverage for malicious and intentionally wrongful acts.

The relevant exclusion in Dysart Taylor’s malpractice insurance policy states that the policy does not provide coverage for any claim based upon or arising out of: “Any dishonest, deliberately fraudulent, criminal, malicious or deliberately wrongful acts or omissions by an Insured; however, the Company will provide a defense for any claim alleging such acts or omissions by an Insured acting in a professional capacity providing Legal Services . . . but the Company will not pay any sums the Insured shall become legally obligated to pay as Damages for any such Claim.”

When Dysart Taylor and Bevan demanded that The Bar Plan assume their defense unconditionally, The Bar Plan declined, and Dysart Taylor and Bevan assumed their own defense. Shortly thereafter, Dysart Taylor and Bevan entered into a settlement agreement with Appellants. Pursuant to that agreement, Dysart Taylor agreed to confess liability and stipulate damages of $4.5 in exchange for the dismissal of Bevan from the case and an agreement by Appellants to limit execution of the judgment to proceeds that could be obtained from Dysart Taylor’s malpractice insurance policy with The Bar Plan.

Following an evidentiary hearing, the trial court approved the settlement agreement and entered judgment in favor of Appellants and against Dysart Taylor. The judgment stated: “On the malicious prosecution claims of plaintiffs against defendant Dysart Taylor Lay Cotter & McMonigle, P.C., judgment is entered in favor of the plaintiffs and against Dysart Taylor. The Court finds that an ordinarily careful lawyer in the position of Dysart Taylor, after making a reasonable inquiry, would not have believed the facts alleged against the plaintiffs or that the underlying judicial proceeding against the plaintiffs was valid. The Court further finds that the conduct of Dysart Taylor was not dishonest, deliberately fraudulent, criminal, deliberately wrongful, or motivated by actual malice. Rather, the conduct of Dysart Taylor was motivated by legal malice. In other words, Dysart Taylor initiated and continued civil proceedings against the plaintiffs primarily for a purpose other than that of securing the proper adjudication of the claims on which they were based.”

The court then awarded the plaintiffs a total of $4,500,000.00 on that claim.

After that judgment became final, Appellants filed their petition against The Bar Plan in the Circuit Court of Jackson County seeking equitable garnishment of the policy limits of Dysart Taylor’s legal malpractice policy. The trial court granted summary judgment and concluded: “In this case, the parties do not dispute that ‘legal malice’ is the appropriate element applicable to lawyers and law firms, and recognized in Missouri for lawyers being sued for malicious prosecution. Where a policy is written for lawyers, and the element of malice applicable to lawyers is legal malice, it follows that the term ‘malicious’ as found in the ‘Exclusions’ section of the policy be defined as legal malice.”

By consenting to a judgment for malicious prosecution, an intentional tort, Dysart’s conduct is also a deliberately wrongful act.

ANALYSIS

Appellants’ claim against Dysart Taylor was for malicious prosecution. Generally, a plaintiff may recover damages resulting from the initiation of a civil action where such action was prosecuted maliciously and without probable cause or was an abuse of process.

Malice in law imputes malice from the mere intentional doing of a wrongful act to the injury of another without legal justification or excuse. The malice required to support a malicious prosecution action against an attorney differs from the malice required on the part of a non-attorney defendant. The test to establish malice on the part of an attorney depends on whether the attorney acted upon a statement of facts provided by the client, or whether the attorney obtained the information acted upon. Where an attorney acts after his or her own investigation, however, malice is proven by demonstrating that (1) the attorney knew that there was no probable cause for the prosecution of the action and (2) the attorney’s primary purpose for initiating or continuing the proceedings was something other than securing a proper adjudication of the claim.

To support a claim of malicious prosecution against an attorney where the attorney has performed his or her own investigation, the plaintiff must prove that the attorney pursued a lawsuit, knowing it to be unsupported by probable cause, for a primary purpose other than securing a proper adjudication of the claim. The conduct of the lawyers was “deliberately wrongful, as well as a legally malicious, act.” If one intentionally does a wrongful act and knows at the time that it is wrongful, he does it wantonly and with a bad motive. The Missouri Court of Appeal found unambiguous the “deliberately wrongful acts” exclusion.  As a matter of law, therefore, Appellants’ claim of malicious prosecution was clearly excluded under the policy language.

The undisputed facts reflect that, at all relevant times, Bevan, the attorney in charge, was a shareholder and director of Dysart Taylor and was the supervisory attorney in charge of the case filed against Appellants. Accordingly, his knowledge of the facts and the nature of his actions in Cameron Mutual’s lawsuit against Appellants must be imputed to the corporation. The judgment was affirmed.

ZALMA OPINION

Had the Appellants not been blinded by the potential of suing an insurer for the tort of bad faith they could have continued with their malicious prosecution suit against the lawyers and obtained a verdict equal to or greater than the $4.5 million settlement. They could then execute on the assets of Bevan and the law firm and could have collected a good part of the judgment. By agreeing to the settlement the lawyers were not punished for their wrongful acts, the Appellants get nothing for their effort and the insurer has no obligation to indemnify the lawyers. The lawyers got away with malicious prosecution for the small cost of entering into the settlement where nothing was paid by the lawyers to the Appellants.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Random Thoughts on Insurance

NEW E-BOOK

RANDOM THOUGHTS ON INSURANCE

A COLLECTION FROM BARRY ZALMA’S BLOG

ZALMA ON INSURANCE

Since 2010 Barry Zalma has been writing a blog post at least five days a week. This e-book is a collection of those posts that reveal my interest in insurance case law.

Some of the cases reviewed were important. Some were of first impression. Others will be totally unimportant. All were interesting to me and I hope are interesting to the reader.

Zalma on Insurance

Is one
of the LexisNexis 50
Top Blogs for Insurance Law – 2011

Zalma on Insurance was selected as a LexisNexis Top Blogs for Insurance Law – 2011!

Selections were made by the LexisNexis Insurance Law Community staff in consultation with the Insurance Law Community Advisory Board members. The

Top Blogs contain some of the best writing out there on insurance law. They contain a wealth of information for the insurance law community with timely news items, practical information, expert analysis, practice tips, frequent postings, and helpful links to other sites. These blogsites demonstrate how bloggers can impact the world of insurance law.

The e-book has 267 different articles on all kinds of insurance issues from appraisal to bad faith, from the CGL to Life Insurance, and from arson to insurance fraud. The entire table of posts is available at http://www.zalma.com/RANDOMTHOUGHTS.htm.

Only $125.00

After you purchase please wait for the e-book to upload from PayPal. If it does not upload please e-mail zalma@zalma.com and I will personally send you a copy of the e-mail in pdf format.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Deny Defense & Lose Right to Belatedly Control Defense

INSURER SHOULD NEVER DENY A DEFENSE UNLESS ABSOLUTELY CERTAIN NO POTENTIAL FOR COVERAGE

Zalma on Insurance in top 50

The District Court, Northern District of California, granted a motion for summary judgment in favor of KB Home in part against the Travlers in Kaufman & Broad Monterey Bay, et v. Travelers Property Casualty, No. : 5:10-CV-2856 EJD (N.D.Cal. 07/18/2012)

BACKGROUND

Travelers issued  commercial general liability policies to Norcraft Companies, L.P., (“Norcraft”) a cabinet installer. The Norcraft policies provide coverage for “property damage” arising out of an occurrence that takes place in the coverage territory and that occurs during the policy period.

Subcontract and Aldrich Action

On or about January 22, 2003, and February 5, 2003, KB Home and Norcraft entered into  subcontracts to furnish, deliver and install cabinets at certain homes within two housing  developments in Monterey, California. The subcontracts required Norcraft to name KB Home as an additional insured under its commercial general liability policies.

On October 21, 2008, a number of homeowners commenced a lawsuit in Monterey County Superior Court against KB Home, Aldrich, et al. v. KB Home, et al. (“Aldrich Action”). The homeowners alleged a number of construction defects, including “cabinet and wood trim” defects, that resulted in damage to the homes and their component parts.

KB Home filed a cross-complaint against various parties, including Norcraft, alleging among other things that Norcraft is contractually required to defend and indemnify KB Home with regard to the Aldrich action.

Travelers’ Acceptance, Withdrawal, and This Action

On April 1, 2009, Glaspy & Glaspy, counsel for KB Home, tendered the defense and indemnity of KB Home as additional insureds under the Norcraft policies in the Aldrich action. This initial tender included copies of the original Complaint, First Amended Complaint, KB Home’s Cross-Complaint, a Stipulation and Order of Reference to the Special Master, the Subcontract and additional insured documentation.

On April 6, 2009, Patricia E. Dlugokenski (“Dlugokenski”), a senior technical specialist for Travelers acknowledged receipt of the tenders and requested additional information including: a  statement of claims or documentation related to the alleged defects and deficiencies; expert investigation reports into defects or damages; current pleadings and any CMO or PTO documents; and the location of any document depository. On April 6, 2009, in response, KB Home provided an updated Homeowner matrix, the amended complaint, and the dismissal of one of the plaintiffs’ homes. KB also informed Travelers that the PTO has not yet been filed and there is no defect list but that KB Home would forward the defect list as soon as it is received. On July 6, 2009, Dlugokenski noted in the internal Claims Notes that “it is likely some, although minor damages resulted from [cabinet] installation. Damages to the walls or pulling away from the walls could be attributed to installation.” (Emphasis added) Also on July 6, 2009, Dlugokenski issued a letter accepting KB Home’s tender as additional insureds under the Norcraft policies.

The letter also requested information that would assist Travelers in its evaluation of the demand for payment of defense expenses, such as contact information for all carriers who have been provided a tender of defense, their responses, the amounts they have paid, the percentage they agreed to pay, a litigations budge, and an additional insured matrix showing the carriers tendered as well as their responses.

On October 20, 2009, Dlugokenski sent an email to KB Homes’ counsel requesting “documentation of damage caused by our named insured (defect report, etc.)” KB Home’s counsel informed Travelers that no defect list was available to date.

On November 5, 2009, Tom Frazier (“Frazier”), Travlers’ unit manager conducted a review of KB Home’s tenders and found that they lacked documentation of damage or liability arising out of Norcraft’s work. On December 1, 2009, KB Home contacted Travelers about its outstanding balance and requested payment. On December 10, 2009, Dlugokenski responded with a single-sentence email stating, “We will be withdrawing our acceptance.”  On February 9, 2010, Hartford Casualty Company (“The Hartford”), another insurance company, accepted KB Home’s tenders of defense and issued a payment of $30,000 for KB Home’s defense in the Aldrich action. The Hartford made no further payments.

On March 9, 2010, Dlugokenski sent a letter to KB Home advising that Travelers was withdrawing from KB Home’s defense.

On May 27, 2010, KB Home filed this action against Travelers. On July 8, 2010, Fred Adelman, counsel for the Aldrich plaintiffs, signed a letter stating that “[t]he plaintiffs in this action are pursuing recovery for damages arising out of the cabinets.”

On August 4, 2010, KB Home provided the Aldrich plaintiffs’ preliminary defect list regarding cabinets, entitled “Aldrich, et al. v. KB Home, et al., Preliminary Defect List.” On December 17, 2010, based on the August 4, 2010 defect list, Travelers sent a letter to KB Homes in which it agreed to participate in the defense of KB Homes as an additional insured from August 4, 2010 forward and that it was appointing Christian Lucia of Seller Hazard Manning Ficenac & Lucia (“Sellar Hazard”) to represent KB Home in the Aldrich action. Travelers added that if KB Home wishes to continue to retain Glaspy & Glaspy to provide it with a defense it may do so, but at its own expense.

On January 4, 2011, KB Home sent a letter to Travelers stating that Travelers has forfeited any right to control KB Home’s defense because it breached its duty to defend KB Home. KB Home also stated that Sellar Hazard had “a clear conflict of interest and is currently representing a subcontractor directly adverse to KB Home in a pending construction defect lawsuit and that under no circumstances will KB Home waive the conflict.

On January 28, 2011, Travelers issued payment of $73,654.54 to KB Home as payment for its one-half share of KB Home’s defense fees and costs in the Aldrich action pursuant to its equal shares allocation with The Hartford. On July 19, 2011, Norcraft and the Aldrich plaintiffs reached a settlement in the Aldrich action by the terms of which plaintiffs agreed to an issue release related to all cabinet issues, in exchange for the lump sum payment of $30,000. Travelers claims that, as of August 25, 18 2011, it had paid in excess of$187,418 in the defense of KB Home in the Aldrich action, which it claims is the amount of all outstanding invoices presented.

On August 26, 2011, KB Home filed its Motion for Partial Summary Judgment. Also on August 26, 2011, Travelers filed is Motion for Summary Judgment or, in the Alternative, Partial  Summary Judgment. On September 16, 2011, Travelers filed counterclaims against KB Homes for reimbursement, unjust enrichment, breach of contract, and declaratory relief.

DISCUSSION

KB Home sought partial summary judgment that:

  1. Traveler’s duty to provide KB Home a defense was triggered from the date of tender, April 1, 2009;
  2. Travelers breached its duty to provide KB Home a defense; and
  3. Belated payment of the costs of the defense in the Aldrich  action did not cure Traveler’s breach of its duty to defend KB Home.

Travelers sought summary judgment in its favor on KB Home’s breach of contract claim because

  1. KB Home breached its duty to cooperate by refusing to accept Travelers’ appointed counsel;
  2. KB Home cannot prove a duty was owed when Travelers denied coverage because Travelers’ duty to defend had not been triggered;
  3. KB Home has not presented any evidence of resulting damages. Travelers also sought summary judgment in its favor on KB Home’s breach of covenant of good faith and fair dealing because
    1. Travelers never withheld benefits due under the policy;
    2. Any delay in paying benefits was based on a genuine dispute regarding coverage; and
    3. Travelers conducted a reasonable investigation of KB Home’s tender.

The District Court considered both motions and ruled against Travelers and in favor of KB Home in most parts of its motion. It reasoned about the various issues:

Breach of Contract

For an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. Hence, the duty may exist even where coverage is in doubt and ultimately does not develop. The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded or until it has been shown that there is no potential for coverage.

The Norcraft policies provide coverage for “property damage.” The Norcraft polices do not cover property damage to Norcraft’s work arising out of it or any part of it.

Travelers argued that the complaint does not allege that other property was damaged as a result of the cabinets. Specifically, Travelers argues that the Aldrich complaint only alleges the existence of cabinet and wood trim defects at the homes and that the cabinets were installed so as to interfere with the cabinets’ useful life.

Travelers reading of paragraph 17, however, appears to consider only the final sentence of the allegation which list the defects, including cabinet and wood trim defects, to which the rest of the paragraph makes reference. The immediately preceding sentence states that the “defects . . . have resulted in damage to the homes and their component parts. Thus, the complaint alleges that cabinet and wood trim defects caused damage to the homes and their component parts, which potentially includes parts of the homes other than the cabinets.

The District Court concluded that as a result of the Aldrich complaint tendered on April 1, 2009, Travelers was required to defend KB Home unless and until Travelers could demonstrate, by reference to undisputed facts, that the claim cannot be covered. KB Home’s motion for partial summary judgment that Travelers owed it a duty to defend as of April 1, 2009 was GRANTED.

Travelers failed to present evidence showing a genuine issue of fact regarding whether, at the time of its March 9, 2010 withdrawal, there was no potential for a covered liability.

To be excused from its duty to defend by KB Home’s alleged breach of the duty to cooperate, Travelers must show prejudice that resulted from KB Home’s withholding these documents. Travelers has not identified any related prejudice, much less provided evidence upon which a reasonable jury could find prejudice. KB Home, however, has pointed to evidence that Travelers was not prejudiced by these documents because, even if these documents had been produced earlier, Travelers would have acted no differently.

Travelers’ expert, Gene Irizarry, declared that “even though KB [Home] did not provide the Lot Files to Travelers, had it done so, no duty to defend would have been triggered.” This evidence indicates that, with or without the documents, Travelers still would have determined that it did not have a duty to defend. Thus, assuming that KB Home withheld these documents, Travelers has not raised a genuine issue of fact regarding whether Travelers was excused from its duty to defend as a result.

The undisputed facts demonstrate that Travelers breached its duty to provide KB Home with a complete and immediate defense of the Aldrich action when it withdrew from KB Home’s  defense on March 9, 2010. Therefore the District Court GRANTED KB Home’s motion and DENIED Travelers’ motion.

Whether Travelers Cured Its Breach By Its Belated Payment

KB Home also moved for summary judgment that Travelers’ belated acceptance of its duty to defend does not cure its prior breaches. In opposition, Travelers argued that KB Home has not provided any evidence of damages. B Home sought judgment that Travelers’ failure to take up KB Home’s defense when its duty was triggered is not cured because Travelers did so after KB Home filed this action.

A belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty. KB Home’s motion for summary judgment that Travelers did not cure its breach by its belated payment for KB Home’s defense was, therfore, GRANTED by the District Court.

“The insurer’s right to control the insured’s defense extends to the right to select legal counsel.” Travelers Property Cas. Co. of America v. Centex Homes, No. 11–3638–SC, 2012 WL  1657121, at *4 (N.D. Cal. May 10, 2012). However, “[w]hen an insurer wrongfully refuses to  defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate.” Eigner v. Worthington, 57 Cal. App. 12 4th 188, 196 (1997).

Here, the Aldrich action was tendered to Travelers on April 1, 2009 and triggered Travelers’ duty to defend. On March 9, 2010, Travelers declined to participate in Aldrich defense. Travelers, however, agreed to defend KB Home on December 17, 2010, after KB Home had provided Travelers with a defect list from the Aldrich plaintiffs on August 4, 2010 and after KB Home filed this lawsuit.

DUTY TO DEFEND AROSE IMMEDIATELY UPON TENDER

Since Travelers’ duty to defend arose immediately upon the April 1, 2009 tender, Travelers’ withdrawal and delay in providing KB Home with a defense divested it of the right to control KB Home’s defense. Thus, Travelers failed to demonstrate that the undisputed evidence shows KB Home’s rejection of Travelers’ chosen counsel was a breach of the cooperation clause.

During the time the insurer had rejected the tender of the defense, the insured arranged and paid for its own defense. The belated tender did not fully remedy the harm caused by the insurer’s refusal to defend by later paying the insured’s attorney fees, though this belated decision unquestionably mitigated its damages.

BREACH OF DUTY TO INVESTIGATE

An unreasonable failure to investigate amounting to such unfair dealing may be found when an insurer fails to consider, or seek to discover, evidence relevant to the issues of liability and damages. Based on KB Home’s initial tender, on July 6, 2009, Travelers’ Claim Notes document Traveler’s decision to accept KB Home’s defense because of a likelihood of covered damages.

An insurer’s early closure of an investigation and unwillingness to reconsider a denial when  presented with evidence of factual errors will fortify a finding of bad faith. KB Home, therefore,  presented evidence sufficient to create a genuine issue of fact regarding whether Travelers acted in bad faith in refusing to defend KB Home.

CONCLUSION

For the reasons discussed above, the District Court ordered as follows:

(1)     KB Home’s motion for partial summary judgment that Traveler’s duty to provide KB Home a defense was triggered from the date of tender, April 1, 2009;

(2)     Travelers breached its duty to provide KB Home a defense; and

(3)     belated payment of the costs of the defense in the Aldrich action did not cure Traveler’s breach of its duty to defend KB Home.

ZALMA OPINION

Travelers’ has been found to breach its duty to defend in two cases in California because of its failure to thoroughly investigate upon tender of defense and that, when it had second thoughts and agreed to defend, found it had lost its right to control the defense.

If, as in KB Homes, there is a small potential for coverage a defense should be provided promptly subject to a reservation of rights. Withdrawing that defense when there is no additional investigation or new facts is not within the custom and practice of CGL insurers in California and most of the country.

Travelers then added insult to the injury caused by its withdrawal of defense by coming back and offering to defend with control of counsel and the defense and ignored the conflict of interest between it, its chosen counsel, and the additional insured. In addition, had it done a thorough investigation it could have accelerated the settlement negotiations and resolved the Aldrich case for less than the amount of defense costs.

 

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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HE WHO SITS ON HIS RIGHTS LOSES THEM

Never Ignore the Statute of Limitations

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The Wisconsin Court of Appeal was called upon to resolve a dispute over the application of a statute of limitations in a suit against American Family Mutual Insurance Company, Gage Creighbaum, Sherry Lagios, and Dimitrios Lagios (the “defendants”) who appealed an order denying their motion to dismiss. The trial court held that the defendants waived their statute of limitations defense by not raising it prior to filing their notice of appearance and serving their request for admissions in response to Maas’s amended complaint. In Justin M. Maas v. American Family Mutual Insurance Company, Gage M., No. 2011AP1661 (Wis.App. 08/01/2012) the Wisconsin Court of Appeal resolved the issue.

BACKGROUND

On August 20, 2007, Creighbaum crashed his vehicle into a vehicle operated by Maas, resulting in personal injury to Maas. On August 18, 2010, two days before the end of the three-year statute of limitations period, Maas filed a summons and complaint against the defendants related to his injuries. Maas failed to serve any of the defendants with the summons and complaint.

Maas filed an amended summons and complaint on February 15, 2011, which he served on the defendants. The amended summons and complaint contained the same cause of action and named the same defendants as the original summons and complaint. The defendants filed an answer to Maas’s amended summons and complaint alleging Maas failed to obtain proper service of process on Creighbaum and the Lagioses and the court therefore lacked personal jurisdiction over them  and alleged that Maas’s claim was barred by the statute of limitations.

The trial court denied the motion, concluding that the defendants’ failure to raise their jurisdictional objection prior to filing the notice of appearance and serving the request for admissions constituted a waiver of their statute of limitations objection. The court further held that Maas’s action was properly commenced and that the amended complaint related back to the original complaint.

ANALYSIS

On appeal, the defendants argued that even though Maas filed his original summons and complaint two days prior to the running of the three-year statute of limitations period, his claim is barred because he failed to serve any of the defendants with the summons and complaint within ninety days of the filing as required by Wisconsin statutes.

The Wisconsin Court of Appeal concluded that the statutes are clear. An action to recover damages for personal injuries shall be commenced within 3 years or be barred. An action is commenced as to any defendant when a summons and a complaint naming the person as defendant are filed with the court, provided service of an authenticated copy of the summons and of the complaint is made upon the defendant within 90 days after filing. Thus, if service is not made within ninety days of the filing of the summons and complaint, the action is not commenced. If not commenced within the three-year statute of limitations period, the action is barred.

It was undisputed that Maas failed to serve any of the defendants with the original summons and complaint within ninety days of filing. Wisconsin procedure requires, therefore, that the court conclude his action was never commenced prior to the running of the limitation period and is therefore barred.

Maas’s failure to serve the defendants with the original summons and complaint within ninety days was a fundamental defect which deprived the trial court of personal jurisdiction over the defendants and rendered the original pleading a legal nullity. The trial court conclusion that the defendants waived their jurisdictional objection by failing to raise the objection when they filed their notice of appearance and served their requests for admissions in response to Maas’s amended pleading fails since there was nothing for the defendants to waive.

CONCLUSION

Maas’s failure to serve the defendants with the original summons and complaint within ninety days resulted in the three-year statute of limitations period expiring without an action having been commenced. The failure was a fundamental defect which rendered the pleading a legal nullity and could not be remedied by the subsequent filing of an amended pleading after the statute of limitations period expired.

ZALMA OPINION

Statutes of limitation were designed to protect people against stale claims because, if suit is not filed promptly, memories fade and witnesses can move away from the jurisdiction. Parties and lawyers that wait to the last moment to sue are taking a chance of losing those rights because of their sloth. Mr. Maas is not without a remedy, however, because his lawyer’s failure to serve the defendants within the 90 days allowed by statute might allow for a case against the lawyer for failing to act within the custom and practice of lawyers in his community.

Although the waiver argument was original and successful in the trial court it did not stand up to scrutiny since no one can waive a nullity nor can a cause of action be created by waiver.

 

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Slumlord Must Repay Insurer for Settlement Contribution

Insurers Should Never Allow Slumlord to Profit From Bad Acts

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In Axis Surplus Insurance Company v. Reinoso No. B228332 (2012) WL 2389324) an insurer, under a full reservation of rights, including the right to recover any costs of defense or settlements paid, defended Edgar and Linda Reinoso from claims by their tenants. Evidence, as the defense progressed clearly established that the Reinosos operated rental properties in a manner that allowed infestations of insects, vermin, and rats. Mr. Reinoso had pleaded no contest to at least two charges about properties he owned and was classified as a “slum lord.”

Ultimately, the tenants settled their claims against the Reinosos and their management company, Proud American, for over $3 million, with Axis contributing over $2 million under a reservation of rights.

Axis sued the Reinosos and Proud American for reimbursement of defense and settlement costs, based on the policy’s exclusion for injuries that were “expected or intended from the standpoint of the insured.” The trial court awarded Axis recovery of its $2 million+ settlement contribution, concluding that Axis had proven that the tenants’ claims were not actually covered.

The California Court of Appeal affirmed the judgment allowing Axis reimbursement of its settlement contribution and found wanting Mrs. Reinoso’s argument that she was an “innocent” insured and that the exclusion for “expected or intended” injuries thus did not apply to her.

Since an insurer only has a duty to indemnify the insured for covered claims, and no duty to pay for non-covered claims because the insured did not pay premiums for such coverage, and since both Reinosos owned and operated the apartment complex in a manner that damaged their tenants and profited from the operation of the apartments Mrs. Reinoso was not innocent of the charges made by the tenants. Since evidence showed that Linda had a sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer of the full amount paid by the insurer to settle the Tenant Action the Court of Appeal concluded would amount to unjust enrichment.

Mrs. Reinoso was a co-owner of the property in question with Edgar, and the property was held as community property. She participated in the management of the property. Defendants in a joint venture are jointly and severally liable for non-economic damages whatever their respective interests in the joint venture. Moreover, Linda’s community property interest would be liable for obligations in connection with the property. Faced with exposure of many millions of dollars, perhaps up to $30 million, and punitive damages, Linda received the full benefit of the settlement.

The Court of Appeal agreed with the trial court that the insurer was entitled to reimbursement of the amounts it contributed to the settlement.

ZALMA OPINION

When defending a case under a reservation of rights it is imperative to, as did Axis, properly reserve rights to contribute to a settlement. If done properly it is imperative that the insurer then file suit to recover the amounts paid if the insured will not voluntarily pay.

To do so, the Court of Appeal noted, that the insurer must create and deliver to the insured:

  1. a timely and express reservation of rights;
  2. an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and
  3. an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.

Axis did so and all insurers considering paying a settlement in a case where there is no coverage for indemnity, should follow the recommendation.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Interpleader Not a Defense To Negligence

When Stakeholder Causes Dispute It Can Still Be Sued For Negligence Not Related to Dispute

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The Ninth Circuit Court of Appeal was asked to determine whether the federal interpleader remedy shields a negligent stakeholder from tort liability for its creation of a conflict over entitlement to the interpleaded funds? The Ninth Circuit resolved the issue in Robert S. Lee; Gina Stevens; Laura Stevens v. West Coast Life Insurance Company, No. 11-55026 (9th Cir. 07/31/2012).

Facts

On March 13, 1998, West Coast Life Insurance Company (“West Coast”) issued a life insurance policy with a death benefit of $800,000 to the late Steve Lee, Sr. Steve Sr. was the original owner of the policy. William Lee, Steve Sr.’s brother, was the original beneficiary. In the subsequent years, West Coast received numerous change of ownership and beneficiary forms from members of the Lee family. At issue is a policy change form signed and executed in July 2005, purporting to change the ownership and beneficiaries of the policy to Robert Lee, Bobbie Bill Lee, and Steve Lee, Jr. Bobbie and Steve Jr. are Steve Sr.’s nephews. Robert is Steve Sr.’s grandson.

Robert, Bobbie, and Steve Jr. executed the aforementioned change forms in West Coast’s San Francisco office with the help of West Coast’s Director of Policy Administration, James Davis. Davis erroneously instructed Bobbie and Robert to sign as the existing owners of the policy, when in fact Steve Jr. was an existing owner and Robert was not. Davis also erroneously failed to ask Steve Jr. to sign a change of beneficiary form which would have transferred a 62.5% interest to Robert as a beneficiary.

The Lee family members made several additional, subsequent changes to the policy’s ownership and beneficiaries. The final change occurred in December of 2008 when Robert Lee and Gina Stevens became the sole beneficiaries. Steve Sr. died in January 2009. Robert and Gina then submitted claim forms to West Coast. In response, West Coast informed Robert and Gina that the July 2005 changes were improperly executed, and therefore that they had no interest in the policy. In March 2009, upon learning that he retained the interest in the policy that he held in 2005, Bobbie submitted a claim form to West Coast. In April of 2009, West Coast responded by contacting all parties involved regarding the disputed claims, urging them to reach a mutual agreement regarding payment of the insurance policy benefits, and informing them that it would file an interpleader action if no agreement could be reached. The parties were unable to reach an agreement.

In August of 2009, Steve Jr., Bobbie, and William Lee (collectively, “plaintiffs”) filed suit against West Coast in the Los Angeles Superior Court alleging claims for breach of contract and breach of the covenant of good faith and fair dealing under California law. West Coast removed the case to federal court invoking diversity jurisdiction, filed an answer and counterclaim in interpleader, deposited $800,000 plus accrued interest with the district court, and added Gina and Laura Stevens as counterdefendants. Robert, Gina, and Laura (collectively, “counterclaimants”) filed counterclaims for negligence and declaratory relief against West Coast, and cross-claims against the plaintiffs.

West Coast moved for partial summary judgment, which the district court granted in West Coast’s favor as to its interpleader claim and on the claims sounding in contract. The plaintiffs and counterclaimants then reached a settlement to distribute the interpleaded funds amongst themselves, and the district court entered an order approving the distribution. The district court concluded that counterclaimants’ negligence claim against West Coast was the only claim remaining to be tried. The court did not address the merits of counterclaimants’ negligence claim, reasoning that they had failed to allege any cognizable damages flowing from West Coast’s alleged negligent conduct.

The Purpose of Interpleader

Both Rule 22 and the interpleader statute allow a party to file a claim for interpleader if there is a possibility of exposure to double or multiple liability. The purpose of interpleader is for the stakeholder to protect itself against the problems posed by multiple claimants to a single fund. This includes protecting against the possibility of court-imposed liability to a second claimant where the stakeholder has already voluntarily paid a first claimant. But it also includes limiting litigation expenses, which is not dependent on the merits of adverse claims, only their existence.

The protection afforded by interpleader takes several forms. Most significantly, it prevents the stakeholder from being obliged to determine at his peril which claimant has the better claim. It is thought that the stakeholder should not be compelled to run the risk of guessing which claimants may recover from the fund.

The stake marks the outer limits of the stakeholder’s potential liability where the respective claimants’ entitlement to the stake is the sole contested issue; however, where the stakeholder may be independently liable to one or more claimants, interpleader does not shield the stakeholder from tort liability, nor from liability in excess of the stake. Congress, in the enactment of the interpleader statute, did not intend thus to wipe out the substantial claims of persons asserting rights against insurance companies. The purpose of the interpleader statute was to give the stakeholder protection, but in nowise to change the rights of the claimants by its operation. Congress had no intention to permit destruction of acquired rights under state law, if indeed it had power so to do.

Many courts have held that those who have acted in bad faith to create a controversy over the stake may not claim the protection of interpleader. Interpleader, which is an equitable remedy, is not available to one who has voluntarily accepted funds knowing they are subject to competing claims.  It is the general rule that a party seeking interpleader must be free from blame in causing the controversy, and where he stands as a wrongdoer with respect to the subject matter of the suit or any of the claimants, he cannot have relief by interpleader.

Counterclaimants did not allege that West Coast acted in bad faith, nor do they contend that the interpleader remedy was, or should have been, unavailable. Rather, they allege that West Coast’s negligent actions in 2005 caused the instant controversy, and claim damages flowing from that negligence. The district court’s conclusion that counterclaimants were required to show that West Coast acted in bad faith in order to claim attorney’s fees as damages that flow from West Coast’s negligence is without support.

Nor does counterclaimants’ negligence claim arise from West Coast’s failure to resolve the controversy over entitlement to the insurance proceeds in their favor. But for Davis’ erroneous recording of the July 2005 change forms, counterclaimants allege that they would not have been forced to litigate their adverse claims against the plaintiffs. In other words, West Coast’s alleged negligence directly and proximately caused counterclaimants to forgo $290,000 to which they claim they were rightfully entitled, and caused them to incur attorney’s fees in litigating this action. Their damages flowed not from West Coast’s filing of an interpleader claim but from its alleged negligent conduct.

ZALMA OPINION

Interpleader is an important tool to insurers who have competing claims against a particular benefit where it would not be safe to pay the sums out to one only to be sued by the other. It protects the stakeholder – if filed in good faith – against the competing claims. It does not protect the insurer from independent claims of negligence.

In this case the insurer negligently dealt with the request of the parties to change the beneficiaries and owners of the life insurance policy. As a result of its negligence there was a dispute that was only resolved by litigating the interpleader. The plaintiffs – after resolving the interpleader – had the right to sue and prove damages against the insurer for its negligence.

If, on the other hand, the insurer had done nothing other than determine that there existed multiple claims from disparate parties to the benefits of the life insurance policy and could not safely determine which were entitled to the benefits, the interpleader would have resolved all disputes between those seeking benefits and the insurer.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Always Give Coverage Counsel All Facts

Insurer is Not Bound to Submerge its own Interest in Order that the Insured’s Interests May be Made Paramount

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Whenever an insurer retains coverage counsel it is essential that coverage counsel is provided the full text of the policy and all facts relating to the inquiry about coverage. When facts are not provided to coverage counsel or are concealed from coverage counsel the insurer is increasing the probability of obtaining an incorrect coverage analysis.

The Third Circuit Court of Appeal was called upon to resolve an an appeal and a cross-appeal arising from an action brought by attorney Benjamin Post (“Post”) against his legal malpractice insurer, St. Paul Travelers Insurance Company (“Travelers”), for, among other things, insurance bad faith and breach of contract. The District Court granted summary judgment in favor of Travelers on the bad faith claim, the order from which Post now appeals. Travelers appeals the District Court’s damage award of $921,862.38 to Post for breach of contract and it was resolved in Benjamin A. Post, Esquire v. St. Paul Travelers Insurance Co., No. 10-3088, (3d Cir. 07/31/2012).

Post argued that his bad faith claim was erroneously dismissed at summary judgment, and asserts, among other things, that there was sufficient evidence to create a genuine issue of material fact that Travelers lacked a reasonable basis to deny coverage. Travelers contended that the District Court erred by awarding damages on Post’s breach of contract claim because the malpractice insurance policy contained an explicit coverage exclusion for sanctions proceedings.

Factual Background

In 2003, Post and Tara Reid, both employed at the time by the law firm of Post & Schell, P.C., were retained to defend Mercy Hospital-Wilkes Barre, Mercy Healthcare Partners, and Catholic Healthcare Partners (collectively, “Mercy”) in a medical malpractice action filed in the Court of Common Pleas of Luzerne County, Pennsylvania, captioned Bobbett, et al. v. Grabowski.

In May 2005, Post left Post & Schell to start a new law firm with his wife-Post & Post, L.L.C. Thereafter, he continued to represent Mercy in the Bobbett matter, and Reid joined Post & Post as an associate. Trial of the Bobbett case began in September 2005. During its first week, the plaintiffs introduced evidence suggesting that Post and Reid had engaged in misconduct during discovery. Specifically, Anne Marie Zimmerman, a risk manager testified about allegedly undisclosed redactions from medical policies produced by Mercy in discovery. Zimmerman testified that Post and Reid were responsible for the redactions. On learning of this possible discovery misconduct, Mercy replaced Post as its counsel.

Fearing that the jury now believed that there had been a “cover-up” involving its lawyers, and concerned with the “substantial potential of uninsured punitive exposure,” Mercy, represented by new counsel, began settlement negotiations with the plaintiffs over the weekend. The negotiations resulted in a settlement of $11 million, which represented the full extent of Mercy’s medical malpractice policy limits. The settlement did not release Post, Reid, Post & Schell, and/or Post & Post from any liability they, or any of them, might have to Mercy for malpractice. Mercy did in fact threaten Post with a malpractice suit.

The Policy

Post & Schell was insured against claims of legal malpractice by Travelers (the “Policy”). The Policy had an annual premium of $226,500, and had an occurrence and aggregate limit of $10,000,000. The Policy insured the firm and “protected persons” (i.e., the firm’s attorneys) against “claims” and “suits” asserting malpractice. It thus insured Post for any alleged acts within the scope of coverage occurring (1) during the Policy’s term and (2) while Post was employed by Post & Schell. The policy contained the following relevant exclusion:

        Exclusions — What This Agreement Won’t Cover
        
        Criminal, dishonest, or fraudulent wrongful acts or knowing violation of rights or laws. We won’t cover loss that results from any criminal, dishonest, or fraudulent wrongful act or any knowing violation of rights or laws committed by:
        
        * any protected person; or
        
        * anyone with the consent or knowledge of any protected person.

Mercy’s Legal Malpractice Claim Against Post

After receiving multiple claims and demands from the hospital the lawyers reported the claim to Travelers whos Michael Spinelli, a senior claims specialist assumed responsibility for the claim.

The Sanctions Petition

On November 21, 2005, the plaintiffs in the Bobbett case filed a 108-page petition for sanctions against Post, Reid, Barton Post, and Post & Post.  In the petition, the plaintiffs claimed that Post and Reid violated the Pennsylvania Rules of Civil Procedure and the Rules of Professional Conduct in their handling of discovery by (1) failing to produce and/or producing altered versions of responsive documents, and (2) misrepresenting to the plaintiffs and the Court what documents Mercy had in its possession.

Travelers retained attorney Mark Anesh, a partner with the insurance defense firm of Wilson Elser Moskowitz Edelman & Dicker, as outside counsel to advise it on its defense and coverage obligations with regard to Post. Anesh is a New York attorney not licensed to practice law in Pennsylvania. Despite the fact that Spinelli’s general practice was to provide coverage counsel with “anything and everything” he had, he did not provide Anesh with any information regarding the allegations that Mercy made in October and November. Spinelli did not even advise Anesh of Mercy’s letters depriving coverage counsel of demands for damages. R

ather, Spinelli sent Anesh only the petition for sanctions and other documents relating to the Bobbett case, and Spinelli asked Anesh only for his opinion on whether there was coverage in connection with the sanctions petition alone. Anesh was not aware that a claim for legal malpractice had been lodged beforehand by Mercy, nor was he aware that the factual allegations in the sanctions petition were identical to the factual allegations underlying Mercy’s malpractice claim. Likewise, Anesh was not aware that Mercy had retained counsel to pursue its legal malpractice claim.

After Anesh reviewed the materials given to him and determined Travelers was not obligated to defend or indemnify Post with respect to the allegations against him in the petition for sanctions, he informed Bochetto by a December 8 letter that this was Travelers’ conclusion. The claim was denied because the sole and complete relief sought by the petition at issue is not for Damages as they are defined in the Policy, but for sanctions. Since sanctions are not included in the definition of Damages under the Policy, no coverage, either for defense or indemnity, will be afforded for the above mentioned petition or any hearing subsequently scheduled to address the contents of the petition.

During his deposition in February 2006, Mercy Chief Executive Officer James May confirmed that Mercy was seeking money damages in the sanctions proceedings-for, among other things, the amount of the settlement and the negative publicity-on account of Post’s alleged misconduct.

On February 20, 2006, Bochetto again wrote to Travelers, this time to notify it of Mercy’s answer to and joinder in the sanctions petition, as well as May’s deposition testimony, all of which made clear that Mercy was seeking money damages in the sanctions proceedings. Post and Reid sought a defense to Mercy’s answer to the sanctions petition.

Spinelli and Anesh reviewed Mercy’s answer and determined that, like the petition for sanctions itself, it did not trigger coverage because it did not allege a claim for “damages” as defined by the Policy. Anesh informed Bochetto of Travelers’ coverage decision.

On October 13, 2006, Post filed a complaint in the United States District Court for the Eastern District of Pennsylvania against Travelers. On February 7, 2008, Post filed an amended complaint against Travelers wherein he asserted five claims: breach of contract based on Travelers’ alleged breach of the Policy; breach of contract, but was based on Travelers’ putative breach of an oral agreement between Bochetto and Anesh that Travelers would pay the costs incurred by Post in connection with the sanctions proceedings; a claim for insurance bad faith; promissory estoppel, contending that Travelers promised to cover his defense costs in connection with the sanctions proceedings; a claim for declaratory judgment that Post was entitled to coverage for defense costs he incurred in connection with the sanctions proceedings.

The District Court entered an Explanation And Order denying Travelers’ motion for partial summary judgment and granting in part Post’s cross-motion. Specifically, the Court denied Travelers’ motion for summary judgment as to Counts I and V with prejudice, and denied that motion as to Counts II and III without prejudice. It granted Post’s cross-motion as to Counts I and V, and denied it as to Count II without prejudice. The Court held Mercy’s malpractice claim triggered a duty to defend that included the sanctions petition after Mercy joined because that petition was involved in the covered claim.  Even if the sanctions petition were not part of Mercy’s claim, the petition was not excluded by the Liability Policy after Mercy joined the petition.

A professional liability insurance carrier should not be able to avoid coverage for what is essentially a malpractice claim simply because of how an attorney’s former client chooses to term the requested relief.

Discussion

The central issue for both Post’s appeal from the dismissal of his bad faith claim, and Travelers’ cross-appeal of the damage award on Post’s breach of contract claim, is whether Travelers had a duty to defend Post in the sanctions proceedings.

Analysis

Whether a pleading raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance upon receiving notice of the claim by the insured. The question whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract to the four corners of the complaint.  Under Pennsylvania law, like that in most states, when an insured tenders multiple claims to an insurer for defense, the insurer is obligated to undertake defense of the entire suit as long as at least one claim is potentially covered by the policy.

Travelers’ contention that Mercy’s letters did not trigger a duty to defend because they indicated only a “potential” claim was found by the appellate court to be underwhelming. There was nothing “potential” about Mercy’s threat to sue Post for malpractice or its assertion that Post’s misconduct caused it monetary loss. The definition of “claim” under the Policy does not require anything more than a “demand that seeks damages,” which Mercy made via its threats and letters. Since words are known by the company they keep the cost of the proceedings involved in the suit includes court reporter’s, arbitrator’s, and mediator’s fees, and not attorneys’ fees.

Mercy’s answer to the sanctions petition (in reality, its joining with the Bobbetts against Post, Reid, Barton Post, and Post & Post) admitted and/or alleged facts potentially giving rise to a covered malpractice claim under the Policy. Mercy admitted and/or alleged that Post was its former counsel, that he failed to exercise ordinary skill or knowledge by unethically and improperly redacting and/or withholding discoverable information, and that his failure to exercise ordinary skill and knowledge subjected him to sanctions and liability for attorneys’ fees-in essence, stating the elements of a malpractice claim.  Moreover, because Mercy sought damages in addition to sanctions, and the facts admitted and alleged by Mercy in its answer to the sanctions petition stated a potentially covered malpractice claim, the Policy’s sanctions exclusion does not shield Travelers from its duty to defend Post.

Conclusion Re Duty To Defend

Travelers owed Post a duty to defend against (1) Mercy’s malpractice claim from October 12, 2005 onward, and (2) the sanctions petition subsequent to the filing of Mercy’s answer on February 8, 2006.

While an insurer has a duty to accord the interests of its insured the same consideration it gives its own interests, an insurer is not bound to submerge its own interest in order that the insured’s interests may be made paramount, and an insurer does not act in bad faith by investigating and litigating legitimate issues of coverage.

Even questionable conduct giving the appearance of bad faith is not sufficient to establish it so long as the insurer had a reasonable basis to deny coverage.

The District Court correctly granted summary judgment in favor of Travelers on Post’s insurance bad faith claim brought since there is nothing in the record – let alone clear and convincing evidence – indicating that Travelers’ purported mishandling of Post’s claim was motivated by a dishonest purpose or ill will.

Travelers did not frivolously decline to provide a defense to Post; rather, after an investigation and retention of outside counsel, Travelers reasonably concluded that the sanctions exclusion in the Policy applied to Post’s claim and denied coverage. Even if Travelers’ claims-handling processes were not ideal, there is no evidence in the record – let alone clear and convincing evidence – to indicate that Travelers’ purported mishandling of Post’s claim was motivated by a dishonest purpose or ill will. Because it performed what appears to be an adequate investigation, and because the sanctions exclusion in the Policy provided it a reasonable basis for denying coverage, Travelers did not engage in insurance bad faith.

ZALMA OPINION

Even though the insurer failed to provide all of the relevant facts to its coverage lawyer, even though its investigation was less than perfect, even though it guessed wrong on the coverage issues, Travelers’ actions did not rise to the level of the tort of insurance bad faith because the appellate court concluded there was no dishonest purpose or ill will. Making an error is not bad faith. Being less than perfect is not bad faith. Failing to follow company standards is not bad faith. To prove that an insurer’s actions were in bad faith it is necessary to show some dishonest purpose or ill will against the insured. Although the court could have concluded failing to tell counsel about all relevant facts that generated an erroneous coverage opinion the appellate court concluded the failure was done without dishonest purpose or ill will.

Of course, if the adjuster had provided coverage counsel, with the demand letters both would have avoided this litigation.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | 4 Comments

Zalma’s Insurance Fraud Letter — August 1, 2012

Money Recovered From Fraud Perpetrators Should Stay With Fraud Fight

Continuing with the fifteenth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) reports in its August 1, 2012 that monies recovered from insurance fraud perpetrator went directly to California’s General Fund and not the continuing fight against fraud with $4 million from Met Life left to the California Legislature. ZIFL also reports on a court of appeal finding that a state can prosecute state crimes against a doctor who committed Medicare and Medicaid fraud even though it was also a federal crime.

ZIFL also reports about a fraud perpetrated on the California Department of Insurance with fake checks being issued that appear to have been issued by the Department and how an arson-for-profit cost the arsonists more than the insurer the intended to defraud where the defendants insured a mobile home for $65,000 and then, after they were caught, claimed it was worth less than $10,000 so they could not be convicted of a felony and finally ZIFL reports on an insurance fraud perpetrator who should win a Darwin award and not be allowed to reproduce because of his exceeding stupidity.

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

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

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

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

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

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

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No Right to Stack Auto Liability Policies in Missouri

Anti-Stacking Language Upheld

Zalma on Insurance in top 50

Patrick McGinness, driving a vehicle owned by his adult daughter, negligently struck and injured Marie DeMeo. DeMeo obtained a $350,000 state-court judgment against McGinness. His daughter’s insurer, American Family Insurance Company, paid its $100,000 policy limit under an owner’s liability policy that covered McGinness as a permitted driver. State Farm Mutual Insurance Company insured McGinness under four liability policies issued for the cars he owned. Each policy provided coverage to McGinness when operating a non-owned vehicle such as his daughter’s. Invoking the policies’ “anti-stacking” provisions, State Farm paid the per-person limit of one policy, $50,000. DeMeo sued to recover an additional $150,000, the combined limits of the other three policies.

In a prior appeal the Eighth Circuit concluded that the anti-stacking provisions unambiguously applied to limit State Farm’s contractual liability. The case was sent back to the district court to determine whether the anti-stacking provisions are invalid, at least in part, because they conflict with the minimum insurance requirements of Missouri’s Motor Vehicle Financial Responsibility Law (“MVFRL”).

On remand, the parties submitted additional briefs; DeMeo argued that the MVFRL mandates payment of the $25,000 statutory minimum coverage for each policy and requested a judgment of $75,000. The district court instead held that the anti-stacking provisions do not conflict with MVFRL requirements and granted summary judgment in State Farm’s favor. DeMeo appeals. Reviewing the district court’s interpretation of the insurance statutes de novo in Marie Demeo v. State Farm Mutual Automobile Insurance Company, No. 11-2695 (8th Cir. 07/26/2012) the Eighth Circuit resolved the dispute.

Missouri Public Policy on Stacking

A public policy limitation on anti-stacking policy provisions has long been part of Missouri insurance law. After the enactment of mandatory minimum levels of uninsured motorist coverage, the Supreme Court of Missouri held: “when a statute requires that uninsured motorist coverage be included in any and every policy covering any motor vehicle,” and the insured has paid for that coverage on two or more vehicles, public policy “prohibits the insurer from limiting an insured to only one of the uninsured motorist coverages provided.” Cameron Mut. Ins. Co. v. Madden, 533 S.W.2d 538, 544-45 (Mo. banc 1976). This decision was an exception to the normal rule of freedom to contract that should not go further than is strictly necessary to serve the statutory policy that an insured not be denied the benefit of some of the coverage which was required and which had to be paid for.

Enacted in 1986, the MVFRL for the first time mandated that motor vehicle owners and operators maintain minimum levels of financial responsibility for damages arising out of their ownership or use of a motor vehicle. Although the statute allows impractical self-insurance alternatives this financial requirement is most commonly satisfied by purchasing a motor vehicle liability policy that meets the requirements of the Missouri statute. The MVFRL ensures that people who are injured on the highways may collect damage awards, within limits, against negligent motor vehicle operators. Policy exclusions or coverage limitations are invalid to the extent they conflict with the MVFRL’s minimum insurance requirements.

In the prior appeal the Eighth Circuit determined that if this issue is governed by contract principles, State Farm’s anti-stacking provisions preclude the additional coverages in question.  The MVFRL did not require that McGinness purchase liability insurance covering his operation of a non-owned vehicle whose owner, like his daughter, maintained the required levels of financial responsibility.

Analysis

If an insured has paid for coverage while operating a non-owned car as part of an owner’s policy, and if that coverage applies to a particular accident, public policy as reflected in the MVFRL requires that at least the mandatory minimum limit be paid even if the victim’s damages are partially covered by policies issued to other insureds. State Farm more than satisfied that obligation to McGinness by paying, not merely the MVFRL minimum $25,000, but the full $50,000 limit of one policy. Since the statute did not obligate McGinness to purchase this coverage for the accident in question did not obligate State Farm to provide this coverage in its owner’s policies, we believe the Supreme Court of Missouri would conclude that the public policy exception to the normal rule of freedom to contract does not preclude enforcing the anti-stacking provisions in this case.

If the insured and insurer may contractually preclude multi-vehicle stacking within a single policy, we see no basis in Missouri public policy to conclude that the MVFRL demands stacking when there are multiple policies.

 

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Justice Can’t Always Be Done

Not Every Wrong Has A Remedy

There is a maxim of law that “for every wrong there is a remedy.” Like all maxims of law it does not fit every circumstance. In the chambers of the Wisconsin Supreme Court two justices became embroiled when one justice put his hands around fellow Justice Ann Walsh Bradley’s neck in June 2011. Prosser said she was the aggressor and he was just defending himself. The problem raised by the dispute is that each member of the Wisconsin Supreme Court, the final arbiter of the dispute, were witnesses to the event. Justice Prosser asked each to recuse themselves.

A Witness Cannot Judge a Dispute

The Supreme Court of Wisconsin, by Annette Kingsland Ziegler, a justice of the Supreme Court was compelled to resolve what it described as a “highly unique” case that “presents extraordinary facts and legal circumstances” in In the Matter of Judicial Disciplinary Proceedings Against the Honorable David T. Prosser, Jr. v. the Honorable David T. Prosser, Jr, 2012 WI 103 (Wis. 07/27/2012).

On June 25, 2012, Justice David T. Prosser, through his attorney, requested that I disqualify or recuse myself from the above-referenced matter, asserting that I am a material witness who was present at the February 10, 2010, and June 13, 2011, events that are the subject of the complaint. Justice Prosser has made essentially the same request of each of his six colleagues on the supreme court.

This decision addresses my individual position on my recusal or disqualification. Nonetheless, each justice is presented with a similar fundamental issue.

The highly unusual issue each justice is called upon to decide is whether he or she, being a material witness to or co-actor in an alleged altercation between two colleagues, may sit in judgment of one or both of the justices involved in the alleged altercation? The answer to that issue, for Justice Ziegler, is an ineluctable “no.”

First and foremost, the conclusion is dictated by the law on judicial ethics. Pursuant to Wis. Stat. § 757.19(2)(b) (2009-10), “[a]ny judge,” including a supreme court justice, “shall disqualify himself or herself from any civil . . . action or proceeding when one of the following situation occurs . . . (b) When a judge is a party or a material witness . . . .” That rule is echoed by SCR 60.04(4)(e)4. of our Code of Judicial Conduct, which provides that a judge “shall recuse himself or herself in a proceeding when the facts and circumstances the judge knows or reasonably should know establish one of the following . . . (e) The judge . . . 4. Is to the judge’s knowledge likely to be a material witness in the proceeding.”

In accordance with the principles of fundamental fairness and the right to a fair and impartial decision-maker, a right that precludes a judge from prejudging a case. In our country and in our state, everyone, even a supreme court justice, is entitled to a fair tribunal. Indeed, both the United States Constitution and the Wisconsin Constitution guarantee equal protection under the law. Under the highly unusual factual situation in the instant case, each justice is in the position to have already formed conclusions regarding the nature of the events that occurred on February 10, 2010, June 13, 2011, and prior thereto. That is, each justice, as a witness, has his or her own perspective on what occurred on February 10, 2010, and June 13, 2011.

Justice Ziegler concluded that “there is simply no way for me to separate my personal perceptions and fairly and impartially judge this matter. Because, at a minimum, the justices are witnesses and all justices are likely to be called as material witnesses in the proceeding, recusal is required.”  She also said:

Some parties do not receive their day in court despite wishing to be heard. For example, some parties are deprived of their day in court because the statute of limitations has passed, a court order has been violated, evidence is suppressed, or a myriad of other circumstances occur that have nothing to do with the merits of the underlying dispute. Here, if a quorum of four justices cannot hear this matter, this may be one of those circumstances.

Justice Zigeler noted that justice is supposed to be blind. Justice is not supposed to turn a blind eye to the obvious. An obvious conflict is presented by simultaneously participating as material witness and as the final decision-maker. Given these extraordinary circumstances, justice Ziegler simply saw no legitimate basis upon which she could participate in this case and respectfully disqualify and recuse herself from the above-referenced matter. The rest of the Supreme Court agreed and this dispute where justices of the Supreme Court of Wisconsin acted outside normal decorum will go unresolved and the wrong, if there was one, will go without a remedy.

ZALMA OPINION

Okay, this is not an insurance case, but it is important to the implementation of justice in the United States. There is not a remedy for every wrong. Regardless of which justice acted improperly they cannot pursue a remedy because the last person capable of making a determination concerning the alleged battery and or the alleged act of self defense will go into history with no one resolving the issue.

Insurance cases will seldom arise where every member of the Supreme Court must recuse themselves so that there is no resolution. However, there are many insurance cases that should never go to trial. It is the duty of the insurance claims professional — the adjuster — to resolve the disputes they deal with and avoid litigation in as many cases as possible.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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What Policy Says Controls — Not What It Should Say

No Coverage for Defense

Zalma on Insurance in top 50

The District Court, Northern District of Illinois was called upon to resolve an issue of an insurer’s duty to defend in light of a subcontractor exclusion in James River Insurance Company v. Keyes2safety, Inc., the Mcclier Corporation, Daniel Mustapha, No. 11 C 901 (N.D.Ill. 07/24/2012). The action was filed by James River Insurance Company seeking a declaration that it has no duty to defend or indemnify Keyes2Safety, Inc. (“K2S”) or Daniel Mustapha with respect to a lawsuit filed by Larry Gipson in the Circuit Court of Cook County. The parties cross-moved for summary judgment.

Background

James River is an insurance company domiciled in Ohio and with its principal place of business in Virginia. K2S is a Michigan corporation with its principal place of business in Michigan. Daniel Mustapha is a citizen of Wisconsin. The underlying action was filed in the Circuit Court of Cook County, Illinois by Larry Gipson against The McClier Corporation, K2S and Daniel Mustapha alleging that Gipson was injured on the job when installing drywall at a construction site at Kennedy King College. Gipson’s allegations state that McClier, the general contractor, entered into a contract with DMB Services/Cotton JV, Gipson’s employer, for drywall work at the Kennedy King construction site. On February 21, 2007, Gipson was engaged in drywall installation at the Kennedy King College construction project when he fell from purportedly defective scaffolding and was injured.

Several months before Gipson’s accident McClier had entered into a contract with K2S to provide site safety at the Kennedy King construction site. K2S’s responsibilities included, among other things, providing 8-hour safety service to observe compliance with safety requirements at the construction site, furnishing daily reports of the safety condition of the site and ensuring compliance with all federal, state and local safety requirements.

K2S hired Mustapha to work at the Kennedy King construction site. The underlying action alleges that K2S and Mustapha, among others, were negligent in various ways causing Gipson’s injuries.

Insurance Policy

James River issued commercial general liability insurance policy number 00012730-1 to K2S effective November 3, 2006, to November 3, 2007. The policy includes coverage for “bodily injury”, “property damage”, and “personal and advertising injury.” Among others, the policy contains an exclusion titled “Injury to Independent Contractors and Subcontractors-Exclusion,” which states that “[t]his insurance does not apply to ‘bodily injury’, ‘personal and advertising injury’ or ‘property damage’ sustained by any independent contractor/subcontractor, or any employee, “leased worker”, “temporary worker” or volunteer to help of same.” (emphasis added)

Analysis

Under Illinois law, an insurer has an obligation to defend its insured in an underlying lawsuit if the complaint in the underlying lawsuit alleges facts potentially within the coverage of the insurance policy, even if the allegations are groundless, false or fraudulent. An insurer may justifiably refuse to defend only where it is apparent from a comparison  of the allegations of the complaint and the policy, that the allegations fail to state any claim within, or potentially within, the scope of policy coverage. Additionally, if the insurer relies on an exclusionary provision it must be clear and free from doubt that the policy’s exclusion prevents coverage. Finally, if the insurer does not have the duty to defend, it also does not have the duty to indemnify.

James River contended that the Injury to Independent Contractors and Subcontractors Exclusion applies to exclude coverage to K2S and Mustapha under the policy. The parties agree that the underlying complaint alleges that Gipson was an employee of DMB Services and that DMB was a subcontractor working at the Kennedy King construction site. Therefore, under the plain terms of the policy, the injury at issue is excluded from coverage.

K2S and Mustapha’s attempt to gain coverage is an appeal to what the exclusion in this case “must have meant,” i.e., that it applied only to independent contractors and subcontractors of K2S and not any independent contractor or subcontractor.  The District Court found the argument unpersuasive since, where terms of an insurance policy are clear and unambiguous they must be applied as written. The court noted that had K2S wanted it could have negotiated policy wording that amended the language of the exclusion to expressly state what K2S says it means.

The District Court found that in the absence of similarly qualifying language, coverage under the facts of the case is excluded.

Conclusion

Because the Court concludes that the Injury to Independent Contractors and Subcontractors exclusion applies, it need not address the applicability of the other exclusions.  The court declared that James River Insurance Company has no duty to defend or indemnify K2S or Mustapha under the policy in connection with the previously described underlying action by Gipson.

ZALMA OPINION

This is an example of greed overcoming wisdom. Although there was clearly no coverage as the Court of Appeal eventually found, the parties attempted to settle the case for $1.5 million but could not agree to terms. The trial court, frustrated with the lack of diligence of the parties, entered a judgment in favor of Heritage and refused to enforce the agreement to agree since it was never finalized. Both parties gambled rather than settle and, up to this time, Heritage won the gamble and the plaintiffs lost.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Control of Vehicle is Necessary

No Control, No Lease, No Borrowing, No Coverage

Zalma on Insurance in top 50

The Iowa Court of Appeal was asked to overturn a trial court’s grant of summary judgment in favor of defendant Heritage Mutual Insurance Company (“Heritage”) after finding the commercial insurance policy Heritage issued to Reed Construction did not provide coverage for a fatal accident caused by Orval Kopp, an employee of Larry Reinier, where Reed Construction hired Reinier to deliver a truckload of asphalt. The question before the court in Paul Craig Jeffries and Gerald Jeffries As Administrators/Executors of v. Jack Ahrold Agency, Inc., Jack Ahrold Agency, Inc. D/B/A Ahrold-Fay, No. 2-229/ 11-1027 (Iowa App. 07/25/2012), whether coverage exists under the Heritage policy where the policy requires that Kopp was using, with Reed Construction’s “permission,” a vehicle Reed Construction “owned, hired, or borrowed.”

The evidence presented revealed that the vehicle at issue was not owned, hired, or borrowed by Reed Construction. In fact Reed Construction hired Reinier to provide the service of delivering asphalt and Reinier retained the right to control the vehicle. In addition, Reed Construction did not give Kopp, Reinier’s employee, permission to use Reinier’s vehicle.

BACKGROUND FACTS

In August 1998, Reed Construction was a subcontractor on a road-construction project being performed in Centerville by Jasper Construction Services. Reed Construction was hired to perform the asphalt work. On August 25, 1998, Reed Construction needed to haul more asphalt than it had trucks and drivers. Reed contacted Larry Reinier, who operated a business delivering product from Norris Asphalt, and asked if his dump truck could deliver the asphalt. Reinier agreed and sent his employee, Orval Kopp, to deliver the asphalt.

Kopp delivered the asphalt and was returning to Norris Asphalt when the truck collided with a vehicle being operated by Boyd Wright. Wright was killed. His passenger, Fanchon Jeffries, suffered severe injuries from the accident and later died as a result of those injuries. Before her death, Ms. Jeffries’ conservator initiated a lawsuit against Kopp, Reinier, and others. On December 1, 2005, Kopp and Reinier confessed judgment in the amount of $2,450,000, plus 6.2% interest and costs, and agreed to assign any right they had to recover against the contractors, their insurers, and their insurance agents. In exchange, the conservatorship agreed it would not execute judgment upon Kopp and Reinier, but would only seek to satisfy the judgment by taking action against the contractors, insurers, and insurance agents.

On October 18, 2007, the plaintiffs filed this action against Heritage (which issued Reed Construction’s insurance policy) and the agency issuing the policy, among others. The plaintiffs alleged Heritage’s business-auto policy provided coverage for Kopp. Heritage filed a motion for summary judgment alleging Kopp was excluded from coverage under the policy. In an amended ruling, the court held the contractual liability exclusion did not bar coverage as a matter of law and Kopp was covered under the commercial insurance policy. The court reaffirmed its ruling following a motion to reconsider.

An April 2010 trial was scheduled to determine the sole issue of the reasonableness of the settlement of the original lawsuit. Prior to the start of trial, the parties informed the district court they had resolved the issues to be tried through stipulation. When the stipulation was not filed for the court’s approval by January 19, 2011, as agreed, the court ordered the parties to file the stipulation by February 25, 2011. The court stated that if the parties failed to do so, it would reconsider Heritage’s motion for summary judgment.

The court reversed its prior ruling and entered summary judgment in favor of Heritage, concluding Reinier’s truck was not a borrowed or hired auto and, therefore, was not covered under the Heritage policy.

INSURANCE COVERAGE

The Heritage policy includes the following pertinent language:

        1. Who is an insured The following are insureds:

            a. You for any covered auto;

            b. Anyone else while using with your permission a covered auto you own, hire or borrow except:

                1. The owner or anyone else from whom you hire or borrow a covered auto.

The policy allows coverage for any vehicle Reed owned, hired, or borrowed. It is clear the truck involved in the accident was not owned by Reed.

The term “borrow” is not defined in the Heritage policy. The Iowa supreme court has followed the ordinary meaning for “borrow” when the term was not defined by the insurance policy, and observed that a vehicle is borrowed when someone other than the owner temporarily gains its use. When a party temporarily gains the use of a vehicle as a substitute for its own vehicles.  The facts of this case are different. Reed did not retain any control over Reinier’s truck. Reed did not have a right to control Reinier’s truck. Rather, Reed hired Reinier to perform a specific task. Reinier performed the task with his own truck and his own employee under his control. The district court concluded the facts of this case don’t fit the definition of “borrowed.” Reed did not gain the temporary use of Reinier’s truck. He contracted with Reinier to provide a delivery by whatever method Reinier chose.

The term “hire” is also not defined in the Heritage policy. “Hired auto” provisions appear in many commercial insurance policies. Some policies define the term “hired auto” expressly, usually as vehicle “used under contract in behalf of” the named insurer. Commercial insurance policies which leave the term “hire” undefined, such as here, are recognized to connote a more narrow and restrictive interpretation than do those policies that define the term.

Similar to the term “borrowed,” the question as to whether a vehicle is “hired” focuses on the issue of control, or right to control, the vehicle. To provide coverage for a hired vehicle, the insured must have control over the vehicle. Specifically, in determining whether a particular vehicle qualifies as a “hired” vehicle, courts commonly consider whether the named insured was in physical control of the vehicle, or at least had a right of control over it, or whether the person rendering the service and the person employing him had entered into a formal lease agreement or contract with respect to the vehicle.

CONCLUSION

The Court of Appeal decided that based on the undisputed facts of this case, Reed exercised only an indirect and limited supervisory control over the use of Reinier’s truck in that he only told Reinier what material the vehicle would be transporting, where to pick the material up, and where to deliver it. Reinier, however, chose which truck and driver (Kopp) to send to deliver the asphalt. Reinier maintained the truck, including carrying insurance on it. Kopp remained an employee of Reinier, and Reinier dictated Kopp’s hours and directed his duties. There was no separate contract or lease agreement by which the truck was hired or leased to Reed Construction for its exclusive use or control.

ZALMA OPINION

This is an example of greed overcoming wisdom. Although there was clearly no coverage as the Court of Appeal eventually found, the parties attempted to settle the case for $1.5 million but could not agree to terms. The trial court, frustrated with the lack of diligence of the parties, entered a judgment in favor of Heritage and refused to enforce the agreement to agree since it was never finalized. Both parties gambled rather than settle and, up to this time, Heritage won the gamble and the plaintiffs lost.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Adjusters Are Entitled to Overtime

Professionalism in Claims Handling Dealt A Serious Blow by California Courts

Zalma on Insurance in top 50

In 1967 when I became a trainee insurance adjuster I believed I was entering a profession where my skill, intelligence and experience were required to help my employer fulfill the promises made by the insurance polices issued. I was not working in a factory doing the same task every day but was required to deal with different matters every day that required knowledge of insurance policies, the law of the jurisdiction and the ability to deal with and negotiate with people insured by my employer fairly and in good faith. Today, adjusters continue to act – in most cases as professionals – carrying out the claims standards set by there employers.

The California Court of Appeal was asked to rule on a writ proceeding after the Supreme Court reversed an earlier decision: Harris v. Superior Court (2011) 53 Cal.4th 170 (Harris), where it concluded that the previous decision of the Court of Appeal had misapplied the substantive law and determine if insurance adjusters were entitled to overtime pay. By making this demand the adjusters may increase their take-home pay but reduce the view of an honorable profession.

FACTUAL BACKGROUND

Defendants are insurance companies, the employers of plaintiffs, the companies’ claims adjusters, who seek damages based on overtime work for which they allege they were not properly paid. Adjusters’ claims are governed by two different California regulations promulgated by California’s Industrial Welfare Commission (IWC). The employers claimed that the administrative exemption to the overtime compensation requirements applies to claims adjusters. The Adjusters claimed that the exemption does not apply. In addition, Adjusters contended that the issue of whether their work duties are of the kind required for application of the administrative exemption is a predominant issue common to the claims of all putative class members, warranting class certification. The trial court initially agreed and certified Adjusters’ proposed class. Both sides petitioned for writ review. Employers sought decertification of the portion of the class that remains certified. Adjusters sought recertification of the decertified portion of the class and also challenged the trial court’s denial of their motion for summary adjudication of Employers’ affirmative defense based on the administrative exemption. In Frances Harris et al v. the Superior Court of, No. B195121 (Cal.App. Dist.2 07/23/2012) the Court of Appeal granted Adjusters’ petition and denued Employers’ petition because Adjusters’ primary work duties are the day-to-day tasks of adjusting individual claims not directly relating to management policies or general business operations.

As stated in Harris: “[Adjusters are] claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation (collectively [Employers]). [Adjusters] filed four class action lawsuits alleging [Employers] erroneously classified them as exempt ‘administrative’ employees and seeking damages based on unpaid overtime work. The four actions were coordinated into one proceeding. [Adjusters] also moved for class certification. The trial court certified a class of ‘all non-management California employees classified as exempt by Liberty Mutual and Golden Eagle who were employed as claims handlers and/or performed claims-handling activities.’”

The Court of Appeal issued an order to show cause, ordered that the petitions be consolidated, and, in a published opinion, granted Adjusters’ petition and denied Employers’ petition. We directed the trial court to grant Adjusters’ motion for summary adjudication and to deny in its entirety Employers’ motion to decertify the class.

The Supreme Court granted review and reversed. The court identified certain errors in our reasoning and clarified certain points concerning the governing law. The court reversed our judgment and remanded to this court to reconsider the matter in light of “the appropriate legal standard set out herein.” The court directed us on remand to “review the trial court’s denial of the summary adjudication motion” but did not expressly direct us to review the class certification issue as well. The court did indicate, however, that the parties remained “free to raise the issue on remand” and the parties did so in their supplemental briefing in this court.

DISCUSSION

Labor Code section 1173 grants the IWC a broad mandate to regulate the working conditions of employees in California, including the setting of standards for minimum wages and maximum hours. Wage orders issued in the state provide for certain exemptions from the overtime compensation requirements. The exemptions are affirmative defenses, so an employer bears the burden of proving that an employee is exempt.  Labor Code section 515, subdivision (a), exempts from overtime compensation ‘executive, administrative, and professional employees’ whose primary duties meet the test of the exemption, who regularly exercise discretion and independent judgment in performing those duties and who earn a monthly salary at least twice the state minimum wage for full-time employees.

Under the statute, to qualify as “administrative,” employees must (1) be paid at a certain level, (2) their work must be administrative, (3) their primary duties must involve that administrative work, and (4) they must discharge those primary duties by regularly exercising independent judgment and discretion. The narrow question before the court was the second point, whether Adjusters work is administrative. That is, whether it meets the test of the exemption. These statutory standards are further understood in light of the applicable wage order.
Parsing the language of the regulation reveals that work qualifies as “administrative” when it is “directly related” to management policies or general business operations. Work qualifies as “directly related” if it satisfies two components. First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Under the federal regulations, incorporated by reference into the state regulations, the qualitative component of the “directly related” requirement provides that an employee’s work duties meet the test of the exemption only if they “relat[e] to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work” but the import of that statement is not perfectly clear. The Court of Appeal interpreted the language to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component of the “directly related” requirement. In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.

The Court of Appeal noted that the undisputed facts revealed that the Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the “directly related” requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like. The Court of Appeal concluded that none of that work is carried on at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of Employers’ business.

Since the Court of Appeal concluded that the undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the “directly related” requirement Adjusters are not primarily engaged in work that is “directly related to management policies or general business operations.”

PRODUCING THE EMPLOYER’S PRODUCT

Employers argue that Adjusters do not produce Employers’ product because Employers’ product is the transference of risk, not claims adjusting. On that basis, Employers conclude that Adjusters’ work must not be production work but rather is administrative and consequently satisfies the qualitative component of the “directly related” requirement.

The Court of Appeal concluded that the argument fails for two reasons. First, as Employers’ own evidence shows, adjusting claims is an important and essential part of transferring risk. If Employers never paid any claims, then they would not be transferring any risk; they would just be transferring their customers’ premium payments to themselves. But Employers cannot pay any claims without first adjusting those claims, namely, making coverage determinations, assessing the value of the covered portions of claims, and paying the covered amount.

Thus, by adjusting claims, Adjusters directly engage in transferring risk. Consequently, assuming the truth of Employers’ contention that their product is the transference of risk, the Court of Appeal would still have to reject their contention that Adjusters do not produce Employers’ product.

Second, Employers’ argument is unsound for an independent reason, namely, that workers who do not produce their employer’s product can still do work that fails to satisfy the qualitative component of the “directly related” requirement. Were that not so, the work of every office worker employed by a manufacturing enterprise would satisfy the qualitative component of the “directly related” requirement.

THE AGENCY OPINION LETTERS AND THE FEDERAL CASE LAW

Employers urge us to defer to a 2002 opinion letter issued by the federal Department of Labor, which concludes that claims adjusters are exempt administrative employees. Adjusters urge us instead to rely on opinion letters issued in 1998 and 2003 by the Division of Labor Standards Enforcement, the California agency charged with enforcing IWC wage orders, which support Adjusters’ contention that they are not exempt. The Supreme Court instructs, however, that “it is ultimately the judiciary’s role to construe the language” of the applicable statutes and regulations.  The Court of Appeal,  therefore, refused to rely upon any of the agency opinion letters.

CONCLUSION

The parties do not disagree as to Adjusters’ work duties. Indeed, the evidence is essentially undisputed as to what those duties are.  Adjusters therefore are not primarily engaged in work that is directly related to management policies or general business operations and are not exempt administrative employees. Plaintiffs’ petition for writ of mandate is granted. The Court of Appeal directed the trial court to vacate its October 18, 2006 order. Defendants’ petition for writ of mandate was denied.

ZALMA OPINION

The success of the Adjusters in this case will increase their individual income, hurt their employer, and will reduce the reputation of adjusters who are now no more important to their employers than the secretary who types up a memo or the maintenance person who mops the floor and empties the trash.

If I were a young adjuster starting employment I would find myself limited to working eight hours a day and 40 hours a week with no respect from my employer or consideration that I, as an adjuster was a professional. Considering this decision house counsel, working for a salary from an insurer, should also be entitled to overtime as would associate lawyers working in a law firm since their work is not directly related to management policies or general business operations but just are involved in parts of litigation like taking a deposition or writing a memo of law. More class actions will follow.

This win for the Adjusters may turn out to be a loss for the adjusting profession.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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State May Prosecute Dr. For Stealing From Medicare

Physician Fraudster Will Serve Eight Years

The Appeal

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Defendant, Benjamin Levine, M.D., appealed his conviction by a jury of third-degree unlicensed practice of medicine,, second-degree theft by deception, two counts of fourth-degree falsification of records, and third-degree insurance fraud. He was sentenced to a term of incarceration of eight years on the conviction for second-degree theft by deception, to concurrent three-year terms of incarceration on the third-degree convictions for unlicensed practice of medicine and insurance fraud and to eighteen months on the fourth-degree conviction for falsification of records set forth in count six. In addition, defendant was ordered to pay $176,078.10 in restitution to the victims identified in count two of the indictment charging theft by deception. The State, in State of New Jersey v. Benjamin Levine, No. A-4065-09T1 (N.J.Super.App.Div. 07/23/2012), conceded that this amount should be reduced to $149,935.43 but otherwise opposed Levine’s appeal.

Facts

The record disclosed that defendant initially received his license to practice medicine in New Jersey in 1970. In New Jersey medical licenses are effective from July 1 to June 30 and must be renewed every two years on the odd year. If a doctor’s license is not renewed within thirty days of June 30 of the applicable year, the doctor’s license is suspended by operation of law.

Levine’s license to practice medicine required renewal by June 30, 2003.  Ms. Feldman of the Board of Medical Examiners informed Levine that he could not practice without medical malpractice insurance.

Following receipt by the Medical Board of an anonymous letter, dated December 25, 2003, stating that defendant was practicing medicine and prescribing drugs without a license, Susan Sugalski, an investigator with the Enforcement Bureau of the Division of Consumer Affairs was assigned to investigate the allegations. Upon taking the assignment, Sugalski made a sweep of pharmacies in the area in which defendant practiced, requesting that those pharmacies permit her to view pharmacy profiles pertaining to defendant for the period from June 2003 to June 2004 in order to determine whether he was writing prescriptions. Additionally, Sugalski requested that her colleague, Investigator Tracey Muse, pose as a patient and determine whether defendant would treat her, which he did on August 30, 2004, following up on the visit with a letter requesting her comments and asking whether she would refer other patients to the office.

Prior to any definitive action by the Medical Board regarding defendant’s continued practice of medicine, the Middlesex County Prosecutor’s Office became interested in the matter as the result of its receipt, in September or early October 2005, of anonymous information that defendant was practicing medicine without a license. Investigator Mark Bertelson subpoenaed billing records from Empire Medicare Service, a private company that handled bills for Medicare. Bertelson testified that records that he received from Empire for services rendered by defendant in the period from July 2003 to October 11, 2005 indicated payments to him in excess of a hundred thousand dollars. Bertelson also interviewed Joanne Kent, defendant’s receptionist/medical assistant from 1996 until December 2005 after which Kent testified at trial that she was responsible for completing patient insurance forms and that they were reviewed by defendant before submission. She testified additionally that, after Bertelson visited the office, she was informed by defendant that she would be receiving a call from the Prosecutor’s Office, and that if she were required to go for an interview, she should take a lawyer; be careful what she said; if she did not like the questions being asked, she should leave; and she should tell them that defendant had a license. Defendant also requested that Kent come in to the office to help him destroy patient files. She refused.

Following the interview with Kent, on December 9, 2005, defendant was placed under arrest for practicing medicine without a license, and evidence relating to defendant’s continued practice of medicine was seized from defendant’s office. Although many records were obtained in this fashion, the investigators were unable to locate the appointment books and payroll records that Kent stated should have been present.

Subsequent investigation disclosed that defendant had deposited in his checking account several hundred checks from insurance companies and Medicare in the period from June 2003 through December 2005. Medicare records indicated that the amount of claims paid to defendant between July 1, 2003 and December 12, 2005, at a time when he was not authorized to receive such payments, was $122,790. Reimbursements from private insurers totaled $26,000.

Other evidence at trial established that defendant had executed an application for medical malpractice insurance on July 27, 2006 in which he failed to disclose in answer to a question requesting such information that he was under indictment, having at that point been indicted on April 19, 2006 and June 16, 2006. Evidence also established that defendant had given false information in seeking renewal of his registration under the Controlled Substance Act.

Conviction

Following trial by jury and entry of a judgment of conviction, defendant appealed, raising a multitude of issues.

Decision

The Appellate court concluded that the vast majority of the issues raised on appeal lack sufficient merit to warrant discussion in a written opinion. The appellate court noted that New Jersey has a heavy and traditional interest in regulating the practice of medicine within its borders and has had great latitude under their police powers to legislate as to the protection of the lives, limbs, health, comfort, and quiet of all persons. New Jersey recognizes that a license to practice a profession is not a basic individual right and the right to practice medicine is granted in the interest of the public.

Since the same act or conduct may violate not only a group of laws of the same jurisdiction, but also a group of laws of several jurisdictions. In either case, the “violation” turns upon both a state of facts and a particular law. Any conviction that ensues is not for the state of facts as such, but for the violation of the particular law that is applicable. Defendant was charged with violating New Jersey’s Criminal Code through acts of theft by deception. He was not charged with violating the Medicare Act even though he did so and the US Attorney did not prosecute..

In the present case, the charge of theft by deception was based solely upon evidence that defendant lacked a license to practice medicine from June 30, 2003 to his arrest. Thus, the issue of whether defendant committed theft pursuant to a “common scheme” could only have one answer, if the jury in fact found that defendant lacked a license, which it did. Moreover, evidence demonstrated that the amount that defendant claimed from a single victim – Medicare – and was paid by it during the period of defendant’s alleged illegal conduct exceeded the statutory amount necessary to qualify his crime as one of the second degree, without consideration of any of the payment by other insurers.

Defendant had actual notice of the need to renew his license and the requirements that he had to meet to do so, as unequivocally evidenced by his note to the Medical Board of April 11, 2003. The court affirmed the conviction and remanded the case to the trial court to permit amendment of the judgment of conviction to reflect a restitutionary award of $149,935.43 as stipulated by the prosecution.

ZALMA OPINION

Physicians, like every other profession, are tempted to commit crimes of fraud against easy paying Medicare and Medicaid because the federal systems seldom review medical billings for accuracy or try to determine if work is actually done. Federal investigators and prosecutors are inundated with massive fraud against Medicare and Medicaid systems that they can only prosecute a small percentage of those committing the crime. This case is important because, although Medicare and Medicaid fraud are federal crimes the criminal activity also violated state statutes. Dr. Levine was not prosecuted by the federal government but was prosecuted successfully by the state of New Jersey. He will serve his time in a state prison rather than a federal prison.

State prosecutors should not shy away from Medicare fraud if subsumed within the fraud is a violation of a state statute. If they do so, like did New Jersey, the crime can be reduced and the temptation deterred.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Fight Against Insurance Fraud In New Jersey Now More Difficult

Agent Owes No More Duties Than Principal

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The New Jersey Supreme Court was faced with an appeal that presented a discrete, narrow legal question: “is a health care provider who has received an assignment of personal injury protection (PIP) benefits from an insured obligated upon request to furnish to the insurer broad information with respect to the provider’s ownership structure, billing practices, and regulatory compliance?” In Selective Insurance Company of America, Selective Way Insurance v. Hudson East Pain Management Osteopathic Medicine and Physical Therapy, No. A-105 September Term 2010 (N.J. 07/18/2012) the Supreme Court was called upon to interpret the language in an insurance policy issued by plaintiff.

Since an insurance policy is a form of contract and the interpretation of contract language is a question of law the Supreme Court reviewed the decision of the appellate court as if it was newly presented to the Supreme Court.

The Supreme Court found it is fundamental that the rights of an assignee can rise no higher than the rights of the assignor. If an assignee can have no greater rights than his assignor, it must follow that an assignee can have no greater duties than his assignor. Selective argued that the medical assignee was required to  fulfill the insured’s duty to cooperate with Selective and its duty to cooperate with the “investigation, settlement or defenses” of the insured’s underlying claim.

The Fraud Legislation

The Legislature set down clear directives with respect to discovery in connection with PIP benefits. The material sought by Selective in this matter far exceeds the statutory limitations of a patient’s “history, condition, treatment, dates and cost of such treatment.”

In an effort to protect the public from insurance fraud, the Legislature passed the Insurance Fraud Prevention Act, which created the Insurance Fraud Prosecutor, and the Bureau of Fraud Deterrence. Defendants contend that the statute places responsibility for the detection and prevention of insurance on the Attorney General and the Department of Banking and Insurance, not on private entities such as Selective. The statute, however, does impose affirmative duties on insurers with respect to insurance fraud. Selective contends that these statutory provisions justify its request for the detailed information it sought from defendants. When Selective filed its complaint, it articulated the legal theories under which it was proceeding: that defendants were obligated to respond to Selective’s discovery demands under both the cooperation clause and the PIP discovery statute.

In reviewing the claims submitted, Selective detected what it considered to be suspicious patterns in both the treatments defendants had provided and the corporate links among the treating entities. Wanting to pursue the questions generated by those perceived patterns, Selective requested that defendants supply to it a variety of data with respect to their ownership structure, billing practices, and compliance with certain regulations. In support of its request, Selective cited the provision within the insureds’ insurance policies requiring the insureds to cooperate with Selective in the investigation of any claim under the policy.  Selective sought a declaratory judgment that defendants were obligated to provide the information and documents it sought and that if they failed to do so, they would be ineligible to receive PIP reimbursement.

Amici stressed that the insurance industry has, for many years, relied on a policy’s cooperation clause to obtain data from medical providers as a check on improper practices. Amici asserted that if insurers are not able to require providers to supply that information, they will be unable to seek relief under the Insurance Fraud Prevention Act.

Appellate Division Decision

The Appellate Division panel relied on the general principle that there is a legally significant distinction between an assignment, which conveys benefits or the potential to receive benefits, and a delegation, which conveys duties or obligations. The principle that an assignment of benefits does not carry with it the corresponding duties of the assignor is not universal in its application.  The record that was before the Supreme Court did not contain the executed assignments upon which Selective relies and is barren with respect to the circumstances under which a particular assignment was executed.

However, the Supreme Court noted that it is fundamental that the rights of an assignee can rise no higher than the rights of the assignor. If an assignee can have no greater rights than his assignor, it must follow that an assignee can have no greater duties than his assignor. Here, an insured’s duty to cooperate with Selective referred to the duty to cooperate with the “investigation, settlement or defenses” of the insured’s underlying claim.

An insured had no duty to provide information to Selective with respect to the ownership structure, billing practices, or referral methods of the medical providers from whom he or she sought treatment for his or her injuries. Because an insured had no obligation to supply that information to Selective, the assignment of benefits executed by an insured could not serve to impose that duty on the providers.

The goal of PIP is to provide prompt medical treatment for those who have been injured in automobile accidents without having that treatment delayed because of payment disputes. The Supreme Court noted that Selective asserts that it has paid all the statements submitted to it and has not sought to deny treatment to any patients. That, however, does not mean they would not do so in the future.

Selective’s final argument rests on New Jersey’s strong public policy against insurance fraud. We have noted that insurance fraud in this State is a problem of massive proportions. The Federal Bureau of Investigation estimates that insurance fraud costs the average American family approximately $400 to $700 per year in increased premiums.

In an effort to protect the public from insurance fraud, New Jersey has adopted both statutory and regulatory structures. The Legislature passed the Insurance Fraud Prevention Act. That statute, however, does impose affirmative duties on insurers with respect to insurance fraud. It requires, for instance, that all automobile insurers such as Selective prepare and file with the Commissioner of Banking and Insurance a plan to detect and prevent fraudulent claims. Further, each insurer must annually file with the Director of the Division of Insurance Fraud Prevention a report on its “experience in implementing its fraud prevention plan.”

An insurer that does not comply with the filing requirements is subject to a penalty of up to $25,000 per violation. Additionally, by regulation, every automobile insurer that insures more than 2,500 vehicles in New Jersey must include as part of its plan to prevent and detect insurance fraud a Special Investigations Unit. Among the duties of the Special Investigations Unit is identifying persons and organizations that are involved in suspicious claim activity.

Selective contended that those provisions obligated the defendants to respond to Selective’s discovery demands under both the cooperation clause and the PIP discovery statute. The Court stressed that its decision is not to be understood as sanctioning attempts to hamper legitimate efforts to root out instances of fraudulent conduct. Nor did it intend to restrict insurers’ reasonable attempts to comply with their statutory obligations.

The Supreme Court concluded that an insured had no duty to provide information to Selective with respect to the ownership structure, billing practices, or referral methods of the medical providers from whom he or she sought treatment for his or her injuries.

ZALMA OPINION

This case is really an attempt to compel a medical provider to give an insurer evidence about the provider that will help it prove that the billings it received from the providers that it believes might be fraudulent. Since there is no way an insured — the assignor of the benefits — could obtain or provide that information the effort failed.

Since the New Jersey statutes required the insurer to maintain an SIU it might have been better if Selective had used the expertise of the SIU investigators. The information it sought are available by investigation since ownership records are public and can be obtained with some effort as can the structure of the medical providers. The billing practices can be obtained by review of medical records of those insureds and claimants who seek benefits. Finally, if the insurer has evidence that the billing by the providers is fraudulent — by taking statements from its insureds who can establish whether the services claimed were provided — it can then sue the providers for fraud and obtain the information by legitimate discovery.

Insurance fraud is much worse than the court and the FBI report. It is essential that insurers do what they can to stop it. They should not, however, waste time and money in an effort like that tried by Selective in this case.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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He Who Sits on His Rights Loses

PRIVATE LIMITATION OF ACTION ENFORCED

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In March 2010, Brian and Julie Hoover (Hoovers) filed a complaint against their home insurer, Country Mutual Insurance Company (Country Mutual), and Michael Spann (the “agent”), a Country Mutual insurance agent. According to the complaint, the agent promised to provide the Hoovers with an insurance policy that would cover the cost of replacing their home and its contents, but Country Mutual refused to pay the replacement cost when an explosion completely destroyed the Hoovers’ home in 2008. Country Mutual and the agent filed separate motions to dismiss the Hoovers’ amended complaint, claiming, inter alia, that the Hoovers failed to file their complaint within the applicable statutory limitations period and within the one-year limitation provision delineated in the policy. The trial court granted both motions. The Court of Appeal was asked, in Brian Hoover and Julie Hoover v. Country Mutual Insurance Company and Michael Spann, 2012 IL App 110939 (Ill.App. Dist.1 07/18/2012) whether the trial court erred when it granted the defendants’ motions to dismiss all the counts in the Hoovers’ complaint as time barred.

BACKGROUND

In 1998, the Hoovers and their family built a house on their land near Pittsfield, Illinois. In 2004, the Hoovers purchased a homeowners’ insurance policy from the defendant, Country Mutual, to insure against a loss in the event of a fire or other casualty. In May 2007, the Hoovers met with the agent to obtain additional coverage that would cover the replacement cost of their home and its contents in the event of a loss.

The agent obtained a new insurance policy from Country Mutual. Included within the terms of the policy were certain conditions, including the following mandated by the statutory fire policy:

Suit Limitation Provision Suit Against Us

No action can be brought against ‘us’ unless there has been full compliance with all the terms under SECTION 2 through 6 of this policy and the action is started within one year after the date of the ‘occurrence.’ “

On January 12, 2008, an explosion completely destroyed the Hoovers’ home. The Hoovers’ copy of their insurance policy was destroyed in the fire. In February 2008, a contractor working for the Hoovers estimated the cost of replacing their home at $513,000. The Hoovers calculated their personal property loss at $370,000. The Hoovers made a claim with Country Mutual for the replacement cost of their home and its contents.

Country Mutual paid the Hoovers a total of $265,000 for the loss of the dwelling and $198,000 for the personal property loss as of March 2008. During the first week of August 2008, Brian Hoover gave the agent the Hoovers’ most recent paid receipts, but the agent informed Brian Hoover that Country Mutual would not be making any further payments on the loss.

Country Mutual refused to pay the Hoovers the full replacement cost for their home and personal property. Country Mutual argued that the Hoovers’ insurance policy did not entitle them to full replacement cost coverage on their house because they purchased a policy with a liability limit that was less than 80% of the actual replacement cost of their home.

On March 3, 2010, the Hoovers filed their initial four-count complaint against Country Mutual and the agent. The Hoovers alleged that during the process of procuring their new insurance policy, the agent did nothing to ascertain what the actual costs would be to replace their home in the event of a loss and the agent did not advise them that they would not receive the replacement cost to replace their home and its contents unless they purchased an insurance policy with liability limits of at least 80% of the actual replacement cost of their home and its contents at the time of the loss.

ANALYSIS

The suit limitation provision in the Hoovers’ insurance policy provided that all suits against Country Mutual must be brought within one year of the date of the occurrence. The Hoovers filed their initial complaint against Country Mutual on March 3, 2010, more than two years after the explosion. Therefore, based on the one year suit limitation provision in the policy, the Hoovers’ breach of contract claim was untimely.

Insurance Bad Faith

Next, the Hoovers contended that the one-year suit limitation provision does not apply to their bad-faith claim against Country Mutual because it is not an action for breach of contract. Every bad faith action is dependent upon proof that there was a breach of the insurance contract. Because the breach of contract action was time barred, and the Hoovers’ claim for bad faith against Country Mutual was dependent on the success of the breach of contract action, the trial court did not err when it dismissed the bad-faith count against Country Mutual.

Negligent Misrepresentation

In count III of the Hoovers’ amended complaint, they alleged that the agent negligently misrepresented facts and led them to believe that he had procured full replacement cost coverage for their home and personal property. The trial court dismissed count III as time barred.

The Court of Appeal noted that the suit limitation provision in the contract does not apply to the Hoovers’ suit against the agent because the negligent misrepresentation count is a tort action against the agent and the insurer and it is not an action for breach of the Hoovers’ contract with Country Mutual.

In order to state a cause of action for negligent misrepresentation, a complaint must first allege facts establishing that the defendants owed the plaintiff a duty to communicate accurate information.  The Illinois Supreme Court explained in an earlier decision that it has recognized a duty to communicate accurate information in only two circumstances. First, the court has imposed a duty to avoid negligently conveying false information where the information results in physical injury to a person or harm to property. Second, there is a duty to avoid negligently conveying false information where one is in the business of supplying information for the guidance of others in their business transactions.

In this case the information that the agent supplied to the Hoovers did not result in any physical harm to the Hoovers, nor did the Hoovers’ reliance on the agent’s information cause the damage to their home and property.  According to the allegations in the Hoovers’ complaint, Country Mutual is in the business of selling insurance. The parties agree that the agent was acting as an agent of Country Mutual at the time of the occurrence. Because the agent was Country Mutual’s agent he was also engaged in the business of selling homeowners’ insurance.  The Court of Appeal held that the Hoovers failed to allege facts that stated a cause of action for negligent misrepresentation against the agent and Country Mutual.

Negligence

Once the Hoovers received the policy, they were in the best position to determine if the policy’s $258,000 liability limit for their house was sufficient to meet the 80% replacement cost requirement, and by receiving the policy prior to the fire, they had an opportunity to read their insurance policy and determine whether the policy limits with Country Mutual were adequate.

When Country Mutual provided the Hoovers with a copy of their insurance policy, which delineated the liability limits for the house and its contents, they had all the information that they needed to determine the limits of their coverage. Accordingly, because the negligence count was untimely, the court had no need to address the issue of whether Spann had a duty to provide the Hoovers with the coverage that they requested.

ZALMA OPINION

Every state that has enacted a statutory fire policy demands that fire insurance contains a one year private limitation of action provision like the one in the Country Mutual policy discussed above. All states enforce the private limitations of action provision. Some, however, treat the private limitation of action provision differently. For example, in my state of California, the private limitation of action provision is tolled — does not run — from the date the insured reports the loss until the date the insurer advises the insured that the claim is denied [Prudential-LMI Commercial Insurance v. Superior Court of San Diego County, 51 Cal. 3d 674, 798 P.2d 1230, 274 Cal. Rptr. 387 (Cal. 11/01/1990)] that held: ” this limitation period should be equitably tolled from the time the insured files a timely notice, pursuant to policy notice provisions, to the time the insurer formally denies the claim in writing.” Had the Illinois court adopted the reasoning of the California Supreme Court the Hoovers suit would not have been dismissed.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

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“A Small Step For Man…”

ZALMA OPINION

The Need For Risk Takers

Zalma on Insurance in top 50

On July 20, 1969, Neil Armstrong stepped upon the surface of the moon as the ultimate successful risk taker. When he said those words 43 years ago, the United States was vigorous and willing to take risks. The United States did not give up even after three astronauts burned to death during a test. A man walked on the moon. I watched him take that small step on poor quality black and white television and, like every other American, was proud.

The move to the moon was exceedingly risky. It was very much like insurance because the essence of insurance is the taking of a calculated risk.

The United States then was willing to take calculated risks to move the country forward. Today the United States is more interested in eliminating risk from life by providing “free” insurance to everyone.

I miss the courage of Neil Armstrong and sincerely wish that what he did was “a great leap for mankind.” It seemed to be at the time and should have been. It is not. The U.S. is led by people who want to take care of everyone, like Robin Hood, by stealing from the rich to give to the poor. No one is willing to take a risk. Business people are afraid to start a business because they know if they fail they will take the loss and if the succeed they will be punished with egregious taxes and regulations.

In 1917 my parents and their parents took a risk and came to the United States with little money and no property. At age 12 my mother worked in a “sweat shop” sewing ladies garments and with the money she earned helped her family to live in a Brooklyn slum apartment building with a toilet in the back yard and no running water. There was no welfare, social security or other “entitlements” to help them, only family and hard work. They took risks, worked hard, started businesses and by the time they passed away they were successes and their children went to college.

In 1979 I took a risk, borrowed money from a bank, and started a law firm. I expected to lose money for a few years and hoped I had saved enough to feed my family as I worked to set up the business. I was surprised when the law practice I set up succeeded and I made more than my last job paid me. If I was starting the business today I would not have been able to take the risk and probably would have taken a law job with the state or local governments.

If you are not willing to take a risk you will never have a reward. You must be willing to fail and work hard to succeed. I took a risk and earned the reward while others worked for a safe salary and retirement. Henry Ford built cheap automobiles even his employees could buy before there were roads built for them to drive upon. He took a risk and was greatly rewarded.

This country needs risk takers like Neil Armstrong and Henry Ford and my grandparents and parents.

Insurance people help people take risks by spreading the risk among many. Insurance must remain as a risk spreading device not as a government entitlement or this country will wither away into a country of people unwilling to take a risk and wanting someone else to take care of them.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Failure to Chew Not Compensable

The Quesadilla Caper

The Virginia Court of Appeal was called upon to resolve a dispute between the workers’ compensation commission and Michael Bernard, a restaurant waiter who attempted to swallow a piece of quesadilla that was too big for his esophagus. The commission found Bernard’s injury occurred in the course of his employment but not as a result of an actual risk of employment. In Michael Bernard v. Carlson Companies — TGIF and, No. 2590-11-2 (Va.App. 07/17/2012) the Court of Appeal resolved the dispute.

We view the evidence on appeal in the light most favorable to Bernard’s employer, the prevailing party before the commission. In 2010, Bernard worked as a host and waiter at a TGI Friday’s (TGIF) restaurant. When new food selections came out, he and other employees often sampled the food so they could make recommendations to customers. The commission found Bernard “was not required to taste anything” and “did not anticipate being disciplined” if he chose not to sample the food. In January 2010, Bernard sampled a quesadilla. Though he had never before had problems swallowing food, Bernard choked on a partially chewed bite of the quesadilla. The strenuous process of dislodging it damaged his esophagus.

Bernard filed a worker’s compensation claim, contending the injury occurred in the course of his employment and arose out of an actual risk of his employment. He did not allege the quesadilla was unusual or defective in any way. Bernard has had Crohn’s disease since childhood. But he did not claim, nor did the evidence prove, that some peculiar quality of the quesadilla triggered his underlying Crohn’s disease.

The deputy commissioner denied the claim, finding the injury occurred in the course of the employment but did not arise out of an actual risk of the employment.  The commission held: “[W]e find that the claimant’s injury did not arise out of a risk of his employment. In cases of injury due to food provided by the employer, we have found compensable injuries only when there was something unusual or abnormal about the food, i.e. it was spicy, hot in temperature, or contained a hard object. Here, there was no problem documented with the quesadilla which became stuck in the claimant’s throat and caused his injury. The claimant did not assert that it was something that he should not eat because of his medical condition. The claimant would have been equally exposed to any risk connected with eating an ordinary quesadilla had he eaten it apart from his employment.”

On appeal Bernard conceded he “attempted to swallow a piece of quesadilla that was too big for his esophagus.”

BASIC ARISING-OUT-OF PRINCIPLES

The Workers’ Compensation Act applies when the claimant satisfies both the “arising out of” and the “in the course of” prongs of the statutory requirements of compensability. The concepts “arising out of” and “in the course of” employment are not synonymous and both conditions must be proved before compensation will be awarded.

Virginia follows the actual risk doctrine which excludes an injury which comes from a hazard to which the employee would have been equally exposed apart from the employment. An actual risk of employment is not merely the risk of being injured while at work. The first premise of the actual risk doctrine requires a hazard or danger not equally present apart from the employment but rather one peculiar to the work. Without this precondition, any injury – of any kind no matter the cause – would be covered by the Workers’ Compensation Act. This would be unfair to employers.

THE COMMON AND UNPECULIAR QUESADILLA

Bernard’s quesadilla was neither a hazard nor a danger – it was simply a quesadilla. No evidence suggested it had unusual properties or was made with defective ingredients. It could not be distinguished (for purposes of presenting a choking risk) from any other quesadilla or, for that matter, any food that requires chewing before swallowing.

The Court of Appeal concluded that the commission correctly concluded Bernard’s choking injury occurred in the course of his employment since TGIF provided the quesadilla, and Bernard tried to eat it to be a better waiter. However, the Court of Appeal found that the commission was also right to conclude the injury did not arise out of an actual risk of the employment. The quesadilla was not a hazard or danger, much less one peculiar to TGIF. Swallowing partially chewed food was a risk Bernard faced equally on and off the job. Nothing about the TGIF quesadilla or Bernard’s work environment increased that risk.

ZALMA OPINION

Workers’ compensation insurance is a no fault system to compensate people who are injured while working and eliminate the need of employees to sue their employers. It is a very broad coverage and serves employees and employers well.

As this case shows workers’ compensation does not provide benefits for every injury that might happen at work. As this case in Virginia shows the employee, to recover workers’ compensation benefits must result from an actual risk of injury not equally present apart from the employment but rather one peculiar to the work. If Mr. Bernard had made and eaten a quesadilla at home and failed to properly chew it he would face the same potential for injury as that suffered when he failed to properly chew a quesadilla provided to him by his employer.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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The Only Certainty in Life Is Taxes

Lies, Damn Lies and Taxes

Oregon Taxes a Non-Resident Insurer’s Income

The Oregon Tax Court was asked to resolve issues concerning earnings and taxes imposed on the Costco Wholesale Corporation (the “Taxpayer”) who is engaged in the operation of membership warehouses offering branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities throughout the United States, including warehouses in Oregon.  The Taxpayer is the parent corporation of a federal affiliated group comprised of Costco, NW Re Ltd. (the insurance company) and other domestic corporations. Taxpayer filed federal consolidated income tax returns on behalf of the affiliated group for each of the tax years at issue. Taxpayer filed Oregon consolidated corporation excise tax returns on behalf of itself and its subsidiaries for each of the tax years at issue. The Tax Court resolved disputes over what was taxable income in Costco Wholesale Corp. and Subsidiaries v. Department of Revenue, State of Oregon, No. TC 4956 (Or.Tax Ct. 07/16/2012).

FACTS

Calculating the Oregon taxable income for each of the years at issue for Taxpayer and its subsidiaries, Taxpayer subtracted the insurance company’s income from Taxpayer’s affiliated group’s federal taxable income. The department conducted an Oregon corporation excise tax audit of Taxpayer and its subsidiaries covering the tax years at issue. As a result of the audit, the department proposed certain adjustments to the Oregon returns as originally filed by Taxpayer and its subsidiaries.

The department issued notices of deficiency assessment (Notices of Assessment) where the department asserted that Taxpayer was liable for additional tax, plus interest and penalties for each of the tax years at issue. In the Notices of Assessment, among other adjustments, the department determined that the insurance company was unitary with Taxpayer and that the insurance company’s income should be included with the Oregon taxable income of Taxpayer and its subsidiaries.

The insurance company is a wholly owned subsidiary of Taxpayer. During the tax years at issue, the insurance company was a Bermuda entity that elected to be treated as a domestic corporation for federal income tax purposes pursuant to Internal Revenue Code (IRC) section 953(d). The insurance company insures general liability, workers compensation, and automobile liability risks of Taxpayer’s affiliated group, including Taxpayer.

The insurance company receives insurance premiums from Taxpayer’s affiliated group including Taxpayer. Through the Green Island Reinsurance Pool, the insurance company also receives reinsurance premiums from unrelated third parties. During the tax years at issue, the insurance company did not own or rent any property located in Oregon. Nor did the insurance company have any employees located in Oregon. The insurance company was not registered to do business in Oregon during the tax years at issue. The insurance company did not file Oregon corporation excise tax returns for any of the tax years at issue.

ISSUE

The issue presented at this stage of the case is whether the income of the insurance company is to be included in the calculation of the Oregon taxable income of Taxpayer.

ANALYSIS

Of the foregoing facts stipulated for purposes of these motions, two are of particular importance. The first of those is that Taxpayer and the insurance company are, under Oregon tax law, in a unitary relationship with each other. The second of those is that the insurance company is not subject to taxation in Oregon and is not required to file a return pursuant to Oregon statutes.

The resolution of this case then depends on whether the return of Taxpayer must include the income of the insurance company in the computation of the Oregon taxable income of Taxpayer.

Even though the effects of combination of income of all unitary affiliates often increased the tax base significantly, this was offset by including, in the apportionment factor denominators, the factor values for all of the unitary affiliates as well. Nonetheless, foreign governments and their domestic corporations objected to the worldwide combination approach as it exposed foreign companies to burdensome and costly audit procedures.

In 1984 Oregon responded to these objections by adopting a “waters-edge” system. The “waters-edge” approach was one in which the income of foreign parent or subsidiary companies was not included in the calculation of Oregon tax base for a related company doing business in Oregon.  This result was technically accomplished by using, as a starting point for the calculation of companies filing in Oregon, only the federal consolidated income of groups that included companies doing business in Oregon. Because federal consolidated returns may only include the income of companies incorporated in one of the states of the United States, the choice of that starting point for determination of tax base meant that the starting number for calculation of the tax base would not include the income of parent or subsidiary companies incorporated in foreign countries.

That said, Oregon did not otherwise abandon its historical commitment to the determination of the income tax base of Oregon Taxpayers by use of the apportionment of the combined income of all companies that were, within the United States, in a unitary relationship. As in the past, determinations of income were to occur for each unitary group – that is each group of companies engaged in a single trade or business. For purposes of these motions both parties have accepted the assumption that Taxpayer and all of its subsidiaries – including the insurance company – comprise one unitary group.

Because the federal consolidated return statutes and regulations do not take into account the concept of a unitary group, the Oregon statutes provide a set of rules for the separate determination of the income of each unitary group in cases where more than one unitary group exists within one federal group of affiliated companies filing a consolidated return. Although the income of each unitary group is separately determined, there is in the statute no provision or indication that would permit the total income of all unitary groups found within one federal consolidated return to be less than the consolidated federal taxable income found on the federal tax return.

As to the one unitary group of companies assumed to exist in this case and found within the federal consolidated return, it is important to determine which company has (or which companies have) by reason of sufficient contact with Oregon, an obligation to file a return in Oregon. For these motions, it is assumed there is only one unitary group existing within the federal affiliated group of corporations. That unitary group includes Taxpayer, the insurance company and all of their federal affiliates. Accordingly, the starting point for the determination of the Oregon taxable income of Taxpayer is the entire consolidated federal taxable income for the year in question. This amount includes the income of the insurance company – it was, after all, included in the federal consolidated return.

CONCLUSION

The starting point is simple: if a corporation files a separate federal return, it will file a separate Oregon return.  If the corporation is included in a federal consolidated return, it will file an Oregon consolidated return.

The fact that the insurance company has insufficient contacts with Oregon to support jurisdiction once again concludes the analysis. If Oregon does not have jurisdiction to require the insurance company to file a return the taxing statutes cannot and do not apply to the insurance company. The tax court concluded that the income of the insurance company, being in the federal consolidated income of the unitary group to which Taxpayer belongs, must be, after any adjustments otherwise required by Oregon law, included in the Oregon tax base of Taxpayer subject to apportionment.

The Oregon consolidated return provisions were designed to exclude from Oregon unitary returns the tax items of corporations incorporated in foreign countries. That was a legislative choice and not required of Oregon. The legislature did not go further. Inclusion of the income of the insurance company in the return calculations for Taxpayer does not therefore, conflict with the purposes of the Oregon unitary tax rules.

Further, nothing in any of the statutory provisions indicates that the legislature intended to exempt the income of some insurance companies. It bears observing that Oregon is, in no way, requiring the insurance company to file a consolidated return or asserting jurisdiction over it. Nor is Oregon directly imposing a tax on the income of the insurance company. Oregon is only taking into account the income of a unitary affiliate in computing, on an apportioned basis, the tax liability of corporations over which Oregon has jurisdiction to tax.

ZALMA OPINION

Old Ben Franklin was right – the only certainty in life is death and taxes. In this case, Costco created an insurance company based in the Bahamas that has no connection to the state of Oregon and yet the income of the insurer was included – for tax purposes – for the benefit of the state of Oregon. If each of the 50 states where Costco does business applies the same rule Costco’s tax obligation will increase logarithmically and may make it less expensive for Costco to buy insurance – whose premiums would be deducted as a business expense – than to operate its own insurer that might even make a profit if run well.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Insurance, to Be Effective, Must Be Written

The Insured’s Burden 

Zalma on Insurance in top 50

It is axiomatic that in every contract of insurance or reinsurance the insured bears the burden of demonstrating that a claim falls within a policy’s affirmative grant of coverage.

The First Circuit Court of Appeal was asked to resolve a reinsurance dispute between an American insurance company and a Canadian insurance company in
OneBeacon America Insurance Company v. Commercial Union Assurance Company of Canada, No. 11-2072 (1st Cir. 07/11/2012). The American company, Plaintiff-Appellant OneBeacon America Insurance Company (“OneBeacon”), claims that the Canadian company, Defendant-Appellee Aviva Insurance Company of Canada (“Aviva”), is obligated to reinsure OneBeacon for policies OneBeacon issued to certain entities in the early 1980s. Both parties filed cross-motions for summary judgment, and the district court denied summary judgment to OneBeacon and granted summary judgment to Aviva. OneBeacon appealed.

BACKGROUND

In the early 1980s, OneBeacon and Aviva were both affiliated members of the Commercial Union group of insurance companies (the two companies are no longer affiliated). The 1980 OneBeacon Policy was effective from March 28, 1980 through April 1, 1981 and was identified as policy no. C8-9101-002. The Policy contained “Endorsement Number 4,” (the “1980 OneBeacon Endorsement Number 4″) which provides:

“It is understood and agreed that this policy or any renewal thereof is 100% reinsured by [Aviva] policy number 6687287 effective 3/28/80 to 4/1/81. ¶ It is further agreed that cancellations of this policy C8-9101-002 or any renewal thereof or policy 6687287 or any renewal thereof shall be reason for automatic cancellations of the other policy.”

Also on March 28, 1980, Aviva issued an insurance policy (the “1980 Aviva Policy”) to Harrisons & Crosfield (Canada) Ltd. (“Harrisons Canada”) with the policy no. 6687287. The 1980 Aviva Policy contains a “Differences in Conditions Endorsement” (the “1980 Aviva Endorsement”), which states: “In consideration of the premium charged, the Insurer agrees that this policy is placed in conjunction with and reinsures Policy No. CL C8-9191-002 issued by [OneBeacon], or any renewal thereof, in respect of: Insured: Harrisons & Crosfield(America)Inc., Harrisons & Crosfield(Pacific)Inc. ¶ Exceptions: This insurance differs from the policy which it follows in the following particulars: (a) Premium: $45,530 (Canadian Funds-Deposit) The Limit of Liability under either or both policies shall not exceed $1,000,000.00 as set forth in Policies 6687 and CL C8-9101-002 or any renewal policies issued by this Insurer.”

On November 26, 1980, Aviva issued to OneBeacon “reinsurance certificate No. 9009419″ (the “Facultative Certificate”) for the “reinsurance term” of March 28, 1980 to April 1, 1981. The Facultative Certificate states that Aviva reinsures policy no. C8-9101-002 (the 1980 OneBeacon Policy), and the reinsurance premium listed is $45,530.00 Canadian. The Facultative Certificate’s policy period was never extended, nor does a separate facultative certificate exist for any subsequent policy period. The Facultative Certificate is the only direct written agreement between Aviva and OneBeacon on the record.

Aviva sent the Facultative Certificate to OneBeacon via a letter dated November 26, 1980, along with a check for $4,553 Canadian. The letter states: “Further to yours of July 1st, 1980. Attached is our Reinsurance Certificate along with our cheque in the amount of $4,553.00 Canadian being your override commission of 10% of the premium which was $45,530.00 Canadian.”

In 1981, OneBeacon issued a policy to Harrisons US, effective April 1, 1981 to April 1, 1982. Around the same time, Aviva issued an endorsement (the “1981 Aviva Endorsement”) to the 1980 Aviva Policy that extended the policy period from March 28, 1981 to March 28, 1982. Significantly, the 1981 Aviva Endorsement explicitly excluded Harrisons US from coverage under the 1980 Aviva Policy.

In 1998, OneBeacon received notice of lawsuits against Harrisons US for asbestos-related injuries. Based upon the coverage it issued to Harrisons US under the 1980, 1981, and 1982 OneBeacon Policies, OneBeacon entered into a defense cost-sharing arrangement with Harrisons US’s other insurers for claims arising from the covered period. In November 2007, OneBeacon requested that Aviva fully indemnify OneBeacon for costs incurred in connection with the Harrisons US claims. Aviva responded that it would reimburse OneBeacon for only one-third of defense expenses and indemnity payments.

On February 2, 2010, OneBeacon filed suit against Aviva in the U.S. District Court for the District of Massachusetts. OneBeacon sought a declaration that Aviva had a contractual obligation to reinsure the 1980, 1981, and 1982 OneBeacon Policies issued to Harrisons US, and also sought damages for Aviva’s alleged breach of contract. On June 24, 2011, OneBeacon and Aviva filed cross-motions for summary judgment. On August 18, 2011, the district court denied OneBeacon’s motion and granted Aviva’s. The court pointed out that the Facultative Certificate was the only contract on the record between the two parties. The court then held that because the Facultative Certificate unambiguously stated that the term of reinsurance ended after April 1, 1981, Aviva did not reinsure the 1981 or 1982 OneBeacon Policies.  The court further concluded that the other evidence on the record also suggested that Aviva reinsured only the 1980 OneBeacon Policy.

DISCUSSION

Under Massachusetts law, and that of almost every state, the insured bears the burden of demonstrating that a claim falls within a policy’s affirmative grant of coverage. It is OneBeacon’s burden to prove that Aviva agreed to reinsure the 1981 and 1982 OneBeacon Policies.

The 1981 Aviva Endorsement explicitly changed the scope of Aviva’s obligations. The Differences in Condition Endorsement in the original 1980 Aviva Policy stated that Aviva would reinsure OneBeacon’s coverage to Harrisons US. However, the 1981 Aviva Endorsement stated that Harrisons US was “specifically excluded from this policy which shall not inure to [its] benefit in any way”.

The fact that there is no Facultative Certificate between Aviva and OneBeacon for the second and third policy years suggests that the relationship between the two companies changed after the first year. Secondly, and most importantly, the evidence regarding the flow of premium payments supports the view that Aviva terminated its reinsurance obligation after the first year. In the first year, in which both parties agree that Aviva reinsured OneBeacon, Aviva received a premium payment of $45,530 Canadian and remitted a 10% fee to OneBeacon. Moreover, the OneBeacon ledger shows that there was a reinsurer for the 1980 OneBeacon policy – identified with the code “C44.” In the second year, however, the OneBeacon ledger reflects that OneBeacon directly received the full $24,000 U.S. premium payment. Furthermore, the ledger does not indicate that there was a reinsurer for the 1981 or 1982 OneBeacon Policies. Further, OneBeacon has not pointed to any evidence that it shared the second- or third-year premium with Aviva. OneBeacon was, therefore, asking the First Circuit reach a result that OneBeacon kept all of the premiums for the 1981 and 1982 policy years, but that it bore none of the risk.  Because there is no evidence that Aviva agreed to provide reinsurance beyond the term of the first policy year, OneBeacon is not entitled to judgment as a matter of law.

Since it is OneBeacon’s burden to prove Aviva’s reinsurance obligation, which OneBeacon cannot do, summary judgment for Aviva was appropriate. Accordingly, we affirm the grant of summary judgment to Aviva.

ZALMA OPINION

Insurance companies, when dealing with reinsurance, like insureds dealing with insurance should know that for insurance to be effective it must be in writing. As Sam Goldwyn allegedly said back in the golden age of movies: “Your oral contract ain’t worth the paper it’s printed on!”

A person suing on a contract of insurance must, primarily, be able to present to the court a written contract. OneBeacon failed to present a contract. OneBeacon failed to show it paid premium for more than the first year. The court destroyed One Beacon’s case as follows:

OneBeacon would have this Court reach a result that OneBeacon kept all of the premiums for the 1981 and 1982 policy years, but that it bore none of the risk. Such a conclusion would defy economic sense.

The lessons taught by this case include the following:

  1. Don’t sue on a contract that you cannot produce.
  2. Be certain, before filing suit, that you can carry the burden of demonstrating that a claim falls within a policy’s affirmative grant of coverage.
  3. Only make arguments to a court that make economic sense.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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The Proper Use of Interpleader

COLORABLE ADVERSE CLAIMS REQUIRE INTERPLEADER

Zalma on Insurance in top 50

When two or more people make a colorable claim on insurance proceeds an insurer cannot safely pay one without facing litigation and the possibility of double payment to the others. The Ninth Circuit Court of Appeal, deciding a case out of Washington state, in Gail Michelman, An Individual v. Lincoln National Life Insurance Company, A Foreign Insurance Company, No. 11-35393 (9th Cir. 07/12/2012) was asked to decide whether an adverse claim to a stake may be so lacking in substance that a neutral stakeholder cannot interplead in good faith. Interpleader is proper when a stakeholder has at least a good faith belief that there are conflicting colorable claims.

BACKGROUND

Gail and Irwin Michelman submitted a life insurance application to Lincoln National Life Insurance Company in 1999 to obtain coverage for their minor daughter, Elizabeth. At the time, Gail and Irwin were married. The application listed Gail and Irwin as the primary beneficiaries and their other daughter, Jessica, as a contingent beneficiary. The application designated Gail as the policy owner, with policy ownership passing to Elizabeth upon her 21st birthday.

Whether Irwin also had an ownership interest in Elizabeth’s life insurance policy is less certain. The insurance contract unhelpfully defined the policy “Owner”-in the singular-as “the Owner identified in the application or a successor.” Although Irwin’s name was written on the line of the application designated for the “Contingent owner,” the Michelmans may have intended for Irwin to be a primary rather than a contingent owner. The application form did not provide a space for more than one primary owner. Nonetheless, in the space to be completed “[i]f two or more Primary owners are named,” the Michelmans checked the box indicating that they were to be joint owners with a right of survivorship between them.

The Michelmans themselves dispute what their intent was. Irwin testified at his deposition that he and Gail intended for both of them to be primary owners of the policy, but that his name was listed on the line for “Contingent owner” because there was no space on the form to insert the name of the second primary owner. At Gail’s deposition, she expressed her belief that Irwin was only a contingent owner. For its part, Lincoln was inconsistent on the ownership issue. Its records reflected that Gail was the policy’s primary owner and Irwin was the contingent owner, but its claims examiner stated in a declaration that the insurance application names Gail and Irwin as joint owners.

Gail and Irwin divorced in 2001. The divorce decree did not include Elizabeth’s life insurance policy among the assets that it catalogued. In 2002, when Elizabeth had not yet reached the age of 21, Gail submitted a change-of-beneficiary form to Lincoln purporting to remove Irwin as a beneficiary and leave herself as the sole primary beneficiary and Jessica as the contingent beneficiary. Lincoln acknowledged this change a few days later in a letter to Gail.

Elizabeth died on August 10, 2009 at the age of 22. Although the autopsy revealed no clear cause of death, the medical examiner found that Elizabeth’s multiple sclerosis and the high level of oxycodone in her blood were contributing factors. Elizabeth’s parents raised concerns about what they considered to be suspicious circumstances surrounding their daughter’s death, but the sheriff’s department found no evidence that another person was involved. Gail, who was out of state at the time of Elizabeth’s death, was never suspected of foul play.

On August 17, 2009, Irwin called Lincoln and stated that Lincoln should look for fraud in the beneficiary information for Elizabeth’s life insurance policy. Irwin told Lincoln that he and his wife were originally equal beneficiaries under the policy and that their divorce decree prohibited any changes.

Lincoln wrote to Gail and Irwin on October 12, 2009. Lincoln informed them that its records showed Gail to be the beneficiary but acknowledged that Irwin had made a conflicting claim. Admitting that the policy proceeds were due and payable, Lincoln explained that by paying one party it faced the risk of being sued by the other. The solution, Lincoln concluded, was to file an interpleader action unless Gail and Irwin could agree how to distribute the proceeds.

Before discovery had commenced, Lincoln moved for summary judgment on all of Gail’s claims. In its August 10, 2010 order, the district court granted Lincoln’s summary judgment motion in part. The court found that interpleader was appropriate and dismissed Gail’s claim for breach of contract but denied summary judgment as to Gail’s bad faith and CPA claims, finding that they were independent of Lincoln’s ultimate coverage decision.

DISCUSSION – Interpleader

Federal Rule of Civil Procedure 22 authorizes a stake-holder to join “[p]ersons with claims that may expose [the stakeholder] to double or multiple liability” and requires such persons to interplead. Here, the district court stated that “the bald assertion of a claim against the policy, without any colorable support, is probably not enough to warrant an interpleader action” but found that Lincoln had a good faith belief that it faced the potential of multiple liabilities.

The Ninth Circuit concluded that “in order to avail itself of the interpleader remedy, a stakeholder must have a good faith belief that there are or may be colorable competing claims to the stake.” This is not an onerous requirement.

The possibility of double liability is only one such problem; another is the cost of litigation, which does not depend on the merits of adverse claims. Although an interpleading stakeholder need not sort out the merits of conflicting claims as a prerequisite to interpleader, good faith requires a real and reasonable fear of exposure to double liability or the vexation of conflicting claims. A “real and reasonable fear” does not mean that the interpleading party must show that the purported adverse claimant might eventually prevail. Of course, the claims of some interpleaded parties will ultimately be determined to be without merit. That, however, is the very purpose of the proceeding and it would make little sense in terms either of protecting the stakeholder or of doing justice expeditiously to dismiss one possible claimant because another possible claimant asserts the claim of the first is without merit.

A stakeholder must interplead in good faith. The threshold showing is not exacting. Interpleader is appropriate where the stakeholder reasonably fears that there may be multiple parties with colorable adverse claims to the stake.

The ambiguity as to primary ownership of the policy appeared on the face of the insurance application, which Lincoln already had in its possession. Given the uncertainty about Irwin’s ownership of the policy, Lincoln had a reasonable fear that Gail and Irwin would make overlapping claims to the proceeds. The Ninth Circuit rejected the contention that Lincoln should have investigated further before interpleading. Interpleader proceedings are pragmatic in nature and should be resolved expeditiously. Because Irwin had a colorable claim to the insurance proceeds, Lincoln need not have expended additional time or resources trying to assess the merits of his claim.

The availability of interpleader need not produce a harsh result for a legitimate claimant who is forced into interpleader due to a rival claimant’s non-meritorious assertions. Lincoln interpleaded in good faith. It knew from Irwin’s phone call that Irwin had a potential claim arising from his asserted co-ownership of the policy and Gail’s unilateral change to the beneficiary designation. The ambiguity of the insurance application showed that Irwin’s assertion was not frivolous. While this alone sufficed to justify interpleader, Irwin took additional steps that further indicated his intent to litigate. He had his attorney send Lincoln a letter requesting that it refrain from paying Gail the policy proceeds. He filed a claim form demanding the policy proceeds. Lincoln thus had a real and reasonable fear of colorable conflicting claims. Consequently, the district court’s judgment in interpleader was proper.

DISCUSSION – Bad Faith

Lincoln did not refuse to pay a claim. It fully acknowledged that it owed Elizabeth’s insurance proceeds to somebody. Lincoln merely refused to pay any particular claimant until a court determined who was legally entitled to the proceeds. This was fully consistent with state law. We agree with the district court that, to the extent Lincoln’s claims investigation policy was unreasonable, any shortcomings in the policy were harmless. Lincoln’s decision to interplead was sound and it had no duty to investigate thereafter.

ZALMA OPINON

When an insurer is faced with competing claims against policy proceeds it is between the classic rock and a hard place. If it pays one it will be sued by the other. If it pays the other it will be sued by the one. Both will sue for the tort of bad faith. Lincoln was faced with this dilemma and took the only option available to it — it interpleaded the funds into court and asked that the competing parties prove to the court which was entitled to the funds.

Of course, when the ex-wife lost she sued and took up on appeal her loss. The Ninth Circuit, in a Solomon-like decision, found that both the ex-wife and ex-husband had colorable claims upon the life insurance proceeds and that, therefore, the insurer properly interpleaded the funds establishing that interpleader was the only safe response to competing claims of different people to the same funds.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Arson, Dead Cat, and Fraud

Zalma’s Insurance Fraud Letter

July 15, 2012 — Now Available

Continuing with the fourteenth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) reports in its July 15, 2012 issue why an arson-for-profit conviction was affirmed by a New York appellate court; and an amazing and unusual attempt at fraud explaining a new use for a dead cat; and why an insurer must treat a person in good faith until evidence allows it to conclude there was a fraud that voided an insurance policy.

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

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

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

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

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

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

The current issue 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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The Four Corners Rule Strikes Again

If the Allegations are Excluded there is No Coverage for Defense

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CGL policies written for people in the construction business are not all inclusive and clearly exclude coverage for defective work. In Ohio, faced with allegations of defective work that caused damage to the first owner of a new home, the Ohio Court of Appeal was asked to throw out a judgment of the trial court which granted summary judgment in favor of Owners Insurance Company (“Owners”) in a defective construction and defective construction materials dispute. Appellant, Gene Patton Inc. (“Patton”), in Motorists Mutual Insurance Co., et al. v. Owners Insurance Co. , 2012 -Ohio- 3112. (Ohio App. Dist.6 07/06/2012), claimed the trial court erred in the following particulars:

  1. The Trial Court erred in granting Owners’ Motion for Summary Judgment, and concluding that the business risk exclusions preclude coverage under the policy.
  2. The Trial Court erred in granting Owners’ Motion for Summary Judgment and finding that Owners is not obligated to provide Patton with a Legal Defense.

FACTS

On March 9, 2000, Robert and Barbara May contracted with Patton to purchase one of Patton’s new construction villa homes in the Carrietowne subdivision, Sylvania Township, Ohio. Less than a year after purchasing the new home, the Mays observed a crack forming on an interior wall of the home. They notified Patton of the issue. Patton suggested increasing the level of humidity inside the home. They complied with this recommendation. Subsequently, the Mays observed condensation forming on windows on the interior of the home during colder weather conditions.

In 2006, a window washer working on the Mays’ home alerted them that one of their windows was badly deteriorating and cracking. The Mays again notified Patton. The Mays also began to observe water dripping on the wall and window sill around the window inside the home during rainstorms. Patton and the window manufacturer both inspected the window but failed to determine the underlying problem. Ultimately, the Mays alerted their insurer, Motorists Mutual Insurance Company (“Motorists”).

Upon receipt of the claim, Motorists dispatched an adjuster to inspect the premises and prepare an estimate for corrective repairs. Based upon this, a check was issued to the Mays in the amount of $2,274.68. In the course of the designated repairs being performed, significant additional property damage was discovered. On April 18, 2008, Motorists had a second check issued to the Mays in the amount of $15,413.13.

On July 17, 2007, Motorists filed a complaint alleging negligence against Patton in Toledo Municipal Court seeking recovery of its initial payments to the Mays. On June 6, 2008, a request by Motorists to file an amended complaint pertaining to the additional funds disbursed to the Mays was granted. The matter was subsequently transferred to the Lucas County Court of Common Pleas as the amended complaint encompassed an amount exceeding municipal court jurisdiction.

On March 22, 2010, Motorists filed the second amended complaint with leave of the court. This complaint incorporated additional allegations against the underlying window manufacturer, Andersen Window Corporation. On April 2, 2010, appellee Owners Ins. Co. (“Owners”), Patton’s commercial general liability carrier, intervened in the case. On January 13, 2011, Owners filed for summary judgment on the basis that the allegations set forth in the second amended complaint were excluded from coverage pursuant to the contractual terms of its commercial general liability policy with Patton and it therefore had no duty to defend Patton in the matter.

On June 7, 2011, the trial court granted summary judgment to Owners. The trial court found that the allegation of negligently performed construction services against Patton fell within a specific exclusion provision of the insurance contract on the basis of the language of exclusionary provision j(7) which expressly excluded coverage for property damage due to work, “incorrectly performed on it.” Thus, this exclusion pertained to negligent construction work such as that alleged in the second amended complaint. In addition, the trial court referenced coverage exclusion provision 2(l) which expressly excluded coverage for property damage arising out of “your work” defined to include materials, parts, or equipment furnished in connection to the construction work. Thus, this second referenced exclusion pertained to potentially defective materials, such as the window utilized by Patton in the course of construction. Lastly, the trial court referenced a policy definition set forth in section V. (17) which further defined the exclusionary language set forth in 2(l) delineating that damages stemming from materials used in connection with the construction work are to be construed as having occurred “away from [the] premises.”

ANALYSIS

Ohio determines whether there is a duty to defend under an insurance policy by applying the allegations of the second amended complaint to the language of the underlying insurance policy executed between Owners and Patton. If the allegations set forth in the complaint are encompassed by exclusionary provisions, then reasonable minds can only conclude that there is no conceivable coverage pursuant to the policy and Owners is entitled to judgment as a matter of law.

The allegation against Owners’ insured, Patton, in the second amended complaint specifically asserts in relevant part that Patton “negligently performed construction services in such a manner to cause water damage to Plaintiff insured’s real property in the amount of $18,187.81.” The determinative exclusionary provision of the underlying insurance policy is set forth in the exclusions portion of the coverage sections at j(7). That provision excludes coverage under the policy for damages to property that, “must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The definitions portion of the contract defines “your work” to include, “work or operations performed by you or on your behalf.” This policy coverage exclusion language and its corresponding definitions clearly encompass the allegations by the Mays of negligent construction services by Patton. There can be no liability under the policy for any property damage caused by negligent construction on the part of Patton or those working on its behalf.

There can be no liability under the policy for any property damage caused by materials, such as the Andersen windows, used in the construction by Patton or those operating on his behalf.

After thoroughly considering any possible coverage pursuant to the underlying commercial general liability policy by which coverage could be triggered on the part of Owners in connection to the second amended complaint the appellate court could find none. The exclusionary provisions set forth in the policy negate any potential coverage for defective construction work or defective materials utilized in the course of the construction work.

Owners, therefore, had no duty to defend Patton pursuant to the commercial liability insurance policy which provides no conceivable coverage for the allegations of the second amended complaint.

ZALMA OPINION

Applying the four corners rule the court had no choice but to affirm the trial court. In courts that allow extrinsic evidence, rather than limiting themselves to the four corners of the complaint, could reach a different result where the damage has resulted from a type of negligence not necessarily excluded. My state of California allows extrinsic evidence to avoid the problems raised by an artful pleader who wishes to punish the person insured by drafting a complaint that provides no coverage. I prefer the use of extrinsic evidence even though, from the recitation of the facts in this case Patton would not have had an ability to obtain coverage.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Bad Faith Deserves Punishment

A Clear Example of “Bad Faith”

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As readers of Zalma on Insurance are aware I am not a fan of the tort of bad faith. However, the following case shows such egregious conduct on the part of an insurer that it cries out for punishment and establishes that some insurers are their own worst enemy. Well trained and experienced claims personnel would have avoided the damages that will eventually be warded against the insurer in this case.

The New Mexico Court of Appeal was asked to resolve an insurance bad faith action brought by Joseph Gant (Receiver) on behalf of Lowell Dydek (Husband) in Lowell Richard Dydek v. Mary Olene Dydek, No. NOS. 30,775 , (N.M.App. 07/09/2012).

Following a trial to a judge only the judge ruled that “USAA breached its contract with Husband by failing to act in good faith to make a timely policy limits settlement offer to Mary Dydek [Wife] and causing a Judgment in the amount of 2.8 million dollars to be entered against Husband.” The judge concluded that “USAA knowingly failed to in good faith effectuate a prompt, fair, and equitable settlement of [Wife's] liability claim . . . in violation of New Mexico…” statutes.  Although Receiver prevailed, the district court ruled that Wife’s agreement not to execute the judgment against Husband’s personal assets precluded the award of the excess judgment as damages. Instead, the court awarded $100 as nominal damages.

The judge also concluded that USAA wantonly and recklessly breached its contract with Husband, and violated New Mexico Statutes. As a consequence of this ruling, the district court granted Receiver attorney fees and costs incurred in pursuing the bad faith claim against USAA as well as punitive damages in the amount of $300,000. In addition, the district court awarded Receiver compensatory damages for attorney fees and costs expended in the Texas litigation.

The Receiver appealed the judge’s refusal to award the full amount of the excess liability judgment entered against Husband.

BACKGROUND

The background facts organize themselves rather neatly into three areas: (1) the three-month period following the collision and ending with Wife’s filing of her tort action against Husband in October 2003, (2) the facts surrounding the so-called “Texas litigation” starting in April 2005, and (3) the process leading to the appointment of Receiver.

Collision and Claims Handling

On July 21, 2003, Husband was driving a vehicle in which Wife was a passenger. The couple was headed to a neurologist appointment to assess what was later determined to be Husband’s early onset of Alzheimer’s disease. Husband attempted to pass on a blind curve and collided head-on with another vehicle. Wife was severely injured and within weeks of the collision incurred hundreds of thousands of dollars in medical bills. Wife’s injuries included: (1) complex facial fractures, (2) a fractured jaw, (3) facial lacerations, (4) acute respiratory failure requiring a tracheotomy, (5) bilateral rib fractures, (6) fractured wrist, (7) fractured spine, (8) bladder rupture, (9) fractured pelvis, (10) fractured and lacerated knees and knee ligament displacement, (11) fractured/dislocated right ankle, (12) fractured left leg, and (13) a puncture wound to the right foot. As of July 25, 2003, Wife was in intensive care, had undergone “an open reduction of internal fixation [ORIF] surgery on her legs and was scheduled for spinal/back surgery.” USAA admitted during discovery that by July 25, it was aware of Wife’s general condition and impending surgery. Though the record does not reflect exactly when Wife was discharged from the hospital, it is clear that she went home sometime in late August with severe injuries after multiple surgical interventions and medical bills in excess of $300,000.

USAA confirmed Husband’s coverage and opened a claim file on July 23, 2003. From that point on each of USAA’s claim handling activities were reviewed by management, ratified and found to be satisfactory to USAA and constituted a general business practice of USAA.

On July 25, USAA determined that Husband was “100% at fault for the collision and crash injuries” to Wife. USAA had enough knowledge of the type and extent of the injuries Wife had incurred to classify her injuries and make a “Serious Injury Referral” to the home office. By July 25, USAA knew where Wife was hospitalized and her general condition, knew the identity of the financial case manager for the hospital, and had received a call from the hospital providing updated billing information for Wife’s treatment.

Taylor Stott was the bodily injury adjuster assigned to the file. Stott knew as soon as he reviewed the file on July 25 that Wife’s injuries and claim had a value in excess of the amount of Husband’s liability coverage.

On July 25, USAA set a reserve for Wife’s bodily injury claim at the policy limit of $100,000. Soon after, however, USAA reduced the reserve to $25,000, relying on a provision in its policy that limited coverage for family members to $25,000. USAA relied on this provision to justify its initial delay in paying Wife’s liability insurance benefits. USAA was aware at the time it reduced the reserve that the family coverage limit had been declared invalid in New Mexico for at least eighteen years. USAA had a provision in its internal operating procedures that said the family coverage limit was invalid in New Mexico.

Eventually, Wife began discussions with USAA to obtain insurance proceeds to help defray her medical costs. Though USAA knew within days that Husband was entirely at fault and that Wife’s damages would exceed the $100,000 policy limit-and after paying the $5000 limit for medical expenses-it made no settlement offers or payments to Wife until October 22, 2003. Instead, on August 20, USAA instructed Wife to forward any additional charges to her health insurer. Similarly, on August 27, USAA sent Wife copies of letters it had sent to various of her medical care providers refusing to pay them on their claims and referring them to Wife’s “health carrier.”

The log noted receipt of an October 23 demand from the attorney for the driver of the other vehicle involved in the July 21 crash seeking “$100K BI limits within ten days from date of the letter and enclosing partial medical specials of $27,623.49. The adjuster responded to this demand within the time frame set by the letter and asked for a thirty-day extension. The other driver’s claim was settled for policy limits on November 25.

USAA’s bodily injury adjuster sent a form letter to Wife on October 22, 2003, claiming “an amicable resolution/settlement had been reached” and offering to pay her $200,000 in settlement of her claim. The district court found that USAA and Taylor Stott knew the factual representation that the adjuster and Wife had reached an amicable resolution/settlement was inaccurate as he had not spoken to Wife about settlement on October 22, 2003.

Wife did not accept USAA’s offer. Instead, five days later, she brought a personal injury proceeding against Husband and a bad faith claim against USAA in Santa Fe. Husband and USAA were separately represented in the case. USAA agreed with the mediator that it would not contest an approved judgment amount, provided that it was between $1.5 and $3.2 million dollars. The parties agreed to damages in the amount of $2.8 million dollars, and the Santa Fe district court entered judgment in favor of Wife in that amount against Husband.

Finally the judge found that USAA failed to honestly and fairly balance its own interests and the interests of Husband by failing to timely pay its $100,000 policy limits to Wife, by reducing its reserves based on an invalid policy provision which caused delay in payment, by failing to pay within a reasonable time after it knew there was a substantial likelihood of recovery in excess of Husband’s policy limits and by its litigation tactics in providing an affidavit for Husband to sign stating he did not want to pursue claims against USAA when it knew through its representatives that he was not competent to sign the affidavit. Moreover, its action in filing a lawsuit against Husband in Texas and defaulting him for attorney fees and costs when he could not have known of the consequences of his agreeing to sign the affidavit exhibits USAA’s culpable conduct. USAA wantonly, recklessly, and in bad faith breached its contract with Husband.

The judge found that USAA’s goal in filing the Texas litigation was to thwart the New Mexico bad faith case which it knew was about to be filed by Wife. Although USAA filed the Texas action against Husband in April 2005, USAA did not serve Husband until July 2005. Husband did not respond. The complaint sought attorney fees from husband “in addition to seeking judgment that Husband should solely remain responsible for excess judgment in favor of Wife.”

Substantial Evidence Supports the District Court’s Findings of Bad Faith
The New Mexico Court of Appeal found that substantial evidence supported the trial judge’s finding that USAA’s offer to settle was not prompt within the meaning of New Mexico statutes.

In fact, when USAA received a settlement offer from Wife, it ignored it. Despite being aware of the time-sensitive nature of the settlement and in violation of USAA’s procedures, the recipient of Wife’s offer did not even forward it to the claims adjuster until after the offer had expired.  These facts alone, viewed in the light most favorable to the judgment, are sufficient evidence to support the finding that USAA was acting primarily in its own interest.

USAA acknowledged that the trial court used USAA’s aggravated conduct in the Texas litigation to provide context for its interpretation of USAA’s conduct throughout its interaction with Wife and Husband. It appears that the district court viewed USAA’s action during the ninety days after the collision in light of its wanton and culpable conduct toward Husband in the Texas litigation. As the trial judge court noted, “the manner in which Husband was dealt with by USAA compounded the earlier failure to timely settle.”

The New Mexico Court of Appeal determined that the arguments or the parties to ask it to decide whether damages in insurance bad faith actions should be determined by the “payment rule” or the “judgment rule.” Although many states have chosen a side in this dispute, thus far New Mexico has not. In jurisdictions that apply the payment rule, damages for bad faith failure to settle may be limited to the value of the insured’s assets that are not exempt from legal process. Under this rule, insurers are not liable when there is a covenant not to execute, nor are they liable when their insureds are “bankrupt, insolvent, or otherwise judgment proof.”

The majority of jurisdictions have chosen to follow the judgment rule. The judgment rule does not require the insured to make payment as a precondition to the insurer’s liability. Underlying this rule is the notion that it is the judgment against the insured, not the amount of his personal exposure to it, that damages the insured. Thus, a bad faith insurer is liable regardless of whether its insured has paid, can pay, or must pay an excess judgment.

The plain language of the New Mexico statute allows recovery of “actual damages.”  However, the Court of Appeal concluded that such an application would lead to absurd results. A narrow reading would undermine the common and accepted practice of assigning the bad faith cause of action to a third party in exchange for a release of liability: upon the release of liability, there would be no actual damages.

In light of the repeated statements from our Supreme Court that mandatory automobile insurance was enacted to protect all New Mexicans the Court of Appeal was certain that the legislature did not intend that protection to depend on the financial circumstances of the insured in each case.

Well-established policy considerations support the use of the excess judgment as a minimum measure of damages. The New Mexico Supreme Court has held that in creating a statutory cause of action for insurance bad faith, the Legislature had a remedial purpose in mind: to encourage ethical claims practices within the insurance industry. An application of general damage principles to preclude recovery of an excess judgment directly undermines that purpose by multiplying the avenues, both ethical and unethical, by which an insurer might avoid the consequences of its bad faith actions. The goal of ensuring ethical claims practices is better achieved by setting the amount of the excess judgment as a floor for damages when an insurer is found to have acted in bad faith.

CONCLUSION

For the foregoing reasons, the Court of Appeal reversed the judgment of the district court with regard to available damages in the bad faith claims and opened the case up to the amount determined at mediation plus punitive damages.

ZALMA OPINION

In most states family exclusions are enforceable and no husband can obtain insurance coverage for injuries caused his wife or child. In New Mexico that is not the case and the claims personnel of USAA knew, or should have know that fact.

Clearly, with a $100,000 policy limit and knowledge of medical special damages three times the policy limit, with clear evidence of the 100% liability of the Husband, would normally have resulted in a quick settlement for policy limits just as there was a quick settlement with the operator of the other car.

The actions of the insurer, including filing a suit against the husband who was suffering from Alzheimers disease while refusing to pay the wife was simply wrong. It makes no sense that USAA paid the third party immediately after receiving a demand for settlement although his special damages were a mere percentage of those proved by the wife.

If the insurance industry wishes to avoid do away with the tort of bad faith it must train its claims people, educate them, and train its supervisory personnel to train and manage the claims staff. USAA, in this case, failed.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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A Collapse or Not a Collapse – That is the Question

“Collapse” Is Not Necessarily a Collapse

 

Zalma on Insurance in top 50

Kings Ridge Community Association, Inc. (“the Association”), appealed a final summary judgment in favor of its insurer, Sagamore Insurance Company in Kings Ridge Community Association, Inc v. Sagamore Insurance Company, No. 5D11-1051 (Fla.App. 07/06/2012). The trial court concluded that the Association’s damaged clubhouse was not in a state of “collapse,” as that term is defined by the insurance policy issued by Sagamore, and thus the loss was not covered.

The Association owns and maintains the common areas, including the clubhouse, of a Lake County community known as “Kings Ridge.” On the morning of February 24, 2010, the exterior doors of the west wing of the clubhouse began to shake and the drop ceiling and soffits deflected downward. The flat roof above the deflected ceiling revealed a substantial depression adjacent to the westernmost HVAC unit. The drop ceiling in the northwest corner of the west wing of the clubhouse structure was significantly deflected downward. The first eleven roof trusses adjacent to the west face mansard roof section had deflected approximately twelve inches at midspan.

The Policy

The clubhouse was insured under an all-risks business owner’s policy issued by Sagamore. The policy provides that the insurer will pay for direct physical loss of, or damage to, the subject premises caused by or resulting from any “Covered Cause of Loss.” A “covered cause of loss” included:

5.d. Collapse

        (1) With respect to buildings:

            (a) Collapse means an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose;

            (b) A building or any part of a building that is in danger of falling down or caving in is not considered to be in a state of collapse;

            (c) A part of a building that is standing is not considered to be in a state of collapse even if it has separated from another part of the building;

            (d) A building that is standing or any part of a building that is standing is not considered to be in a state of collapse even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.

The policy also provided for the following exclusion:

    B.2. We will not pay for loss or damage caused by or resulting from any of the following:
        i. Collapse

Collapse, except as provided in the Additional Coverage for Collapse. But if collapse results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

Facts

Following the event, each party hired expert engineers to inspect the property, investigate the cause of the damage, and issue reports. The parties agree that the findings and conclusions of both parties’ engineers are virtually identical. The engineers found that the first eleven roof trusses in the western area of the west wing of the clubhouse failed, deflecting approximately twelve inches at midspan. As a result, the roof above the trusses depressed twelve inches and the ceiling below the trusses deflected twelve inches as well.

Both engineers noted that the top chord of the original trusses in the clubhouse west wing had been field-modified at the time of the building’s construction. They also noted that the original air-conditioning units on top of the building had been replaced by units that weighed more than the original units and that rainwater would regularly pond on the roof. The engineers concluded that the combined factors of the cut top chord, the heavier HVAC unit, and the ponding rainwater all contributed to the failure of one or several of the eleven consecutive roof trusses, which resulted in the progressive failure of the remaining eleven trusses on the day of the reported incident. As a result of the damage to the roof, drop ceiling, and roof trusses, it was the opinion of the engineers that the structure represents a dangerous and unsafe structural condition.

The Coverage Issue

After the Association submitted a claim under the policy, Sagamore filed a declaratory judgment action to determine the extent, if any, of its duty to provide coverage for the claimed loss. Relying on the policy wording the trial court concluded that the clubhouse was not in a state of collapse within the terms of the policy and granted Sagamore’s motion for summary judgment.

The Court of Appeal, stating the general rule of interpreting insurance contracts that courts are bound by the plain meaning of the contract’s text if  the language is plain and unambiguous.  However, if the language is susceptible to more than one reasonable interpretation, one providing coverage and the other limiting coverage, then the policy is ambiguous. When language in an insurance policy is ambiguous, a court will resolve the ambiguity in favor of the insured by adopting the reasonable interpretation of the policy’s language that provides coverage as opposed to the reasonable interpretation that would limit coverage.

Sagamore argues that the policy does not cover the claimed loss because the roof has not “fallen” and the building is still standing. On February 24, 2010, there was an unexpected change to the clubhouse when the exterior doors of the west wing of the clubhouse began to shake and the drop ceiling and soffits deflected downward, the flat roof above the deflected ceiling substantially depressed, and the first eleven roof trusses adjacent to the west wing of the clubhouse structure deflected twelve inches at midspan. Many of the building parts suddenly fell down or inward. The policy is not written in terms of how far a part of a building must fall down or to what degree a part of a building must cave in to constitute “collapse.”

Finally, the record establishes that the building is structurally unsafe and cannot be occupied for its intended purpose. The policy did not require total destruction for a “collapse” to occur. To the extent that the policy can be interpreted as requiring the roof to have fallen to the ground for coverage to apply, the policy is ambiguous.

The drop ceiling, flat roof, and trusses were upright on their base and had remained at the same level, degree, and amount of height for an indeterminate period. At the time of the incident, they collapsed. Immediately after the incident, they were no longer upright on their base; they were no longer at the same level, degree, or amount of height that they had previously maintained.

In sum, the Court of Appeal held that the policy language is susceptible to more than one reasonable interpretation, one providing coverage, and the other limiting coverage. Finding the policy ambiguous the Court of Appeal resolve the ambiguity in favor of the insured by adopting the reasonable interpretation of the policy’s language that provides coverage as opposed to the reasonable interpretation that would limit coverage.

ZALMA OPINION

This is a case where an insurer applied form over substance. Although the structure had not fallen to the ground it had collapsed to the point where it was not safe to inhabit. If the insurer wished to have such restrictive reading of the collapse provision it needed a clear definition of the term collapse. It failed to do so sufficiently and found that the court required it to pay a claim it did not intend to pay.

The most difficult work I ever took on was the writing of an insurance policy that was “easy to read”, “clear and unambiguous”, and that was precise enough to limit coverage to the benefits the insurer intended to provide and nothing more. Sagamore made a valiant effort with the policy wording but it was not good enough to convince this court.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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After A Jury Finds Fraud Insurance Policy Is Void

Fraud Voids Coverage

While Investigating Fraud Insurer Must Act in Good Faith

Zalma on Insurance Makes Top 50

Mark Kohout defaulted on a loan secured by a mortgage on his home in Litchfield. The mortgagee, Mortgage Electronic Registration Systems, Inc., purchased the home for $170,000 at a sheriff’s sale, but it burned down during the six-month redemption period. Kohout’s insurance carrier, Illinois Farmers Insurance Company, had already suspected Kohout of making a fraudulent claim on the policy for an earlier loss. It issued a $170,000 check jointly to Homecomings Financial, LLC, the mortgage subservicer, and Kohout, after Homecomings submitted a claim for the fire loss. Homecomings deposited the check without Kohout’s endorsement. A jury later found Kohout guilty of defrauding Farmers on the previous unrelated claim. Kohout brought this suit under various theories seeking payment of the $170,000 insurance proceeds. The Minnesota Court of Appeals, in Mark Kohout v. Homecomings Financial, LLC, et al, No. A11-1765 (Minn.App. 07/09/2012), were asked to resolve the dispute.

FACTS

Mark Kohout owned real property in Litchfield, Minnesota. On September 6, 2006, Kohout obtained a loan from Lendsource, Inc., and he secured the loan with a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (MERS). The loan was later assigned and pooled with other loans in a trust. The mortgage required that Kohout obtain property insurance against loss by fire and that he name the mortgagee (Homecomings) as the lender or additional loss payee.

Kohout insured the property for $299,000 with Illinois Farmers Insurance Company under a Minnesota Standard Fire Insurance Policy. Homecomings was named as the mortgagee on the policy. The policy states: “16. Mortgage Clause. The word “mortgagee” includes trustee or loss payee. If a mortgagee is named in this policy, a covered loss will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of the mortgagees. If we deny your claim, such denial will not apply to a mortgagee’s valid claim if the mortgagee: . . . . c. submits a signed, sworn statement of loss within 60 days after we notify the mortgagee of your failure to do so.”

The general conditions section of the policy includes a void-by-fraud provision: “Concealment or Fraud. This entire policy is void if any insured has knowingly and willfully concealed or misrepresented any material fact or circumstance relating to this insurance before or after the loss.”

Kohout defaulted on his note in May 2007, still owing $250,310. MERS foreclosed on the mortgage. It purchased the property for $170,000 at the sheriff’s sale in December 2007 and later conveyed it to USB. Kohout had a six-month statutory redemption period after the date of the property’s sale.

During that period, on February 16, 2008, a fire destroyed the dwelling on the property. Kohout notified Farmers of the loss. Farmers asked Kohout to submit a sworn statement as proof of loss several times. Kohout did not submit one until July 18, 2008. In his proof-of-loss statement, he claimed personal-property losses of $33,290, but he did not submit a proof-of-loss statement for the dwelling itself.

On June 19, 2008, one day before the redemption period expired, Farmers informed Homecomings that Kohout’s claim was under investigation as suspicious and that it had not issued any funds to him. It advised Homecomings that it could file its own claim under the policy’s mortgage clause. Homecomings did so on July 1, 2008.

On October 14, 2008, Farmers issued a check for $170,000-the amount of real-property loss claimed by Homecomings. The check was made payable to both Kohout and Homecomings but was delivered by mail to Homecomings. Homecomings asked Farmers to reissue the check payable only to Homecomings, but Farmers refused. In January 2009, Homecomings transferred the claim and check to Quality Claims Management Corporation, a public-insurance adjustor.

Quality Claims’s President Ronald Reitz requested that Farmers reissue a check payable only to Homecomings. Farmers again declined. It suggested that Reitz obtain Kohout’s signature. Reitz requested that Kohout endorse the check. Kohout agreed to endorse the check but only if Quality Claims paid him $20,000. Quality Claims declined; it deposited the check at Cornerstone Bank, without Kohout’s endorsement.

Before the February 2008 fire, Kohout had filed a claim with Farmers in October 2007 alleging that $160,000 in personal property had been stolen from the home. Farmers refused to make any payment on his claim because it found that he had misrepresented the items lost. After Kohout sued in that case, a jury found that he had “misrepresented or concealed a material fact with respect to his insurance claim with the intent to deceive or defraud [Farmers],” and the district court concluded as a matter of law that “[t]he policy of insurance is voided by [Kohout's] misrepresentation or concealment of a material fact with respect to his insurance claim.” Judgment was entered in favor of Farmers on July 23, 2009.

Farmers later sent Kohout a letter stating that he had no further basis to submit a claim for the fire because his fraud had voided his policy.

Kohout commenced this lawsuit seeking the $170,000 in August 2010. The respondents and Kohout moved for summary judgment. The district court granted the respondents’ motions and dismissed all of Kohout’s claims.

DECISION

Kohout argued that the district court erred by granting summary judgment in favor of the respondents.

The Court of Appeal concluded that the trial court correctly held that Kohout’s insurance policy is void.

Kohout argued that the policy is not void because Farmers never provided him with a notice of cancellation. Under Minnesota law, an insurer must give an insured 30 days’ notice if it cancels a policy for misrepresentation or fraud. But Kohout’s policy was not cancelled. It was instead deemed void.

Kohout contended that “void” and “cancel” mean the same thing. The Court of Appeal disagreed.  “Cancel” means to destroy a written instrument by defacing or obliterating it or to terminate a promise, obligation, or right while “Void” means of no legal effect; null. More significant, the terms “cancelled” and “voided” are contained in two different statutory subdivisions. Neither the statute nor the insurance policy provision that incorporates it suggests that Farmers was required to notify Kohout before his policy became void as a result of his fraud.

Kohout also contended that, by issuing a check with his name on it, by requesting proof of his claim, by failing to deny his claim or assert the defense during the limitation period, and by issuing the check after knowing of the potential fraud, Farmers waived its right to assert fraud. The policy had not yet been declared void at the time of the check’s drafting, so Farmers was required to issue it to both parties.

The fraud at issue here was not in controversy in this case; it was previously proven in Kohout’s case arising from his rejected October 2007 insurance claim. Farmers’ reference in its answer noting Kohout’s prior fraud sufficiently put Kohout on notice of the defenses asserted in this case.

Because a jury found that Kohout intentionally defrauded Farmers on a claim before the fire, his policy with Farmers became void and the district court did not err by granting summary judgment on that basis.

ZALMA OPINION

This case is an example of how a prudent insurer dealt with a fraud, protected itself against the perpetrator of the fraud, paid the innocent mortgagee and still needed to go through trial and an appeal to establish that it was correct. That Kohout had the unmitigated gall to seek payment on a second loss after a jury found he had defrauded his insurer reveals why the tort of bad faith makes the cost of insurance excessive for everyone. Kohout filed suit hoping to bludgeon the insurer into paying a claim it did not owe because the cost of the defense exceeded the amount claimed. Illinois Farmers did the right thing, paid the mortgagee and the named insured, and defended the spurious lawsuit.

Since Kohout filed two fraudulent claims against Illinois Farmers I must wonder why no prosecutor has filed criminal charges against Kohout.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Posted in Zalma on Insurance | 1 Comment

You Can’t Make an Apple Into an Orange

Clear Language of Policy Enforced

The Wisconsin Supreme Court reviewed a published decision of the court of appeals to determine if an excess liability policy also provided uninsured motorist (UM) coverage. The Court of Appeal reversed the decision of the trial court, which had granted summary judgment in favor of Auto-Owners Insurance Company in Michelle B. Wadzinski, Individually and As Personal Representative of v. Auto-Owners Insurance Company, 2012 WI 75 (Wis. 07/05/2012). The sole question for review is whether a reasonable insured would read the Executive Umbrella insurance policy at issue to afford $2,000,000 of UM coverage.

The circuit court held that the Executive Umbrella policy was clearly intended to provide only third-party liability coverage and granted summary judgment in favor of Auto-Owners. The court of appeals reversed the circuit court, concluding that the Executive Umbrella policy was contextually ambiguous, and therefore, the policy should be construed in favor of the insured to afford coverage.

BACKGROUND

On August 3, 2006, Steven Wadzinski was struck and killed by an uninsured motorist while he was riding a motorcycle. At the time of the accident, Mr. Wadzinski was the Chief Executive Officer of Pecard Chemical Company, Inc., which had purchased multiple insurance policies through Auto-Owners. In the Commercial Auto Insurance policy, Pecard Chemical is the named insured. That policy’s grant of coverage provides $1,000,000 in third-party automobile liability coverage, as well as first-party coverage for UM and underinsured motorist (UIM) benefits. Each line of coverage (UM & UIM) affords $150,000 per person or $300,000 per occurrence of first-party coverage. Pecard Chemical is also the named insured under the Commercial Umbrella policy, which policy’s grant of coverage provides up to $5,000,000 in third-party liability coverage. The Commercial Umbrella policy specifically excludes UM and UIM coverage.

In a third Auto-Owners policy, the Executive Umbrella policy, Mr. Wadzinski is the named insured. The Executive Umbrella policy shares a policy number with the Commercial Umbrella policy under which Pecard Chemical is the named insured. The Executive Umbrella policy, whose language is now at issue, provides $2,000,000 in excess coverage over the underlying policies that are listed in Schedule A. Those underlying policies are a Comprehensive Personal Liability policy (not at issue) and an Automobile Liability policy with a $500,000 minimum coverage requirement.

After Mr. Wadzinski’s death, Auto-Owners paid Wadzinski’s estate the limits of the Commercial Auto policy’s UM coverage, $150,000. When Auto-Owners refused the estate’s claim for payment of $2,000,000 in UM benefits under the Executive Umbrella policy, Mrs. Wadzinski, individually and as the representative of Mr. Wadzinski’s estate, brought suit against Auto-Owners.

The provision in the Executive Umbrella policy that concerned the Supreme Court was an endorsement captioned “Exclusion of Personal Injury to Insureds Following Form.” That endorsement provides as follows: “We do not cover personal injury to you or a relative. We will cover such injury to the extent that insurance is provided by an underlying policy listed in Schedule A.” (emphasis added) The policies listed in Schedule A were also issued by Auto-Owners.

The parties brought competing motions for summary judgment on the issue of UM coverage under the Executive Umbrella policy. Auto-Owners asserted that the Executive Umbrella policy “clearly and unambiguously excludes an additional claim for UM coverage.” Wadzinski argued that the Executive Umbrella policy, when read as a whole, is ambiguous and that a reasonable insured would expect $2,000,000 in UM coverage under the policy.

DISCUSSION

The trial court granted Auto-Owners’ motion for summary judgment on the question of whether the Executive Umbrella policy affords coverage for losses caused by uninsured motorists. Insurance contract interpretation is a question of law that the Supreme Court reviewed independently.  Whether an insurance contract is ambiguous is also a question of law for our independent determination.

EXCLUSION OF PERSONAL INJURY TO INSUREDS

 FOLLOWING FORM

We do not cover personal injury to you or a relative. We will cover such injury to the extent that insurance is provided by an underlying policy listed in Schedule A.

The caption to the endorsement gives notice that what is to follow is an exclusion from coverage for the insured’s first-party personal injury claims. However, interpretation of an insurance policy cannot rest on a caption alone; the entire policy provision must be considered. The statements in the endorsement about what “we do not cover” or what “we will cover” are statements of Auto-Owners’ obligations under the Executive Umbrella policy and Auto-Owners’ obligations under the additional policies listed in Schedule A. Stated otherwise, the “Comprehensive Personal Liability” policy and the “Automobile Liability” policy, listed in Schedule A of the Executive Umbrella policy, were issued by Auto-Owners. Therefore, no other vendor of insurance has any impact on the interpretation of the endorsement at issue here and no other vendor will make payments under either of the underlying policies described in Schedule A.

There can be no misunderstanding that first-party coverage is not created by the first sentence of the endorsement.  The policy’s language that “We will cover such injury to the extent that insurance is provided by an underlying policy listed in schedule A,” is reasonably interpreted as Auto-Owners’ assurance to its insured that even though the Executive Umbrella policy does not provide first-party coverage, that lack of coverage for first-party claims does not interfere with Auto-Owners’ agreed-upon coverage for first-party claims when such coverage is afforded by a policy listed in Schedule A of the Executive Umbrella policy. The Supreme Court concluded that:

the exception can have no other meaning and remains consistent with the grant of $2,000,000 third-party liability coverage in the Executive Umbrella policy while also maintaining Auto-Owners’ obligation in Auto-Owners’ Automobile Liability policy listed in Schedule A.

“Following form” is an insurance industry term of art that is typically understood by insurance professionals to suggest that an excess or umbrella policy incorporates the terms of another underlying policy.

The Wisconsin Supreme Court, applying general rules of insurance policy interpretation, concluded that the Executive Umbrella policy’s grant of coverage provides only one type of coverage: excess third-party liability coverage. Read in context, neither the exclusion of first-party coverage nor its exception that reaffirms Auto-Owners’ underlying obligations can be read to rewrite the umbrella policy’s unambiguous grant of third-party coverage. Accordingly, it concluded that Wadzinski’s Executive Umbrella policy cannot reasonably be construed to afford $2,000,000 of UM coverage.

CONCLUSION

The Supreme Court concluded that the Executive Umbrella policy at issue does not afford first-party UM coverage. The policy’s grant of coverage unambiguously provides only excess third-party liability coverage. Further, the language and structure of the endorsement to the Executive Umbrella policy demonstrate that the endorsement reaffirms the umbrella policy’s exclusion of first-party coverage. Additionally, an exception to that exclusion clarifies that the exclusion is not intended to interfere with first-party coverage in other Auto-Owners policies that are referred to in Schedule A. Accordingly, we conclude that the circuit court’s summary judgment in favor of Auto-Owners was proper, and therefore, we reverse the decision of the court of appeals.

ZALMA OPINION

The justices of the Wisconsin Supreme Court are not totally collegial. This case raised a dissent that excoriated the majority. Regardless, the law in Wisconsin is that an umbrella liability policy — whether standing alone or claiming to be a following form — cannot provide more coverage than that promised by the insurer. The policy promised to pay $150,000 in UM/UIM coverage and no more. It also promised to pay up to $2,000,000 if the insured injured a third party.

That Steven Wadzinski and the company he led decided to provide more coverage for third parties than it provided to its Chairman was, with 20/20 hindsight, a poor decision that error cannot be cured by attempting to create an ambiguity in a policy and change an auto liability umbrella coverage into an umbrella UM/UIM coverage.

The case teaches anyone with automobile insurance coverage to buy UM/UIM cover equal to or greater than the coverage it makes available to third parties.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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No Conflict When Coverage Issue Not A Fact to Be Adjudicated

Independent Counsel Available only If There is a Real Conflict

Zalma on Insurance in top 50

Downhole Navigator, L.L.C. (“Downhole”) appealed to the Fifth Circuit Court of Appeal from the magistrate judge’s grant of partial summary judgment for Nautilus Insurance Company (“Nautilus”). Nautilus had issued Downhole (the insured) a commercial general liability policy; after a third party, Sedona Oil and Gas Corporation (“Sedona”), sued Downhole, Downhole rejected the representation offered by Nautilus under the policy on the ground that Nautilus’s reservation-of-rights letter had created a conflict of interest. Downhole hired its own independent counsel; when Nautilus refused to reimburse Downhole for the cost of its independent counsel, Downhole filed this action, seeking a declaratory judgment that Nautilus had a contractual duty to defend and indemnify Downhole in the Sedona lawsuit. In Downhole Navigator, L.L.C v. Nautilus Insurance Company, No. 11-20469 (5th Cir. 06/29/2012) the Fifth Circuit Court of Appeal was called upon to resolve the dispute.

FACTS

Downhole services the oil drilling industry. Sedona, an oil well operator, hired Downhole around November 2008 to help redirect an oil well toward a better location within a desired reservoir. According to Sedona’s complaint, Downhole developed the plan to conduct the deviation and participated directly in the deviation process, but around December 2008, Downhole negligently executed the deviation plan, causing damage to the well. On March 3, 2009, Sedona brought a negligence action against Downhole in Texas state court.

Downhole had a one-year general commercial liability policy with Nautilus, running from mid-June 2008 to mid-June 2009. Downhole submitted its notice of claim and indemnification to Nautilus on March 24, 2009. Nautilus responded on March 30, 2009, and tendered a qualified defense under a reservation of rights.

APPLICABLE EXCLUSIONS

Nautilus reserved its right to decline indemnity coverage if, after further investigation, the underlying suit fell under one of three policy exclusions:

  • the “expected or intended injury” exclusion, which excludes “‘bodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured”;
  • the “property damage” exclusion, which excludes certain “physical injury to tangible property”;
  • the “testing or consulting” exclusion, which excludes damages arising from “[a]n error, omission, defect, or deficiency in . . . any test performed or . . . [in] [a]n evaluation, a consultation or advice given, by or on behalf of any insured.”

Additionally, though not referenced in the letter, two other exclusions are relevant to this case: the “professional liability” exclusion, which excludes damages arising from “the rendering of or failure to render any professional services,” including “the preparing, approving, or failing to prepare or approve … opinions, reports, surveys, . . . or drawings and specifications,” and “supervisory, inspection, architectural or engineering activities”; the “data processing” exclusion, which excludes damages arising from “the rendering of, or failure to render, electronic data processing . . . services, advice or instruction …”

THE COVERAGE LITIGATION

On April 27, 2009, in response to the reservation-of-rights letter, Downhole notified Nautilus that it was rejecting Nautilus’s proffered defense, writing: “Your decision to act under a reservation of rights has created a material conflict with respect to the selection of counsel. . . . Downhole has been left with no choice but to select its own representation. Pursuant to Texas law, Downhole expects and demands that you cover all damages related to this claim, including attorneys’ fees, up to the applicable limits of [the policy].”

On May 11, 2009, Nautilus responded that it had “reserved [its] rights while investigating the matter,” and insisted that “[u]ntil or unless a coverage issue develops, Downhole is not entitled to separate counsel.”  On March 3, 2010, Downhole filed this action, seeking a declaratory judgment that Nautilus has a contractual duty under the policy to defend Downhole, cover the cost of Downhole’s independent counsel, and indemnify Downhole in the underlying Sedona suit. The parties filed cross-motions for summary judgment.

ANALYSIS

The parties agreed that Texas law governs this dispute. Under Texas law, it is well-settled that the insurer owes a duty to defend its insured against any allegation that is potentially covered by the policy. It is also well-settled that an insurer’s right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case.

In the typical coverage dispute, an insurer will issue a reservation of rights letter, which creates a potential conflict of interest. And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense.  Applying the principle to this case the Fifth Circuit agreed with Nautilus that the facts to be adjudicated in the underlying Sedona litigation are not the same facts upon which coverage depends.

The underlying Sedona litigation concerns whether Downhole negligently performed its deviation work. If the insurance policy between Downhole and Nautilus excluded coverage for Downhole’s negligent conduct, and Nautilus accordingly reserved its right to disclaim coverage based on whether Downhole had negligently performed its work, then the facts to be adjudicated in the Sedona litigation would be equivalent to the facts upon which coverage depends.

The Fifth Circuit found that no such equivalency existed since Downhole’s negligence is not a coverage issue between Downhole and Nautilus. Indeed, although the policy excludes coverage for “testing” or “consulting” services, the facts about whether Downhole breached a duty to Sedona by failing to act as a reasonably prudent provider of deviation-correction services are not equivalent to the facts that could determine whether Downhole was “testing” or “consulting” for Sedona.

The fact-finder in the litigation will not decide whether Downhole’s work constituted “testing” or “consulting.” Rather, while several other issues: (1) whether Downhole provided “professional” or “data processing” services to Sedona, or (2) whether Downhole should have expected the damage to the well resulting from its work, or whether Downhole was occupying the property while providing its deviation-correction services could be critical coverage issues, they are irrelevant to whether Downhole acted negligently.

The Texas Supreme Court has never held that a conflict arises any time the attorney offered by the insurer could be tempted-in violation of his duty of loyalty to the insured-to develop facts in the underlying lawsuit that could be used to exclude coverage. The mere observation that coverage issues may turn on facts developed in the litigation does not necessarily entail that a conflict of interest will arise if the facts that could be developed in the underlying litigation are the same facts upon which coverage depends.

The facts to be adjudicated may be the same facts upon which coverage depends in other situations, such as where the insurer reserves the right to deny coverage based upon a breach of contract exclusion and the underlying litigation raises a claim for breach of contract, or where the insurer reserves the right to deny coverage for damages taking place outside the contract period and the underlying action involves the issue of when damages took place.

Because the facts to be adjudicated in the Sedona lawsuit are not the same facts upon which coverage depends, the potential conflict in this case does not disqualify the attorney offered by Nautilus to represent Downhole. We agree with the magistrate judge’s ruling and hold that Downhole is not entitled to reimbursement from Nautilus for the cost of hiring independent counsel.

ZALMA OPINION

The right to independent counsel, first clarified in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis), provided that when a conflict of interest existed between an insurer and the insured where the facts of the law suit could control the coverage issue an independent counsel was required. It has been abused for many years and read more broadly than intended. Check the case, United States v. Stites, 56 F.3d 1020 (9th Cir. 05/26/1995) to learn about someone who went to prison by abusing the Cumis decision.

This Fifth Circuit opinion is, in my opinion, an important step in clearing up the understanding of the right to independent counsel. Lawyers appointed by insurers are not evil nor is it their intent to give the insurer – who happens to pay the bills – a way to deny coverage to the insured. Rather they are only concerned with providing a competent defense to the insured they were hired to defend.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

 

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Claims Commandment XV

Thou Shall Not Be Cruel

Zalma on Insurance in top 50

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Insurers pay to the satisfaction of their insureds and claimants approximately 95% of all claims presented. However, there will always be claims made on policies that do not provide coverage. They can be as simple as:

  1. A fight in a bar with an all inclusive assault and battery exclusion.
  2. Earthquake damage to a house with no earthquake coverage.
  3. A flood to a house with no flood insurance.
  4. A landslide wipes away a house and lot where landslide is excluded.
  5. An auto accident two days after the policy expires.
  6. Vandalism damage to a car that is only covered by basic third party liability coverage.
  7. A business intentionally pollutes a nearby waterway.

Advising an insured or claimant that there is no coverage on an insurance policy always falls upon the shoulders of an insurance adjuster. How the adjuster fulfills the task of advising a person that he is on his own and can expect nothing from the insurer can cause, or avoid, a lawsuit from the insured.

It is essential that the adjuster deal with the claim denial in pleasant, empathetic and kind fashion. The adjuster should never be brusk and cruel. The adjuster should never take joy in denying a claim although it is the adjuster’s obligation to comply with the terms and conditions of the policy.

Be kind. Be considerate. Be clear, concise, and advise the person whose claim must be denied, why his claim must be denied. That means the adjuster must provide the insured with the results of the adjuster’s investigation that reveals all of the facts relied upon, how they apply to the specific wording of the policy, and how the facts and the policy wording are interpreted by the courts of the place where the claim occurred. If possible the denial should be written and detailed and presented in person to the insured or claimant so that the adjuster is available to answer any questions raised by the denial.

No insurance policy covers every potential claim. Some casualties are either uninsurable or not insured. It is not only correct, honest and moral to explain a denial to the insured, in states like California, it is required by Regulation:

(1) Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge. Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing. [California Fair Claims Practices Regulations Section 2695.7(b)(1)]

The Regulations are clear but they fail to take into consideration the duty of the adjuster to deal with the insured with empathy and personal contact. It just requires a cold, written statement, that must contain difficult to understand legalisms. Fulfilling the Regulation to the letter is cold and cruel unless delivered by an adjuster, who, through the investigation process has developed a rapport and trusting relationship with the insured.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

 

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Attempt to Restrain Public Adjusters in Florida Fails

The First Amendment Prevails

Zalma on Insurance Makes Top 50

Public Insurance Adjusters provide a service to people who wish to present a claim to a first party insurer. Because, in a catastrophe, people are suffering and vulnerable states attempt to control the solicitation by public adjusters to protect the public. Florida, by statute, attempted to protect its public by restricting the solicitation by public adjusters for the first 48 hours after a claim causing event.

The Florida Supreme Court was asked, in Jeffrey H. Atwater v. Frederick W. Kortum, No. SC11-133 (Fla. 07/05/2012), to resolve a dispute over a statutory regulation affecting public insurance adjusters, who are authorized to assist insureds and thirty-party claimants in the filing and settlement of insurance claims. The Court of Appeal declared invalid section 626.854(6), Florida Statutes (2008), a provision regulating solicitation by public adjusters. The state appealed the decision to the Florida Supreme Court.

BACKGROUND

During a 2007 special session, the Florida Legislature created a Task Force on Citizens Property Insurance Claims Handling and Resolution (Task Force) to make recommendations regarding the 2004 – 2005 hurricane claims of Citizens Property Insurance Corporation. After receiving the report of the Task Force, the state enacted the following statute:

A public adjuster may not directly or indirectly through any other person or entity initiate contact or engage in face-to-face or telephonic solicitation or enter into a contract with any insured or claimant under an insurance policy until at least 48 hours after the occurrence of an event that may be the subject of a claim under the insurance policy unless contact is initiated by the insured or claimant.

In October 2009, Frederick W. Kortum, Jr., a public adjuster, filed a complaint for declaratory and injunctive relief alleging that the statute violates his constitutional rights to free speech, equal protection of the laws, and to be rewarded for his industry. Kortum asserted that the statute prohibits all public adjuster-initiated communication during the forty-eight-hour period. In response, the Department of Financial Services (Department) contended that the statute does not prohibit a public adjuster from using written methods of communication to contact a potential claimant.

The trial court determined that the satute is ambiguous, accepted the Department’s interpretation that the statute prohibited only in-person or telephonic communication, and ruled that the statute is constitutional. The trial court concluded that it primarily regulates conduct-not speech. The United States Supreme Court stated:

[G]overnment regulation is sufficiently justified if it is within the constitutional power of the Government; if it furthers an important or substantial governmental interest; if the governmental interest is unrelated to the suppression of free expression; and if the incidental restriction on alleged First Amendment freedoms is no greater than is essential to the furtherance of that interest. [United States v. O'Brien, 391 U.S. 367 (1968)]

The Court of Appeal reversed the trial court’s decision. After determining that the plain language of the statute prohibited all public adjuster-initiated contact, whether electronic, written or oral, the statute regulates commercial speech, not merely conduct.

For commercial speech to come within the First Amendment it must:

  1. concern lawful activity and not be misleading.
  2. determine whether the asserted governmental interest is substantial.
  3. if 1 and 2 are answered positively
  4. the court must determine whether the regulation directly advances the governmental interest asserted, and
  5. whether it is not more extensive than is necessary to serve that interest.

ANALYSIS

Kortum asserted that the statute acts as a forty-eight-hour ban on all commercial speech from public adjusters to potential clients. The Department in turn asserted that the statute does not actually regulate commercial speech. According to the Department, the statute only restricts how a public adjuster may contact the potential client during a forty-eight-hour period, not what a public adjuster may say to a potential client during that time. Specifically, the Department contends that the statute prohibits only in-person or telephonic solicitation and that because written communications are not initiated through any other person or entity, the statute does not prohibit public adjusters from distributing written documents, such as informational mailings, to potential claimants during the forty-eight-hour period. Neither party contends that the statute limits a public adjuster’s ability to engage in general advertising not targeted at a specific homeowner known to have experienced a recent loss.

The definition of “contact” is not restricted to any particular type of communication, but rather encompasses both written and oral transmissions. The statute’s prohibition against initiating contact thus means that a public adjuster may not make any sort of communication to an identified claimant during the forty-eight-hour period.

The Supreme Court has expressly held that solicitation in a business context is protected commercial speech. Even a communication that does no more than propose a commercial transaction is entitled to the coverage of the First Amendment.

Because the statute regulated commercial speech – not merely conduct – the Florida Supreme Court agreed with the Court of Appeal that the statute is unconstitutional and cannot be enforced.

Zalma Opinion

The intent of the Florida Legislature was a good one. The solution was not because it violated the first, and probably the most important, of all amendments to the U.S. Constitution.

The same result of protecting victims of casualties from less than scrupulous public insurance adjusters could have been effected by enacting a statute allowing the person signing a contract with a public insurance adjuster could cancel that contract after a cooling off period. In a catastrophe situation the cooling off period should be at least a week and as much as a month to give the victim of the casualty time to relax, recover, and give serious consideration to whether it is in the best interest of the insured person to continue to the relationship with the public insurance adjuster.

The National Association of Public Insurance Adjuster (NAPIA) publishes a code of conduct for public adjusters that includes:

  • The members shall conduct themselves in a spirit of fairness and justice to their clients, the Insurance Companies, and the public.
  • Members shall refrain from improper solicitation.
  • No misrepresentation of any kind shall be made to an assured or to the Insurance Companies.
  • Members shall not engage in the unauthorized practice of law.
  • Members shall not disseminate or use any form of agreement, advertising, or any printed matter that is harmful to the profession of public adjusting, or which does not comply with the rules and regulations of the Insurance Department of the state in which such member is professionally engaged, or which might subject public adjusting and public adjusters to criticism or disrespect.

If all public insurance adjusters followed the NAPIA code of conduct few would have their contracts cancelled. With a statute allowing cancellation of the contract will not cause harm to those who follow the NAPIA code of conduct and will protect the vulnerable victims of a casualty from those who do not.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Insurance Fraud Conviction Stands

Intent to Defraud Is Necessary for Conviction

Zalma on Insurance Makes Top 50

The California Court of Appeal was called upon to determine the propriety of a conviction for auto insurance fraud in People v. Ronda Lee Papa, No. D058654 (Cal.App. Dist.4 06/13/2012) after a jury convicted Ronda Lee Papa and her co-defendant, Darrell Kehl, of filing a false motor vehicle insurance claim. Papa appealed, contending her counsel provided ineffective assistance by failing to make a Sixth Amendment Confrontation Clause objection to testimony from an insurance investigator.

FACTUAL BACKGROUND

Papa and Kehl lived together. Papa had a liability only insurance policy on a Mazda vehicle, effective July 6, 2009. On July 24, Papa added comprehensive and collision coverage, and the next day, added Kehl as an additional driver on the policy.

On July 31, Officer Stephen Imel from the Sycuan Tribal Police Department received information that a vehicle was found at the bottom of a cliff near Sloane Canyon. After arriving at the scene, Officer Imel received a call that a Mazda vehicle was reported stolen from a casino parking garage. The description of the Mazda matched the vehicle at the bottom of the cliff.

Casino surveillance videos showed Kehl leaving the casino with co-defendant James Ciani. The two men walked across the parking lot together. A few minutes later, Ciani entered the parking garage and walked towards a Mazda. The video then showed the Mazda leaving the garage.

Papa had reported her car stolen at the casino. Officer Erik Duesler drove Papa to the scene where the car went over the cliff. Papa showed no emotion and identified the car. Officer Duesler later asked Papa if she knew who had taken her car and she responded that she did not. After Officer Duesler drove Papa back to the casino, Papa met with Kehl.

That same day, Kehl called the insurance company to make a claim for loss of the vehicle. Papa called the insurance company a few minutes later. A theft examiner conducted a recorded telephone interview with Papa. During that interview, Papa said that she drove to the casino and left her car in the parking structure with the key still inside. When she returned a few hours later, the car was missing.

Papa’s claim was assigned to David McCauley, Jr., in the insurance company’s Special Investigations Unit. McCauley asked Papa to meet with him at the casino for an interview. Papa agreed to the meeting, but did not show up. McCauley also told Papa to contact Officer Duesler regarding a police report. Papa never filed the required police report. Similarly, Papa failed to submit a completed theft questionnaire, which was required by the insurance company. The insurance company terminated Papa’s claim and made no payment for the loss.

DISCUSSION

McCauley testified in part based on an activity log, which he described as “documentation that tracks the claim from start to finish for documentation purposes, . . . evidence and also in the event it’s ever needed to be produced.” He explained that the activity log starts when an insured initiates a claim and includes entries from persons within the insurance company that take part in handling the claim. McCauley testified that the activity log indicated that Papa’s original check to the insurance company for payment was returned to Papa because the account it was written on could not be located. When Kehl’s counsel inquired as to the status of the policy, McCauley responded that counsel “would have to ask the revenue department” because he was not “privy” to that information. During cross-examination by Ciani’s counsel, McCauley stated that during a break in the proceedings, he learned from the activity log that the policy was in force because the insurance company eventually received a MoneyGram payment on August 4. He further explained that “once the payment was received and reviewed by underwriting, then they confirmed that the coverage taken out initially from the date of the first day of the policy was not affected, therefore, in force.”

Papa contended her trial counsel was ineffective because he did not make a confrontation clause objection to McCauley’s testimony based on the activity log that an insurance contract was in force. Even assuming that counsel’s failures were constitutionally deficient Papa did not establish prejudice sufficient to create a reasonable probability that a different result would have occurred in the absence of the claimed error.

Papa was convicted of “[k]nowingly present[ing] a false or fraudulent claim for the payments of a loss for theft, destruction, damage, or conversion of a motor vehicle, a motor vehicle part, or contents of a motor vehicle” in violation of Penal Code section 550, subdivision (a)(4).  Contrary to Papa’s contention, an “in force” insurance contract is not a necessary element of the crime.  The statute does not require an “in force” contract and does not make any reference to the status of an insurance policy. An insurance company’s payment of a claim is not determinative of whether a claim is false or fraudulent because the gravamen of the substantive offense is the defendant’s intent to defraud.

The crucial issue was Papa’s intent to defraud, which did not turn on the status of the policy. Papa submitted a false or fraudulent claim believing the policy was in effect. This was sufficient to prove the gravamen of the offense and her conviction was affirmed.

Zalma Opinion

Insurance fraud continues to grow logarithmically. Even when a person is convicted of insurance fraud appeals like this one rise to keep the fraud perpetrators out of jail.

The importance of this, not officially reported, case is that the crime of insurance fraud does not even require an effective policy at the time of the claim. All that is required for a prosecutor to prove insurance fraud in California is to show that the defendant made a claim to an insurance company believing that there was a policy in effect knowing that the claim was false and fraudulent. Pappa was convicted even though she failed to complete the claim process, failed to collect a dime from the insurance company, and failed to pursue the insurance company. She knowingly made a false claim and that was enough to convict her either of fraud or the attempt to commit fraud.

Neither a valid policy nor a completed claim is required. Hopefully California prosecutors will take note and prosecute more like those involved in this attempt to profit from the intentional destruction of a vehicle.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

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Happy Birthday U.S.A.

As the son of an immigrant — a first generation American born in the U.S.A. — I wish everyone a Happy Independence Day and thank everyone for the the opportunity the U.S.A. gave my family to escape oppression at the turn of the 20th Century so I, and my children, could enjoy the freedom of the U.S.A.

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I am on vacation

My wife and I are enjoying beautiful Vancouver BC so posts and Zalma’s Insurance Fraud Letter will be late this month.

 

 

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Claims Commandment XIV

Thou Shall Adjust

This series of claims commandments is an effort to

Zalma on Insurance Makes Top 50

provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

The claims handler has been called an “adjuster” for centuries because he or she is capable of adjusting to different situations. In modern practice and adjuster is:

The person knowledgeable in insurance retained by an insurer for the purpose of assisting the insured in proving a loss to the insurer. A person who expresses to the insured the fidelity and good faith of the insurer.

The adjuster is also a person who, “for any consideration whatsoever, engages in business or accepts employment to furnish, or agrees to make, or makes, any investigation for the purpose of obtaining, information in the course of adjusting
or otherwise participating in the disposal of, any claim under or in connection with a proof of loss or engages in soliciting insurance adjustment business.”  [California Insurance Code § 14022.]

It is the obligation of the adjuster to determine the amount of loss, the cause of the loss, and the final settlement in cash value after all factors have been considered.

The adjuster must be capable of working with various people under multiple difficult situations, determine the dispute and resolve it in a manner that is acceptable to the insured or claimant and the insurer for whom the adjuster works.

The courts of many states have created a tort called “bad faith conduct of insurance contract requirements” (the “tort of bad faith”). Although bad faith is grounded in contract principles it is treated as a tort for the purpose of assessing damages. To understand the tort remedies available for bad faith conduct the adjuster must understand a fundamental principle of contract law that every contract imposes on each party a duty of good faith and fair dealing in its performance and its enforcement.

The adjuster provides the service promised by the insurance company. The adjuster is the living embodiment of the insurance company: this is the person the insured meets when he faces a loss and needs help. It is the adjuster, and the help he or she gives the insured, that is the essence of the promise made by the insurer when the policy is issued. Without this service insurance becomes meaningless. The adjuster is the foundation upon which an insurer is built. If the adjuster is not professional, and does not provide the service promised by the insurer, the promise made by the policy is broken and the insurer will first lose customers and ultimately fail. Claims that are owed must be paid promptly and with good grace. To do otherwise would be to ignore the purpose for which insurance exists: to provide service, protection, and security to the insureds.

To do the task the adjuster must be flexible and ready to work within the confines of the contract of insurance, the covenant of good faith and fair dealing, and simple good manners to work as a partner with the insured or claimant to resolve the claim to the satisfaction of both. If a claim is properly adjusted litigation between insurers and insureds and claimants will diminish and in many cases disappear.

© 2012 – Barry Zalma

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

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

For more detail on the handling of claims consider acquiring the e-book version or full printed version of Barry Zalma’s treatise, “Insurance Claims: A Comprehensive Guide” available from Specialty Technical Publishers at http://www.stpub.com or Mr. Zalma’s recently published  e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment XIII

Thou Shall Educate Yourself Continuously

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Insurance and the law of insurance is continuously changing. As regular readers of Zalma on Insurance are aware new cases on insurance issues come from the courts daily. Facts and practices that are clear and unambiguous today will be ambiguous or wrongful tomorrow. Acts that are considered bad faith today will be considered to be good faith tomorrow.

The key to becoming a professional claims handler is education and information. For that reason the professional should, among other things:

  1. Read Zalma on Insurance daily.
  2. Read the insurance trade journals daily, most of which are available for little or no cost, on line:
    1. Bests Review.
    2. Business Insurance.
    3. Insurance Journal.
    4. Claims Journal.
    5. Claims Magazine.
    6. American Agent and Broker Magazine.
    7. National Underwriter.
    8. Underwriters Insider.
    9. Zalma’s Insurance Fraud Letter.
    10. Dozens of others.
  3. Join and participate in insurance or investigation related LinkedIn groups.
  4. Join and participate in insurance or investigation related Yahoo groups or Google groups.
  5. Subscribe to the newsletters of IRMI.
  6. Subscribe to Findlaw’s summaries of recent insurance decisions.
  7. Take insurance related continuing education classes.
  8. Obtain an insurance related designation like CPCU, CLU, AIC, etc.

It is also necessary to comply with state regulations regarding licensing and continuing education. For example only, California now requires of adjusters:

Hour Requirements:

  • 24 hrs biennially – Independent Insurance Adjusters and Public Adjusters

Line Specific Requirements:

Courses must be in license type held.  If multi-licensed, any course is allowed.

Ethics
4 hrs – Life/Health Agent and/or Fire/Casualty Broker-Agent, independent insurance adjusters and Public Adjusters

Education Methods:

  • Classroom
  • Self-Study
  • Online

Compliance Renewal Date:

  • Independent & Public Adjusters renewal date is 5/31 of even numbered years

Carryover Hours:
Excess hours can be carried forward to next renewal period. Excess hours completed after expiration date do not carry forward to next renew period.

Course Repetition:
Courses may not be taken more than once in each renewal period for credit

Reporting Method: 

  • CE credits are reported online daily to the CDI (classes within 30 days after course completion)
  • Licenses can be renewed online at www.insurance.ca.gov and click on the Online License Application

Exemptions to CE Requirement:

  • Agents who are 70 years or older and have had a California insurance license in good standing for 30 or more continuous years

Non-Residents:
Exempt if licensee meets home state CE requirement, with the exception of nonresidents selling annuities or LTC.

To be a professional claims handler it is essential that you understand the covenant of good faith and fair dealing, the basis of insurance, how insurance works, and a high level of skill in the profession.

© 2012 – Barry Zalma

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

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

For more detail on the handling of claims consider acquiring the e-book version or full printed version of Barry Zalma’s treatise, “Insurance Claims: A Comprehensive Guide” available from Specialty Technical Publishers at http://www.stpub.com or Mr. Zalma’s recently published  e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment XII

Thou Shall Stay With A Claim

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Insurance is a personal service business. Although there is nothing in a policy of insurance that even mentions an insurance adjuster insurers found that they needed to help the people they insured to make it possible to resolve claims without animosity. The insurance adjuster is the only contact a person insured has with the insurer.

The claims adjuster is the person knowledgeable in insurance retained by an insurer for the purpose of assisting the insured in proving a loss to the insurer. A person who expresses to the insured the fidelity and good faith of the insurer. The adjuster determines the amount of loss, the cause of the loss, and
the final settlement in cash value after all factors have been considered.

Adjusters are the representatives of the insurers who must fulfill the promises made by the underwriter when the risk was taken. They must determine that the decision to insure was based upon accurate facts and that the underwriter fully understood the risk he or she was taking. Underwriters weigh the hazards faced  by a particular property before agreeing to take on the risk of loss.

The adjuster is the foundation upon which an insurer is built. If the adjuster is not professional, and does not provide the service promised by the insurer, the
promise made by the policy is broken and the insurer will first lose customers and ultimately fail. Claims that are owed must be paid promptly and with good grace. To do otherwise would be to ignore the purpose for which insurance exists: to provide service, protection, and security to the insureds.

To be an effective adjuster it is imperative that the adjuster establish rapport with the insured and continue with the insured from the first notice of loss until the conclusion of the claim to the satisfaction of the insured and the insurer. The rapport and continuity is lost when management changes the adjuster on a claim more than once.

To properly serve the people the insurer insures requires professional insurance claims handlers who are secure in their position and can spend the time necessary to assist an insured to resolve a claim even if that claim, like a third party liability claim, takes years to resolve.

Lesson

To fulfill this claims commandment insurers must staff their claims department with experienced, professional claims personnel who have chosen claims handling as a profession. The claims personnel must be people who can empathize with the insured and, if there is one, claimant.

The insurer must emphasize to its personnel that it requires continuous rapport with the insured and claimant and that it will never change the person in charge of a claim unless absolutely necessary. Claims people should make clear to the insured and the claimant that they will be with them from beginning until the claim is resolved.

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

For more detail on the handling of claims consider acquiring the e-book version or full printed version of Barry Zalma’s treatise, “Insurance Claims: A Comprehensive Guide” available from Specialty Technical Publishers at http://www.stpub.com.

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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It Is No Excuse that Victim of Fraud Could Have Discovered Fraud

Fraud In Inception Voids Coverage

Zalma on Insurance Makes Top 50

In California the Supreme Court held, in Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal. 2d 659 [79 Cal. Rptr. 106, 456 P.2d 674], where it was held that under certain circumstances an automobile liability insurer could not rescind its policy when it failed to investigate representations contained in the application. The court pointed out that loss of the right to rescind did not leave the company remediless since it could still prosecute a cause of action against the insured for damages for wrongful misrepresentation, after satisfying the injured person’s claim, or, in an action brought by the insured, after he has satisfied a judgment against him by the injured person, defend on the ground of misrepresentations in the application. The Supreme Court put a burden of investigation on insurers even though there are more than 20 million drivers in California and ignoring the cost of such an investigation. It did not consider making the person responsible for the accident pay directly to the injured.

The Covenant of Good Faith and Fair Dealing

Since the beginning of modern insurance it has been described as a contract of the utmost good faith where each party is required to be fair, truthful and in good faith with each other. Courts, like that the California Supreme Court in Barrera, feel sorry for the injured victims of the fraud perpetrator and place the initial burden on the insurer.

The Michigan Supreme Court was asked to decide whether an insurer can rescind an auto policy after an accident to avoid liability on the ground of fraud in the application for insurance, when the fraud was easily ascertainable and the claimant is a third party in Titan Insurance Company, Plaintiff-Appellant v. Mckinley Hyten, Howard, No. 142774 (Mich. 06/15/2012).

FACTS

McKinley Hyten obtained a provisional driver’s license in April 2004. In January 2007, Hyten’s driver’s license was suspended by the Secretary of State because of multiple moving violations and two minor traffic accidents. In light of what she perceived as assurances from her probation officer, Hyten anticipated that her license would be restored at a district court hearing scheduled for August 24, 2007. That same year, Hyten’s mother, Anne Johnson, inherited a motor vehicle that she “earmarked” for Hyten. Given the anticipated restoration of Hyten’s driver’s license, Johnson sought to obtain automobile insurance for Hyten. Johnson telephoned an independent insurance agent who, after being told that Hyten’s license had been suspended, informed Johnson that Hyten could not be insured until her license had been restored.

Regardless, an application for insurance from Titan Insurance Company was filled out on Hyten’s behalf and postdated to August 24, 2007, and on August 22, 2007, Hyten signed the application for insurance. The application form asked, “Does the applicant’s household have any unlicensed drivers or any drivers with a suspended or revoked driver’s license?” In response to this question, the “No” box was checked. The form stated that Titan could review Hyten’s driving record, but also stated that Titan could rely on the applicant’s representations.

On August 24, 2007, the policy became effective and provided personal protection insurance coverage for bodily injury of $100,000 per person/$300,000 per occurrence.

At the August 24, 2007, hearing, Hyten’s driver’s license was not restored, and it was not restored until September 20, 2007. Titan was not informed of this fact. Subsequently, in February 2008, Hyten was driving the insured vehicle and collided with the vehicle of Howard and Martha Holmes, causing injuries to them. In the process of investigating the accident, Titan learned that Hyten did not have a valid driver’s license when the policy was issued. In anticipation that the Holmeses would be filing claims against Hyten for their injuries, Titan filed the instant action seeking a declaratory judgment. Titan averred that had it been informed that Hyten’s license had been suspended, it would never have accepted the risk and would not have issued the insurance policy. Given Hyten’s fraudulent conduct in her application for insurance, Titan sought a declaration that, should the Holmeses prevail in their action, Titan was not obligated to indemnify Hyten.

Farm Bureau Insurance Company, the Holmeses’ insurer, intervened as a defendant, and Titan, Farm Bureau, and Hyten each filed cross-motions for summary disposition. Relying on Court of Appeals decisions holding that an insurer may not avoid liability under an insurance policy for fraud that was easily ascertainable, and concluding that whether a person possesses a valid driver’s license is easily ascertainable, the trial court granted Farm Bureau’s and Hyten’s motions for summary disposition. The Court of Appeals affirmed.

ANALYSIS

Insurance policies are contracts and, in the absence of an applicable statute, are subject to the same contract construction principles that apply to any other species of contract.

In addition, because insurance policies are contracts, common-law defenses may be invoked to avoid enforcement of an insurance policy, unless those defenses are prohibited by statute.  Titan asserted the defense of fraud to avoid liability under the insurance policy entered into with Hyten.

FRAUD

In Michigan, actionable fraud requires (1) That defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.

The doctrine of innocent misrepresentation is also well settled in Michigan, recognizing, by a long line of cases, that if there was in fact a misrepresentation, though made innocently, and its deceptive influence was effective, the consequences to the plaintiff being as serious as though it had proceeded from a vicious purpose, he would have a right of action for the damages caused thereby either at law or in equity. Silent fraud is a legal or equitable duty of disclosure in Michigan where a fraud arising from the suppression of the truth is as prejudicial as that which springs from the assertion of a falsehood.

None of the different doctrines or types of fraud recognized in Michigan requires that the party asserting fraud prove that the fraud could not have been discovered through the exercise of reasonable diligence. Stated differently, these doctrines do not require the party asserting fraud to have performed an investigation of all assertions and representations made by its contracting partner as a prerequisite to establishing fraud.

EASILY ASCERTAINABLE

The principal question presented to the Michigan Supreme Court was whether an insurer may rescind a policy for fraud in the application for insurance, when the fraud was easily ascertainable and the claimant is a third party. The court asked whether it should hold that it should place a burden on the insurer with respect to each of its thousands of policy holders to determine that the statements on every application are true.  Rather, it asked whether the insurer is entitled to give credence to its insured’s honesty until it has actual notice that he is a scoundrel?

The short answer is that a litigant cannot be held estopped to assert a defense, or to have waived his right thereto, because of facts he does not know.

However, when it is the insured who seeks benefits under an insurance policy procured through fraud, even an easily ascertainable fraud will not preclude an insurer from availing itself of traditional legal and equitable remedies to avoid liability.

The injured parties argued that the “easily ascertainable” rule is required for the protection of third parties. In Michigan there is no basis in the law to support the proposition that public policy requires a private business in these circumstances to maintain a source of funds for the benefit of a third party with whom it has no contractual relationship. Absent insurance, the operator of the motor vehicle is personally liable for tort liability. By requiring an insurer to indemnify an insured despite fraud in obtaining an insurance policy, the “easily ascertainable” rule relieves the insured of what would otherwise be the insured’s personal obligation in the face of his or her own misconduct. As between the fraudulent insured and the insurer, there can be no question that the former should bear the burden of his or her fraud.

CONCLUSION

Overruling earlier precedent the Supreme Court held that there being nothing in the law to warrant the establishment or imposition of an “easily ascertainable” rule and placed the burden of the fraud, if at trial it is proved, on the person who bought the policy fraudulently and relieved the insurer of any obligation.

ZALMA OPINION

I, the California Supreme Court, and the Michigan Supreme Court feel sorry for the people injured by a person who obtained a policy of insurance by fraud. That empathy, however, does not change the rights of parties to a contract. Because of her fraud, if proved at trial, Ms. Hyten was uninsured because had she been truthful in the application for insurance she would never have been insured.

The victim of a fraud should not be, and will not be in Michigan, required to conduct an investigation to determine whether an insured lied on the application. Since insurance is a business of utmost good faith an insured can be expected to be truthful in an application for insurance and the insurer should, in good faith, make its decision to insure based on an assumption that the facts in the application are true.

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Public Adjuster May Attend EUO

Limitations on Attendance at

Examination Under Oath

Who Should Attend?

Zalma on Insurance Makes Top 50

An insurance examination under oath (EUO) exists in policies of insurance to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. The Florida Court of Appeal, recognizing the importance of the EUO, was asked to determine whether the insurance policy issued to an insured prevents the insured from having his public adjuster present during the examination under oath in Zafar Nawaz v. Universal Property, No. 4D10-4288 (Fla.App. 06/13/2012).

Mr. Nawaz sought to recover under his insurance policy for wind damage to his home. After inspecting the home’s damages Universal Property issued appellant a check for $14,416. Four years later Nawaz, relying upon the efforts of a public adjuster, submitted a new estimate for damages to his home totaling almost ten times his original claim, $138,419. Nawaz also invoked his right to appraisal pursuant to the insurance policy. Universal Property indicated that it was investigating Nawaz’ new claim and scheduled Nawaz for an EUO.

The Policy

The insurance policy states the following:

SECTION I – CONDITIONS

2. Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:

f. As often as we reasonably require:

(3) Submit to examination under oath, while not in the presence of any other “insured,” and sign the same . . . .

The insurance policy specifically defined “insured” as:

3. “Insured” means you and residents of your household who are:

a. Your relatives; or

b. Other persons under the age of 21 and in the care of any person named above.

Facts

Nawaz appeared at the scheduled examination under oath with his public adjuster. Universal Property requested that the public adjuster leave the room before the examination was conducted. Nawaz refused to instruct the adjuster to leave the examination, so Universal Property suspended the examination. As a result, Universal Property filed a complaint for declaratory relief, claiming that Nawaz failed to comply with the insurance policy. Nawaz also filed claim for declaratory relief as a counterclaim.

The trial court determined that the insurance policy “would exclude public adjustors from attendance at sworn statements.” The court recognized that “[t]he language in the policy forbids any other insured to be present but is silent as to anyone else.” However, the court was concerned that restricting the interpretation of the policy to exclude only another “insured” would lead to results such as allowing the presence of the press, other insurance companies, or members of the general public. Further, the court was concerned as to the participation of the public adjuster, since the adjuster’s participation would be limited. The court determined that appellant’s public adjuster could not attend the examination under oath.

Analysis

The Court of Appeal concluded that the plain language of the contract would allow Universal Property to exclude only another insured from the examination under oath. The clear language of the insurance policy states that Nawaz could be required to submit to an “examination under oath, while not in the presence of any other ‘insured.’” Clearly, the Court of Appeal concluded, “the public adjuster does not fit into the plain language of the definition of ‘insured.’”

Reversing the decision of the trial court, the appellate court noted that by ignoring the plain language of the contract, the trial court essentially rewrote the contract. It is settled law that courts may not rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain. It would have been a simple matter for Universal Property to have written a restriction into the policy limiting those who could be present for the examination under oath. In conclusion the appellate court found that the trial court erred in failing to give effect to the plain language of the insurance policy.

The Florida Court of Appeal noted that it is bound by the policy’s plain language and guided by the words of Judge Learned Hand, who wrote over a hundred years ago: “A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved . . . that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake, or something else of the sort.” [Hotchkiss v. Nat'l City Bank of N.Y., 200 F. 287, 293 (S.D.N.Y. 1911).]

Similarly, in the present case, United Property was “held” to the “words” and their “usual meaning.”

ZALMA OPINION

The decision seems to strike a new rule of insurance law but it is simply stating the obvious. The policy does not prohibit the attendance of the public adjuster or his next-door-neighbor.

Of course, since a public adjuster is not a lawyer he or she can do nothing at the EUO other than to sit and listen, and if desired, take notes.

Further, since most public insurance adjuster contracts, provide an assignment of a portion of the claim to the public adjuster, it can be reasonably argued that the public adjuster is a partial insured – the “you” defined by the policy – and should be kept from the EUO the insurer, if it desires, can also be examined under oath concerning how the amount of damages – discovered four years later – had increased by a factor of 10.  Rather than trying to keep the public adjuster out of the EUO while the insured was examined I would have demanded the EUO of the public adjuster and kept the named insured out of the room.

An EUO is designed, as the US Supreme Court said more than a century ago, in Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 3 S. Ct. 507, 28 L. Ed. 76 (1884), the Supreme Court of the United States said:

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured. A false answer as to any matter of fact material to the inquiry, would be fraudulent. If it made, with intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if it failed it would be a fraud attempted. And if the matter were material and the statement false, to the knowledge of the party making it, and willfully made, the intention to deceive the insurer would be necessarily implied, for the law presumes every man to intend the natural consequences of his acts. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed; and if they are knowingly false and willfully made, the fact that they are material is proof of an attempted fraud, because their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them, and to whom they are addressed. ‘Fraud.’ said Mr. Justice CATRON, in Lord v. Goddard, 13 How. 198, ‘means an intention to deceive.’ ‘Where one,’ said SHIPLEY, C. J., in Hammatt v. Emerson, 27 Me. 308-326, ‘has made a false representation, knowing it to be false, the law infers that he did so with an intention to deceive.’ ‘If a person tells a falsehood, the natural and obvious consequence of which, if acted on, is injury to another, that is fraud in law.‘ (Emphasis added)

I can see a good reason for the public adjuster’s attendance since he or she can be questioned or called upon to assist the insured in presenting accurate testimony. If, as is best, each witness is to be examined without the presence of other important witnesses, the policy can be easily reworded as follows:

As often as we reasonably require:

You shall submit to examination under oath, while not in the presence of any other “insured” or any other person other than a licensed attorney representing you, and sign the same.

 

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Duty to Settle Requires a Willing Plaintiff

No “Bad Faith” Failure to Settle

Zalma on Insurance Makes Top 50

In March I posted an article on the need to put a stake through the heart of the tort of bad faith at http://zalma.com/blog/?p=2724. The post that follows deals with a case that supports the position I took in that post and makes me wonder why more courts don’t recognize the inequity and damages to the public caused by the tort of bad faith.

In 1985 Justice Kaus of the California Supreme Court made a comment on the tort of bad faith that predicted the finding of the Florida Appellate court case I summarize below. Justice Kaus said:

The problem is not so much the theory of the bad faithcases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. [White v. Western Title, 40 Cal. 3d 870, 221 Cal. Rptr. 509(December 31, 1985).

Florida Refuses to Allow Bad Faith Set-Up to Succeed

In Olive Goheagan, As Personal Representative of the Estate of Molly v. American Vehicle Insurance Company, A Florida For Profit, No. 4D10-3781 (Fla.App. 06/13/2012)
Olive Goheagan, as personal representative of the estate of Molly Swaby, individually and as assignee of John Perkins, appealed a final summary judgment entered in favor of American Vehicle Insurance Company ("AVIC") on Goheagan's claim of bad faith in failing to protect its insured, Perkins, from an excess judgment.

Facts

On February 24, 2007, Perkins rear-ended the decedent, Swaby, while traveling at a high rate of speed. Perkins had bodily injury liability coverage under an AVIC policy in the amount of $10,000/$20,000. Swaby was severely injured in the accident and remained hospitalized in a coma until her death on May 12, 2007.

Two days after the collision, on February 26, Perkins reported the accident to AVIC. AVIC opened a claims file and assigned the claim to adjuster Lee Ann Grieser. AVIC spoke to Perkins's attorney on February 27. On February 28, Grieser sent a letter to Perkins advising him that the bodily injury claims for the accident may exceed his policy limits, and that AVIC would "make every attempt to settle all claims for bodily injury in accordance with [his] policy limits.” As of March 1, Grieser had determined that Perkins was the sole cause of the accident and intended to settle the claim for Perkins’s $10,000 policy limit.

Grieser attempted to contact Goheagan, Swaby’s mother, on February 28, March 1, March 21, March 27, and April 16. On February 28, Grieser was told by Swaby’s stepfather that Goheagan had retained an attorney. The stepfather gave Goheagan’s cell phone number to Grieser and told Grieser to call Goheagan. Later that day, Grieser called Goheagan’s home number and was told by a friend of Goheagan that Goheagan was not available. Grieser left her contact information with Goheagan’s friend.

On March 1, Grieser left Goheagan a voicemail message asking for Goheagan’s attorney’s information. On March 7, an AVIC property adjuster called Goheagan and received no answer or answering machine.

Grieser reached Goheagan on March 21 and asked for the name of Goheagan’s attorney. Goheagan told Grieser that they would talk later. Grieser called again on March 27. Goheagan initially told Grieser to speak to someone else. When Grieser asked Goheagan for the name of the attorney that the stepfather had informed her was hired regarding this accident, Goheagan said she would call Grieser back. On April 16, Grieser called Goheagan and again Goheagan said it was not a convenient time to talk and that Grieser would have to call some other time. On April 19, Grieser learned that Goheagan had filed a wrongful death suit against Perkins. AVIC offered to tender Perkins’s $10,000 available coverage to Goheagan’s attorney on April 26, which was rejected. Goheagan also rejected a second settlement offer dated June 7.

Subsequently, Goheagan’s wrongful death action against Perkins went to trial. Following a jury verdict, a final judgment was entered against Perkins in the amount of $2,792,893.65 on January 20, 2009. An additional cost judgment in the amount of $28,070 followed.

The Bad Faith Suit

Goheagan filed the instant common law bad faith action against AVIC after the final judgment was entered against Perkins in her wrongful death suit. Goheagan alleged that AVIC breached its duty of good faith with regard to the interests of Perkins, in part, by failing to affirmatively initiate settlement negotiations with Swaby, failing to actually tender the policy limits in a timely fashion, and failing to warn Perkins of the possibility of an excess judgment.

AVIC moved for summary judgment, arguing that no genuine issue of material fact existed as to whether AVIC fulfilled its duty of good faith toward Perkins.

Goheagan filed the affidavit and deposition of Mark Lemke in opposition to AVIC’s motion for summary judgment. In Lemke’s opinion, “[t]he claim should have immediately been recognized as one requiring tender of the $10,000 policy limits. Steps should have been taken to immediately tender the $10,000 policy limits to Molly Swaby. This did not happen.” Lemke also submitted that no ethical rules would have prohibited Grieser from tendering a check to Goheagan. Lemke’s expert testimony was not effective because it was limited to legal conclusions which are the sole province of the court.

The trial court granted summary judgment in favor of AVIC.

Analysis

The good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.

In this case, the appellate court found that the evidence did not support the proposition that AVIC failed to settle the claim if possible, where a reasonably prudent person would do so nor does it demonstrate that the failure to settle was willful and without reasonable cause. To accept Goheagan’s theory of bad faith, AVIC would have had to tender a letter with a check that could not be cashed. Since Swaby’s stepfather informed AVIC that Goheagan had retained an attorney regarding this accident.  Florida’s Administrative Code, like that in every state, has a rule that an adjuster may not negotiate or effect settlement directly or indirectly with any third-party claimant represented by an attorney, if the adjuster has knowledge of such representation.

Although normally the question of whether an insurer acted in good faith is to be decided by a jury, there are instances where the evidence demonstrates that the insurer fulfilled all its legal obligations. Where the insurer fulfills its obligations and there is not sufficient evidence from which any reasonable jury could have concluded that there was bad faith on the part of the insurer, then summary judgment should be granted for the insurer.

The claim for “bad faith” failure to settle should be exactly that – only for situations in which the insurer truly is refusing in bad faith to settle, not when it is in fact attempting to settle the claim. Gwynne A. Young & Johanna W. Clark, The Good Faith, Bad Faith, and Ugly Set-up of Insurance Claims Settlement, 85 Fla. Bar. J. 9, 14-15 (Feb. 2011).

ZALMA OPINION

The Florida court made clear that it does not like cases where an insurer is “set-up” for bad faith because injuries were severe and available limits were small. When an adjuster attempts to communicate with the claimant’s counsel and is met with petulance and a refusal to communicate, even after an attempt to settle is made, there can be no bad faith on the part of the insurer. There is, however, bad faith on the part of the insured and counsel who compelled the insurer with small limits, to defend its insured through trial of a clear liability case and then defend a spurious bad faith case. But, like the animals in George Orwell’s Animal Farm, all litigants are equal but some are more equal than others. Although an insured or claimant can sue an insurer for the tort of bad faith an insured cannot sue the insured for the tort of bad faith.

 

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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No Coverage if Insured Fails to Meet Condition Precedent

Expensive Failure to Meet Condition 

Zalma on Insurance Makes Top 50

Major corporations buy insurance protection in multiple layers starting usually with a self-insured retention, a primary policy and multiple layers of excess insurance. Excess insurance is, by definition, insurance that has no obligation until the limits of the insured’s self-insured retention and the limits of liability of the primary insurer or insurers is fully exhausted by payment of settlements or judgments before the next layer in line has any obligation to pay defense or indemnity.

Lawyers representing the insured who is insured under a tower or stack of primary and excess insurance policies where the primary and many of the excess policies are exposed, must be careful to read and understand the wording of each policy before considering settlement with the primary insurers. In J P Morgan Chase & Co., et al., Plaintiffs-Appellants v. Indian Harbor Insurance Company, et al., Defendants, Arch Insurance Company, et al., Defendants-Respondents., New York Supreme Court, Appellate Division First Judicial Department, 2012 NY Slip Op 04702,  No. 6461-6462-6463- (N.Y.App.Div. 06/12/2012) the major corporate plaintiffs represented by some of the most respected lawyers in the country, destroyed the right to collect from a tower of insurance coverages because they entered into settlement agreements that did not clearly exhaust the limits of the primary or lower levels of insurance.

The Trial Court Decision

J.P. Morgan Chase, and others appealed from orders of the Supreme Court, New York County (Barbara R. Kapnick, J.), entered May 31, 2011, which granted the motions by Arch Insurance Company, St. Paul Mercury Insurance Company, Twin City Fire Insurance Company, Lumbermens Mutual Casualty Company and Swiss Re International SE for summary judgment dismissing the amended complaint as against them with prejudice.

The Allegations

Plaintiff alleges that defendants breached their contractual obligations to provide indemnification under excess insurance policies they issued. Plaintiff’s predecessor, Bank One Corporation, purchased $175 million in “claims made” bankers professional liability insurance and securities action claim coverage for the period October 1, 2002 to October 1, 2003. Bank One’s insurance program was structured as a tower of follow-the-form coverage in excess of a self-insured retention.

Underlying Litigation

In November 2002, actions were brought against Bank One and some of its affiliates in connection with their roles as indenture trustee and otherwise with regard to certain notes issued by NPF XII, Inc. and NPF VI, Inc. Plaintiff’s entities (the JP Morgan entities) were defendants in some of the actions as well as other related actions in which the Bank One entities were not defendants. Between July and November 2004, while the NPF litigation was still pending, the Bank One entities were merged into the JP Morgan entities. Between February 2006 and March 2008, plaintiff settled six actions that were part of the NPF litigation for an aggregate of $718 million. Plaintiff’s theory of recovery in this action is that the portion of the settlement attributable to claims made against the heritage Bank One entities, as opposed to claims based on the conduct of the premerger JP Morgan entities, exceeded the combined limits of the policies in the Bank One tower of insurance.

Two of the lower layer primary insurers settled without admitting liability for approximately $34 million.

Twin City moved for summary judgment, asserting that plaintiff could not establish the occurrence of express conditions precedent to coverage under Twin City’s policy. Invoking their own policy provisions, Swiss Re, Lumbermens, St. Paul and Arch also moved for summary judgment on similar grounds. All the motions were granted.

The Policies At Issue

Defendant Indian Harbor Insurance Company was the primary carrier while defendants Houston Casualty Company, Arch Insurance Company, St. Paul Mercury Insurance Company, Twin City Fire Insurance Company, Lumbermens Mutual Insurance Company, Swiss Re International SE and nonparties Federal Insurance Company, American Zurich Insurance Company and Gulf Insurance Company provided excess coverage. The carriers and the tiers of coverage they provided are listed in descending order as follows: Tier/ Insurance CompanyCoverage Limits Seventh Excess – Swiss Re$50 million in excess of $150 million Sixth Excess – Federal$10 million in excess of $140 million Fifth Excess – Lumbermens, St. Paul and Arch$30 million in excess of $110 million, with a “quota share” apportionment of $10 million among the three carriers Fourth Excess – Twin City $15 million in excess of $95 million Third Excess – Zurich$15 million in excess of $80 million Second Excess – Gulf$15 million in excess of $65 million First Excess – Houston$15 million in excess of $50 million Primary – Indian Harbor 50% of loss up to $50 million subject to a maximum coverage limit of $25 million.

The Twin City policy provided “that liability for any loss shall attach only after the Primary and Underlying Excess Insurers shall have duly admitted liability and shall have paid the full amount of their respective liability.” Hence, by the plain language of this attachment provision, the underlying insurers’ admission of liability and the payment of the full amount of their liability were conditions precedent to Twin City’s liability under its policy.

Analysis

A condition precedent is an event which must occur or an act which must be performed by one party to an existing contract before the other party is required to perform. The condition was not met because Zurich, the insurer directly beneath Twin City in the Bank One tower, did not admit liability when it settled with plaintiff. The settlement agreement between Zurich and plaintiff provided that “the negotiation, execution and performance of this Agreement shall not constitute, or be construed as, an admission of liability or infirmity of any defense or claim whatsoever by any Party.”

Moreover, there was no way to determine that Zurich paid the full amount of its liability under its Bank One tower policy because the settlement provided for no allocation of the settlement amount. As a result, since there was no way to determine from the settlement agreement, whether Zurich and its co-insurer had actually paid out their full limit there was no evidence presented to the trial court that the policy limits were exhausted. As a result the second condition set forth in Twin City’s policy was not met. Since the entire tower of insurance coverages were “follow form” and, therefore, had the same wording, the conditions precedent to liability under the remaining moving parties’ excess policies have not been met.

Excess coverage, by definition, only becomes applicable after all underlying insurance has been exhausted by payment of the total underlying limit of insurance.  The excess policies before the court unambiguously required the insured to collect the full limits of the underlying policies before resorting to excess insurance.

Settlement for less than the underlying insurer’s limits of liability does not, nor can it, exhaust the underlying policy. In this case, summary judgment was properly granted because the aforementioned combination of plaintiff’s settlements with Zurich and Steadfast preclude any determination of whether Zurich’s policy limits were reached as required by the policies issued by Twin City, Lumbermens, St. Paul, Arch and Swiss Re. Plaintiff’s pre-action settlement with Federal and Executive Risk had the same effect on Swiss Re’s liability because there was no allocation of the settlement between the two underlying carriers.

Twin City does not challenge the validity of its policy. It simply maintains that conditions precedent to coverage were not met. As stated above, its premise is that conditions precedent to its liability have not been met. Therefore, the maintenance provision is irrelevant to Twin City’s motion. Since parties to an insurance contract are free to impose any condition precedent to liability upon a policy as they choose. The Appellate Division found no ambiguity in any of the policies and as a result since the condition precedent was not met summary judgment was properly granted.

ZALMA OPINION

I have preached for the last 45 years, apparently to empty pews, that insurance is a necessity to the operation of any business, including a major international bank. Lawyers dealing with insurance, whether for a major client like Chase or a homeowner in Nebraska, must be certain that they understand the terms and conditions of the policies with which they must deal before giving a client advice on the settlement of claims against an insurer. In this case J. P. Morgan Chase settled with two of its low lawyer insurers for a total of $34 million as part of a claim for $175 million. Because the settlement agreements were drafted poorly and did not allocate the $34 million to establish that the payment was an admission of liability and payment of the full limit of the policies, the bank lost the opportunity to collect $141 million from its excess insurers.

Lawyers who represent people in their disputes with insurers must either be expert insurance coverage lawyers who spend sufficient time to understand clearly each term and condition of each policy before moving forward with settlement negotiations with some, but not all, of the insurers or should retain the services of a professional, expert, insurance coverage lawyer. No settlement of a primary policy should be entered into without exhausting the limits unless it fully indemnifies the insured.

I should give up preaching about the importance of insurance and the need to understand the insurance involved in any dispute. I am, however, a glutton for punishment and can only hope that someone will read this post and avoid the same errors that resulted in this summary judgment that cost Chase $141 million.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Insurer’s Duty To Settle

No Duty to Settle if Insurer Lacks Information Needed

Zalma on Insurance Makes Top 50

In a suit against insurers for breach of the implied covenant of good faith and fair dealing, the  rejection of plaintiff’s request to instruct the jury that it could consider the insurer’s failure to effect a settlement in determining whether it acted in bad faith was affirmed by the Ninth Circuit.  Although the trial court legally erred in holding, as a matter of law, that an insurer’s duty of good faith and fair dealing cannot be premised on the insurer’s failure to effectuate settlement in the absence of a reasonable demand, the district court did not abuse its discretion in refusing the instruction because there was no evidentiary foundation for it in Yan Fang Du, Individually v. Allstate Insurance, No. 10-56422 (9th Cir. 06/11/2012)

FACTS

Appellant Yang Fang Du brought suit against Allstate Insurance Company and its subsidiary Deerbrook Insurance Company (collectively “Deerbrook”) for breach of the implied covenant of good faith and fair dealing. Du was injured in an accident caused by Deerbrook’s insured, Joon Hak Kim. After Du received a judgment against Kim in the amount of $4,126,714.46, Kim assigned his bad faith claim to Du.

Du brought the instant suit against Deerbrook, arguing that Deerbrook breached the implied covenant of good faith and fair dealing owed to its insured Kim when Deerbrook did not attempt to reach a settlement of Du’s claims after Kim’s liability in excess of the policy limit became reasonably clear. Du appealed the district court’s rejection of the request to instruct the jury that it could consider Deerbrook’s failure to effectuate a settlement in determining whether Deerbrook breached the implied covenant.

Kim’s insurance policy issued by Deerbrook had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident. Deerbrook was aware that there was a claim of serious injury by Du and accepted Kim’s liability.

No settlement demands or offers were made until June 9, 2006, when Marc Katzman, Du’s lawyer, submitted a $300,000 global demand for all four plaintiffs. For the first time, Du documented her medical costs at $108,742.92. The demand also listed medical costs to Wan Hai Feng at $6,676.00, Shuo Feng at $13,274.00, and Li Jie Wang at $13,809.00.

Anna Harcharik, Deerbrook’s adjuster, told Katzman there was insufficient information about Wan Hai Feng, Shuo Feng, and Li Jie Wang and suggested settling Du’s claim separately. Katzman rejected the suggestion and indicated that Deerbrook had to pay the full $300,000 policy limit and settle all claims.

ANALYSIS

The Plaintiff sought the following instruction:

 In determining whether Deerbrook Insurance Company breached the obligation of good faith and fair dealing owed to Mr. Kim, you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Yan Fang Du’s claim after liability [of its insured Kim] had become reasonably clear.  The presence or absence of this factor alone is not enough to determine whether Deerbrook Insurance Company’s conduct breached the obligation of good faith and fair dealing. You must consider Deerbrook Insurance Company’s conduct as a whole in making this determination.

The district court ruled, among other things, that there was no factual foundation for the instruction, as “the issue of settlement was broached at a sufficiently early time in the litigation that it vitiates any claim or effective claim insofar as a failure to initiate a settlement discussion.” At trial, the district court gave modified instructions. Both of these instructions made clear that breach of the covenant of good faith and fair dealing could be found only if Deerbrook had failed to accept a reasonable settlement demand, not for failing affirmatively to effectuate a settlement.

Likewise, the jury verdict form asked, “1. Did Deerbrook unreasonably or without proper cause, fail to accept a reasonable settlement demand for an amount within policy limits?” The jury answered “no.” The district court then entered judgment in favor of Deerbrook.

DISCUSSION

Du’s appeal raised one central legal issue: “Does an insurer have a duty, after liability of the insured has become reasonably clear, to attempt to effectuate a settlement in the absence of a demand from the claimant?”

California courts have commonly applied the duty to settle to situations in which the insurer unreasonably rejects a settlement offer within policy limits.  At issue in this case is whether the duty more broadly requires an insurer to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand. The Ninth Circuit concludes that insurers have such a duty.

If, as the general duty of good faith requires, the insurer to conduct itself as though it alone were liable for the entire amount of the judgment, a rational party should attempt to settle if there is a substantial likelihood of recovery in excess of those limits and there is a reasonable opportunity to settle within policy limits.

Second, although the California courts have not squarely addressed the question, the Ninth Circuity has interpreted California law to impose such a duty. Even when no formal, written offer exists the Ninth Circuit has held that the injured even a party’s informal statements was sufficient to give an insurer a reasonable opportunity to settle the claim within the policy limits. As a result the Ninth Circuit concludes that when an insurer fails to take any action it neglects its good faith duty to take affirmative action in settling the claim.

California courts have not ruled to the contrary. Thus, an insurer can violate the duty of good faith and fair dealing by failing to attempt to effectuate a settlement within policy limits after liability has become reasonably clear. Du’s proposed instruction was a fair statement of the law. However, the district court did not abuse its discretion in ruling that there was no foundation for Du’s proposed jury instruction. The evidence at trial established that Deerbrook could not make an earlier offer because Deerbrook lacked corroborating proof of the extent of Du’s injuries and medical expenses. Du’s expert also conceded that it was reasonable for Deerbrook to rely on counsel’s Katzman’s promise to provide medical information, a promise that remained unfulfilled until June 2006. Du’s expert further admitted that Deerbrook could not have obtained Du’s medical records without getting them from Du’s lawyers.

Before June 2006 Deerbrook had no proof of the injuries of the other three individuals injured in the accident. Paying Du $100,000 could have left Kim underprotected if the remaining three claims exceeded $200,000, especially as prior counsel had asserted that the Fengs suffered “life threatening” injuries.

Since there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du the Ninth Circuit concluded that the district judge did not abuse his discretion in finding there was no evidentiary basis for Du’s proposed instruction although the district court legally erred in holding as a matter of law that an insurer’s duty of good faith and fair dealing cannot be premised on the insurer’s failure to effectuate settlement in the absence of a reasonable demand.

ZALMA OPINION

It is not unusual for a plaintiffs’ lawyer to make a policy limits demand early in the investigation of a claim and litigation from a claim where the defendant has low or inadequate limits of liability hoping that the insurer will reject the claim so that the lawyer can then claim the refusal to settle was an act of bad faith. I, like Justice Kaus of the California Supreme Court, am concerned on how lawyers often abuse the tort of bad faith.

The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. [White v. Western Title, 40 Cal. 3d 870, 221 Cal. Rptr. 509 (December 31, 1985)]

In this case the plaintiffs’ lawyer knew the limits were only $100,000 per person and $300,000 for the entire accident. The demand for all four showed that $100,000 was fair for Du but Allstate had no information that allowed it to evaluate the injuries to the other three injured party.

The less is that to properly “set up” an insurer for bad faith the offer to settle must be made only after the insurer has sufficient evidence to make a reasonable and prudent conclusion that liability was clear and that the amount of the settlement was reasonable and appropriate. Short string offers early in a case may be a total waste of time and lead a plaintiff into extensive investigation and litigation that will result, as it did for Ms. Du, in no recover over the limit.

Insurers, must also understand that when they have sufficient evidence and information to determine liability is clear must affirmative work to settle. Of course, in this case, since the plaintiff though the insurer was set up for a bad faith case, settlement negotiations were impossible. The plaintiff and her counsel, by their actions, did not create a bad faith case but gave Allstate an absolute defense to the claim.

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

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I’m Out of Town

There will be few posts while I’m away until Thursday.

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Claims Commandment XI

Thou Shall Empathize With the Claimant

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Everyone in a claim situation is unhappy, disturbed, shocked, injured either in body or emotionally and need help. The adjuster must recognize the difference between sympathy and empathy. Empathy is identification with and understanding of another’s situation, feelings, and motives. It is the ability to understand another person’s circumstances, point of view, thoughts, and feelings.

Sympathy, on the other hand, is the sharing of another’s emotions, especially of sorrow or anguish and includes pity and compassion. It is the fact or power of sharing the feelings of another, especially in sorrow or trouble. Sympathy must be lilmited to the needs of relatives or clergy, not a professional relationship.

The adjuster should avoid sympathy and work to convince the insured or claimant that the adjuster empathizes with the claimant’s situation. Empathy can be shown if the adjuster can honestly express one or more of the following similarities between the adjuster and the claimant:

  • They have similarities in their families;
  • They practice the same religious denomination;
  • They were also wounded in the war while serving in the US Military;
  •  They have children of the same age;
  •  They belong to the same club;
  • They engages in the same hobby;
  • They are fans of the same sports team, or
  •  They have some interest in common.

When the claimant believes that the adjuster empathizes with the problems of the claimant or the insured the two will work together as a team to resolve the claim. With empathy, the adjuster can provide the service promised by the terms and conditions of the insurance policy.

The adjuster is the living embodiment of the insurance company: this is the person the insured meets when he faces a loss and needs help. It is the adjuster, and the help he or she gives the insured, that is the essence of the promise made by the insurer when the policy is issued. Without this service insurance becomes meaningless. The adjuster is the foundation upon which an insurer is built. If the adjuster is not professional, and does not provide the service promised by the insurer, the promise made by the policy is broken and the insurer will first lose customers and ultimately fail. Claims that are owed must be paid promptly and with good grace.

To do otherwise would be to ignore the purpose for which insurance exists: to provide service, protection, and security to the insureds. The property adjuster has a duty to:

  1. help the insured prove the loss to the insurer;
  2. help the insured understand the terms and conditions of the policy; and
  3. conduct a thorough investigation to determine if a third person is responsible for the loss so that subrogation can be instituted to recover, in addition to the money paid by the insurer, the deductible or other non-covered portions of the loss.

Insurance claims professionals are people who:

 

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

An insurer whose claims staff is made up of people who are less than Insurance Claims Professionals will be destroyed by expensive and counter-productive litigation.

The liability adjuster represents the insurer and deals directly with the insured. When a claim is made, the insurer provides an adjuster to help the insured understand the policy and comply with its conditions. The role of the liability adjuster is slightly different to that of the property adjuster. The liability insurance adjuster has a three-fold duty:

  1. to the insured, to protect him or her against exposure to liability to third parties as a result of an accidental tort that falls within the definition of “occurrence”;
  2. to the claimant, to treat him or her fairly and, if liability exists, to resolve the claim promptly without ignoring the duty to the insured; and
  3. to the insurer, before agreeing to resolve a claim, to establish that coverage exists for the loss under the terms and conditions of the policy, that the insured is liable to the third party, and the most reasonable resolution of the claim has been achieved.

The lesson for every claims person is to have empathy for the insured and the claimant recognizing that as a result the claims investigation will be completed with ease, the insured or claimant will assist the adjuster, and the claim will eventually be resolved with both the insurer and the insured will be satisfied with the result.

Barry Zalma, Inc.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment X

Thou Shall Not Pretend to be a Lawyer

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Some experienced and professional claims people know the law in their area of expertise better than most lawyers. Most claims people do not nor are they capable of pretending that they know the law. Whether the claims person knows the law of insurance contracts or tort law well, he or she is not a lawyer and should not do anything that even hints that the adjuster is acting as a lawyer.

Therefore, communications with an insured, dealing with coverage issues should be limited to the wording of the policy and the claim against the insured. If the case requires that legal authorities be cited to an insured or claimant to best communicate the position of the insurer the adjuster should retain the services of a competent coverage lawyer to write to the insured as the attorney for the insurer.

Many years ago some disreputable insurance companies rescinded policies of insurance as a matter of policy to avoid legitimate claims. The claims staff was instructed to rescind every policy that generated a large claim. When a competent policyholder’s lawyer sued on behalf of those whose policies were rescinded and took the deposition of the adjuster and destroyed the insurers’ position with a simple question: “Please spell rescission.” None could spell it correctly and those who could were stumped by the second question: “What elements must be proved to establish a valid rescission.”

A coverage lawyer would have no trouble answering the two questions. An untrained and inexperienced adjuster could not. The insurers who rescinded willy nilly we assessed punitive damages in addition to requiring them to pay the claims and most went out of business.

Adjusters should be adjusters and leave lawyering to lawyers.

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Claims Commandment IX

Thou Shall Document the Claim File

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Insurance claims handling is a person to person business where the claims handler, the insured and the claimant (if there is one) interact with each other. Because the interaction is not always perfect it is essential to document the interaction in the claims file whether hard paper or electronic and paperless. In addition to the fact that such documentation is good claims handling, it is required by most state insurance regulators. For example:

(1) maintain claim data that are accessible, legible and retrievable for examination so that an insurer shall be able to provide the claim number, line of coverage, date of loss and date of payment of the claim, date of acceptance, denial or date closed without payment. This data must be available for all open and closed files for the current year and the four preceding years;

(2) record in the file the date the licensee received, date(s) the licensee processed and date the licensee transmitted or mailed every material and relevant document in the file; and

(3) maintain hard copy files or maintain claim files that are accessible, legible and capable of duplication to hard copy; files shall be maintained for the current year and the preceding four years. [California Fair Claims Settlement Practices Regulations, 10 CCR 2695.3 (a)]

Adjusters, claims handlers and any other claims personnel who maintain “working” or “field” files, should be aware that those additional files are part of the file and records required to be kept by the Regulations and are subject to examination by the Commissioner.

The practice of being less cautious in the maintenance of “working” or “field” files should be discontinued. Every comment and note made in a claims file should be written as if it were addressed to “Dear Commissioner” or Dear Ladies and Gentlemen of the Jury.”

All file destruction practices should be reviewed to ascertain that no file will be destroyed less than five years after it is opened nor less than four years after it is closed. Insurers should also maintain procedures to never destroy a file if litigation has started or is anticipated until after the litigation is resolved.

A diary system for the destruction of old files should be established by the insurer and its claims personnel with a requirement to keep the files at least two years longer than the CDOI requires as an extra precaution.

If the files are scanned into computer media, microfilmed, or recorded in a method other than paper backups off site backup of the files should also be maintained.
If date stamps are not in use the insurer should provide a date stamp to each claims person so that the date of each action will be recorded in the file. If the insurer is “paperless” all incoming mail and documents must have imbedded in the image a date showing when the document was received.

A mail log should also be maintained to establish dates of mailing of each document. If the insurer uses computer generated e-mail and logging the computer should be programmed to record the date and time of each entry in such a manner that the employee cannot modify or change the dates of any entry. All e-mail communications must be saved for up to five years in a searchable database or in connection with the electronic claims file.

Further, all electronic records must be kept in such a manner that would allow a complete copy of the electronically recorded record to be printed out in full so that it is available to produce to the CDOI or in discovery if litigation occurs. Every computer record should be kept with on-site and off-site back-ups of the records.

Every insurance regulator will conduct audits of insurers doing business in their state. Failure to properly document files as required by good claims handling, statutes or regulations will find the insurer facing fines and bad reports on the ability of the insurer to properly complete the promises made by the insurance policy. Also, unfortunately claims people must spend a great deal of their time documenting the file because about three percent of all claims result in litigation against the insurer. It is essential to every litigation that the insurer has a record of everything they did to protect the insurer against false allegations of bad faith.

The professional claims person will log every telephone call, keep every e-mail and letter in the claims file, and document everything done to deal with the claim.

One way to protect the claims handler and the insurer is Barry Zalma’s E-Book:

Zalma on California Claims Regulations – 2011

This book was designed to assist insurance personnel who do business in the state of California. It will assist all insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, public insurance adjusters, policyholders and counsel for policyholders working with insurers doing business in California. All insurers doing business in California must comply with the requirements of California Fair Claims Settlement Practices Regulations (the “Regulations”) or face the ire of, and financial punishment from the California Department of Insurance (“CDOI”).

The state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath or that the claims person has read and understood the Regulations.

It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should be familiar with the Regulations since they set a minimum standard for claims handling.

Whether the insurer fulfilled the requirements or not can assist the lawyer in evaluating the exposure faced by an insurer or policyholder client. The existence of compliance with the Regulations is important to the evaluation of a claim for breach of the covenant of good faith and fair dealing and evaluation of a claim of damages resulting from the tort of bad faith.

The Regulations impose on all insurance claims personnel the requirement that they read and understand the Regulations or attend an annual training program no later than September 1 of each year. They require that insurers ascertain that every employee involved in any way in the claims process is trained about the Regulations or has submitted a sworn statement that he or she has read and understands the Regulations. The Regulations even require that the insurance claims managing executive attest, under oath, that each employee has been trained with regard to and/or understands the Regulations.

The E-book is available at http://www.zalma.com/REGS.htm

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Claims Commandment VIII

Thou Shall Not Suffer Fraud to Succeed

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Insurance fraud in the U.S. is epidemic. Insurance fraud continually takes more money each year than it did the last from the insurance buying public. Estimates of the extent of insurance fraud in the United States range from $87 billion to $300 billion every year. In truth no one really knows the extent of insurance fraud because most insurance fraud schemes succeed without the insurer even suspecting that it is being defrauded.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. No one will ever place an exact number on the amount lost to insurance fraud but everyone who has looked at the issue know – whether based on their heart, their gut or empirical fact of 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-insurers drops logarithmically.

A report from the Insurance Services Office (ISO) noted:

  1. Insurers consider fraud “a serious problem” but their companies’ anti-fraud efforts only “moderately effective.”
  2. Sixty-eight percent say their companies’ anti-fraud programs address claims fraud “thoroughly,”
  3. 19 percent say they address premium fraud “thoroughly,”
  4. 25 percent say they address application fraud “thoroughly,”
  5. Slightly more than one-third (37 percent) think the amount of fraud their companies have experienced has increased over the past three years.
  6. Forty-two percent think that 21 percent or more of total claims contain “soft” fraud, but only 6 percent think that 21 percent or more of claims contain “hard” fraud.
    1. They agree that fraud is most prevalent in the private passenger auto and workers compensation lines of business.
  7. Eighty-two percent of the 353 insurers responding to the survey say they have an anti-fraud program at their companies.
  8. One hundred percent of the large insurers, 91 percent of the medium insurers, and 64 percent of the small insurers have an anti-fraud program.
  9. Sixty-three percent of the companies say that the state or states in which their companies do business require an anti-fraud plan.
  10. However, only 13 percent of insurers doing business in these states (n=213) consider state requirements and guidelines “very useful.”

Because fewer than one-third of respondents answered questions about their companies’ expenditures, estimates of industry-wide spending on anti-fraud efforts are not reliable. The response rate suggests that insurers are unable to isolate anti-fraud expenditures in their budgets or unwilling to share what figures they have with other insurers and the general public.

What Do The Results of the Effort Against Fraud Really Show?

Insurance fraud prosecutions and investigations are anemic. What the reports do not tell is that most of those convicted were sentenced to probation. Few made full restitution and those who served time were few and far between. Insurance criminals are laughing at the insurance industry, the police agencies, the Fraud Divisions and the prosecutors. If they are one of the few criminally convicted, they face an average sentence of only five years probation and 60 days in jail. Jail time is usually served on weekends so that the convicted fraud perpetrators can still ply their fraudulent trade on weekdays.

For insurance fraud to be prosecuted the insurer must do the work to complete a thorough investigation that can be presented to a prosecutor because police, federal investigators, prosecutors and even Fraud Division investigators will do nothing until the case is presented to them in detail by an insurer. Every person involved in the business of insurance must understand that insurance fraud is the orphan child of the criminal justice system. Insurance fraud will never be totally defeated. It will be reduced and may be made unprofitable to the perpetrators when the public and prosecutors recognize that insurance fraud is a serious problem that effects their own financial condition.

Everyone involved in the business of insurance and everyone who buys insurance must make it clear that they are angry with what is happening to their insurance premium dollar. When I, and everyone who has ever purchased a policy of insurance, hear that $300 out of every $1,000 we pay in premium goes to a criminal we should all want to scream out the window, as did the character in “Network” — “I’m mad as Hell, and I’m not going to take this any more!”

What is Fraud?

Insurance fraud is a tort, a civil wrong. Black’s Law Dictionary, 6th Edition, defines fraud as:

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

In simple language, fraud can be defined as a lie told for the purpose of obtaining money from another who believes the lie to be true. Civil insurance fraud exists if an insured:

  • makes a representation to the insurer that the insured knows is false;
  • conceals from the insurer a fact he or she knows is material to the insurer;
  • makes a promise he or she does not intend to keep; and
  • makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.

Investigating Fraud

The beginning of a thorough insurance fraud investigation is the interview. The interview can be informal, it can be recorded with an audio recording device, it can be recorded with a handwritten statement signed by the witness or it can be recorded by a certified shorthand reporter. The interview is a structured conversation. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps. Interviews are everywhere. Interviewing is an art. Use of methods similar to those used by scientists conducting experiments is a more accurate description of interviewing.

Conclusion

Whenever fraud is suspected it is the duty of the insurer, its claim staff and its special investigation unit (SIU) to conduct a thorough investigation. If a preponderance of the evidence gathered reveals that a fraud has been committed: that there was a material misrepresentation or a concealment of a material fact, made with the intent to deceive the insurer, that the insurer was actually deceived, and that the insurer was damaged by the deception, the claim must be rejected. If a preponderance of the evidence does not exist or establishes there was no fraud the claim should be paid.

Zalma on Insurance Fraud – 2012

If you wish to know everything there is to know about insurance fraud, Barry Zalma has totally rewritten his seminal E-Book on insurance fraud and has added over 600 pages to the original book. It is available at http://www.zalma.com/zalmabooks.htm.

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

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

It is the purpose of the E-book to provide information to those who are engaged in the effort to reduce insurance fraud. It will provide information for the lawyers representing insurers so that they can adequately advise their clients who are victims of the crime of insurance fraud.

This E-book will provide information for insurance claims investigators, special insurance fraud investigators working at insurance company Special Investigation Units (SIU), Fraud Bureau Investigators, and Prosecutors will have the information needed to allow prosecution of insurance criminals to proceed. Prosecutors will also have sufficient information to understand the importance of the crime and the need to reduce the crime by effective prosecution and punishment of the insurance fraud perpetrators.

By including the full text of decisions from courts of appeal, state supreme courts, and federal courts across the country the reader can understand what happens after the investigation is completed in order to better complete the investigation.  

Since the effort to reduce insurance fraud requires the assistance of courts – both civil and criminal – the prudent fraud investigator, insurance adjuster, insurance attorney or insurance Special Investigation Units, and insurance management will have the information to deal with state investigators and prosecutors. It is also necessary to read the full text of decisions of the courts of appeal to fully understand the facts gathered by the investigators and prosecutors.

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Coverage Cannot Be Created by Estoppel

When Providing a Defense to Questionable Coverage Always Reserve Rights

Zalma on Insurance Makes Top 50

The Wisconsin Supreme Court reviewed a published decision of the court of appeals, Maxwell v. Hartford Union High School District, 2010 WI App 128, 329 Wis. 2d 654, 791 N.W.2d 195, that insurance coverage had been created by virtue of the insurer’s failure to issue a reservation of rights letter during its unsuccessful defense of the District in a contract lawsuit. The Supreme Court was called upon to decide whether an insurer’s failure to issue a reservation of rights letter is sufficient to defeat, by waiver or estoppel, a coverage clause in an insurance contract that would otherwise justify the insurer’s denial of coverage in Dawn L. Maxwell v. Hartford Union High School District and Hartford Union High School, 2012 WI 58 (Wis. 05/30/2012).

FACTUAL BACKGROUND

Dawn Maxwell (Maxwell) began her employment with the District in 2000, always serving in administrative capacities. She entered into a new employment contract with the District in 2006. It covered the time period from July 1, 2006, to June 30, 2008. In January 2007, however, Maxwell was informed that her position would be eliminated at the end of the 2006-2007 school year. After a series of back and forth negotiations and events, including an interim settlement agreement, Maxwell was told that her employment would end on August 31, 2007.

 On August 30, 2007, Maxwell filed a complaint against the District. Hartford Union High School had a $10,000,000 Public Entity Liability Insurance Policy from Community Insurance Corporation that was in effect from October 1, 2006 to October 1, 2007.

 In early September, CIC assigned Attorney Levy to represent the District in the Maxwell case. Attorney Levy entered a formal appearance on September 21, but had been present in an unofficial capacity at the TRO hearing on September 5. Attorney Levy remained an attorney of record for the District until August 2009. During this time, Attorney Levy did not represent CIC; and neither CIC nor Aegis (on CIC’s behalf) sent a reservation of rights letter to the District or Attorney Mohr.

 On June 11, 2008, after receiving numerous filings, the circuit court granted partial summary judgment to Maxwell on her claim for breach of contract. It awarded compensatory damages of $103,824.22 at a hearing September 8.

 On August 18, 2008, Knee, litigation manager for CIC via Aegis, sent a response by email–informing Mohr that CIC was not liable for any judgment for damages due under Maxwell’s performance contract or any settlement for lost wages or lost benefits. Knee notified Mohr that CIC would continue to defend the District, through appeal, but it was not liable for damages excluded from coverage in the policy.

Analysis

The CIC policy, clearly and unambiguously, excluded coverage “for that part of any award or settlement which is, or reasonably could be deemed to be, compensation for loss of salary or fringe benefits of your employee(s).” The trial court had no difficulty determining that the exclusion applied to the monetary damages claimed by Maxwell. That the CIC policy excludes coverage was never in dispute.

The general rule is well established that the doctrine of waiver or estoppel based upon the conduct or action of the insurer or its agent is not applicable to matters of coverage as distinguished from grounds for forfeiture.  While estoppel may be used to prevent an insurer from insisting upon conditions which result in forfeiture, estoppel has not been used in Wisconsin or in the majority of states as a means where the scope of coverage of an insurance policy can be expanded to include coverage which was not provided for or was excluded in the contract.

As a general rule, conditions and terms, either of an inclusionary or exclusionary nature in the policy, go to the scope of the coverage or delineate the risks assumed, as distinguished from conditions and terms which furnish a ground for the forfeiture of coverage or defeasance of liability.

An insurer is liable for all risks it agrees to assume in the insurance contract. Exclusions in the contract are written to limit coverage. The insurer bases premiums on anticipated risks and the realization that ambiguities in the policy are likely to be construed against the insurer. An insured is entitled to the coverage it has paid for, provided that it does not forfeit that coverage by violating some provision of the contract. The Wisconsin Supreme Court noted that a contract of insurance should not be rewritten to bind the insurer to a risk it did not contemplate and for which it has not been paid. In addition the Supreme Court concluded that waiver and estoppel cannot be used to supply coverage from the insurer to protect the insured against risks not included in the policy or expressly excluded therefrom, for that would force the insurer to pay a loss for which it has not charged a premium.

Estoppel may prevent an insurer from enforcing certain policy provisions against its insured. However, even where the relationship of insurer and insured exists, estoppel cannot be used to enlarge the coverage of an insurance policy, for then the effect would be to create a new contract providing coverage for which no premium has been paid.

Insurers have multiple duties to their insureds. These duties include a duty to defend their insureds and a duty to act in good faith toward their insureds. When insurers breach these duties that arise out of the insurance contract, they may be subject to a measure of damages not limited by the contract. Liability insurance coverage usually includes a duty to defend and a duty to indemnify. The duty to indemnify and the duty to defend are separate contractual obligations. A policy may provide one without providing the other. When a contract imposes a duty to defend, however, that duty is broader than the duty to indemnify.

In this case, CIC provided a defense – fulfilling its duty to defend the District. While the District raised several claims in its third-party complaint against CIC, the issue before this court is whether CIC’s failure to send a reservation of rights letter while defending the District is enough, under waiver or estoppel, to prevent CIC from invoking its defense of noncoverage. CIC’s failure to issue a reservation of rights letter in this case did not constitute a breach of the duty to defend or bad faith.

Regardless of its conclusion the Supreme Court emphasized the importance of insurers communicating with their insureds. An insurer is in a superior position to the insured in relation to the formation and interpretation of the insurance contract.  It warned that its opinion must not be interpreted as a license for insurers not to communicate forthrightly with their insureds –especially when insurers dispute coverage. It certainly would have been better practice for CIC to send a reservation of rights letter in this case. Its failure to do so has created ill will and completely overshadowed CIC’s extensive costs in providing a defense. As CIC conceded in oral argument, this case would not be here if CIC had sent a reservation of rights letter. The lesson here is that CIC could have avoided the costs of this appeal by issuing a reservation of rights letter. A reservation of rights letter can not only head off litigation but also preserve forfeiture defenses at a time when an insurer may not know whether such a defense exists. As we have clearly stated, forfeiture defenses can be waived, because the insured has purchased the coverage the insurer seeks to deny.

The Supreme Court concluded that the failure to issue a reservation of rights letter cannot be used to defeat, by waiver or estoppel, a coverage clause – as distinguished from grounds for forfeiture – in an insurance contract.

ZALMA OPINION

This is a lawsuit and appeal all the way to the Supreme Court of Wisconsin that could have been avoided by following good claims handling procedures and providing a reservation of rights letter to the plaintiff advising that although defense would be provided if the damages claimed were proved then the insurer would refuse to pay indemnity. The claims people failed to do so, provided the defense without reservation, and when the verdict came in they refused to indemnify since the policy provided no coverage for the judgment entered against the insured.

Insurers, who think they save money, by laying off competent and experienced adjusters and replace them with young, inexperienced, untrained and inexpensive adjusters will learn — as more of these cases work their way through the courts — that the inexpensive adjusters are more expensive, to a factor of twenty, than the old prows they let go. The insurer needed to go to the Supreme Court to avoid paying damages for which it collected no premium and possible bad faith damages when the majority refused to make coverage by claimed estoppel although the insurer did not convince all of the justices.

The lesson is clear: Only use experienced, well-trained, knowledgeable and professional adjusters.

 

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment VII

Thou Shall Never Lie to an Insured

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

Insurance is considered a business of the utmost good faith. The principle of utmost good faith (uberrima fides) was, I believe, first stated in the British House of Lords by Lord Mansfield in 1766 in a case where he concluded that the duty of good faith rests upon both the insured and the insurer and held the insurer to its knowledge at the time the policy was signed. The insurer, like the insurers, took the premium, knowing the condition of the security provided, and could not upon loss claim the insurer was deceived. [Carter v. Boehm, 3 Burr 1905 (1766)]

As the old maxim says “honesty is the best policy.” There is no excuse for an insurance claims professional to lie to an insured. Not only is a lie to an insured a failure to act with the utmost good faith, it is an action fraught with danger. Keeping up a consistent lie is almost impossible. All definite statements can be corroborated or proven false by further investigation. If a lie, the lie will be proved.

Lies to insureds — even when done for what the claims person believes is a good purpose — will always cause the insurer problems. Lies created on the run invariably include internal contradictions. A lie told to an insured can be, and most certainly will be, used by the insured to prove that the actions of the insurer were made in bad faith such that the insurer will be punished with punitive damages.

In Allison v. Fire Insurance Exchange, 98 S.W.3d 227 (Tex.App. Dist.3 12/19/2002) a major punitive damage award was obtained by a plaintiff who claimed that the adjuster lied to her about the authority to resolve a claim for mold damage. Although the case was reversed because of an excess verdict the lie cost the insurer a great deal of money when the case was eventually settled.

Claims people get into trouble when they fail to tell the truth to the insured about the following:

  1. The check is in the mail.
  2. There is no problem with coverage.
  3. I will pay the fees of the lawyer of your choice.
  4. The claim is being reviewed by senior management.
  5. I need another 30 days to complete my investigations.
  6. I need a copy of your policy.
  7. I need you to go to all of the places where you bought the stolen property to get a receipt.
  8. I will hire a contractor to rebuild your house.
  9. I don’t have authority to settle your claim.
  10. I don’t need to do an investigation to know your claim is not covered.
  11. Any other statement that is not true.

California Insurance Code Section 790.03(h)(1) provides:

 Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:

        1.    Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

Similarly, the California Code of Regulations, 10CFR 2695.4 provides:

(b) No insurer shall misrepresent or conceal benefits, coverages, time limits or other provisions of the bond which may apply to the claim presented under a surety bond.

This should be self-evident. It is a statement of prudent and common claims handling. Although this Regulation seems to apply only to surety bonds it also applies to any type of insurance. Nothing can be gained by an insurer concealing or misrepresenting information about the policy or the surety bond. Claims staff should be warned that violation of this regulation will be grounds for discipline and almost certain loss of employment.

On the other hand, proving that insurers and insured play on a different set of rules, a mere oversight or honest mistake will not cost an insured his or her coverage; the lie must be wilful. [Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 95-97, 3 S. Ct. 507, 515-16, 28 L. Ed. 76, 82 (1884)]

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment VI

Thou Shall Document The Claims File

Zalma on Insurance Makes Top 50

This series of claims commandments is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Most insurance regulators require that every insurer maintain claim files that are subject to examination by the regulator or by his or her duly appointed designees. The regulator requires that the claim files must contain all documents, notes and work papers (including copies of all correspondence) which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed and the insurer’s actions pertaining to the claim can be determined. Similarly, insurance company management needs the same ability to determine that the claims people are doing what they expect to be done to keep the promises made by the insurance policy.

In simple language everything the claims person does should be recorded in the claims file whether kept in a computerized system or a paper file. Every document collected, every photograph taken, every video recorded, every letter written, every e-mail sent, notes of every telephone conversation,should be in the claims file. Every comment and note made in a claims file should be written as if it were addressed to “Dear Commissioner” or Dear Ladies and Gentlemen of the Jury.”

The information in the claims file must be maintained so that the claim data are accessible, legible and retrievable for examination so that an insurer shall be able to provide the claim number, line of coverage, date of loss and date of payment of the claim, date of acceptance, denial or date closed without payment. This data must be available for all open and closed files for the current year and for, at least, the four preceding years.

All file destruction practices should be reviewed to ascertain that no file will be destroyed less than five years after it is opened nor less than four years after it is closed. Insurers should also maintain procedures to never destroy a file if litigation has started or is anticipated until after the litigation is resolved.

A diary system for the destruction of old files should be established by the insurer and its claims personnel with a requirement to keep the files at least two years longer than the regulator requires as an extra precaution.

If the files are scanned into computer media, microfilmed, or recorded in a method other than paper backups off site of the files should also be maintained. The claims person must record in the file the date the claims person received, date(s) the document was processed and date the licensee transmitted or mailed every material and relevant document in the file and maintain hard copy files or maintain claim files that are accessible, legible and capable of duplication to hard copy. Files must be maintained, at least, for the current year and the preceding four years.

If date stamps are not in use the insurer should provide a date stamp to each claims person so that the date of each action will be recorded in the file. If the insurer is “paperless” all incoming mail and documents must have imbedded in the image a date showing when the document was received. A mail log should also be maintained to establish dates of mailing of each document.

If the insurer uses computer generated e-mail and logging the computer should be programmed to record the date and time of each entry in such a manner that the claims person cannot modify or change the dates of any entry. All e-mail communications must be saved for up to five years in a searchable database or in connection with the electronic claims file.

All electronic records must be kept in such a manner that would allow a complete copy of the electronically recorded record to be printed out in full so that it is available to produce to the regulator or the insurer’s supervisory personnel or in discovery if litigation occurs.

The key for the claims person is, if in doubt about putting information into a claim file, always put the information in and never fail to record actions that relate in any substantial way to the file, the adjustment of the claim or the investigation conducted by the claims person.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Zalma’s Insurance Fraud Letter — June 1, 2012

Go to Jail, Go Directly to Jail

Continuing with the eleventh issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) it reports on June 1, 2012 Barry Zalma comments on why, even after being convicted of insurance fraud, an insurance criminal will attempt to reduce his or her sentence to one where little or no time is spent in jail. The Sixth Circuit Court of Appeal did not fall for the convicted fraud perpetrator’s ploy and kept him in jail.

ZIFL also reports on Allstate’s suit against 52 insurers for insurance fraud seeking a return of the money paid to those it alleges defrauded Allstate and reports on the release from prison of Michael Segal, the convicted fraud perpetrator who was convicted in connection with charges that he looted Near North’s premium fund trust account of $35 million for personal and company use. ZIFL also reports on a fraud by an insurerm holeinone.com, who surprised Troy Peissig who thought he won a $18,000 hole-in-one contest at a charity tournament only to be disappointed because he wasn’t paid a dime nearly two years after making the 170-yard shot.

The issue also ends with an “Heads I Win, Tails You Lose” story on a true story of a lawyer who was finally caught after scuttling several boath and tried to get even more by sinking a yacht.

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

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

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

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com.
If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

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Claims Commandment V

Thou Shall Communicate With the Insured

This is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Zalma on Insurance Makes Top 50

The key to resolving insurance claims amicably is constant and substantive communication between the insured and the adjuster. Communication about the claim on a regular basis allows the insured and the adjuster to build rapport.

Building rapport is a fundamental aspect of human communication.  Being able to build rapport could be viewed as a basic element of social intelligence. The professional should first spend time establishing rapport and the confidence of the person being interviewed. there are four elements of building rapport.

People who wish to build rapport should strive to:

  1. build trust, such as demonstrating honesty, reliability, and fairness, understanding another person’s views, such as making statements that the professional understands how the other person feels,
  2. show respect, that is be polite and express gratitude, and
  3. be the kind of person who others would like by stating a willingness to be empathetic and altruistic.

A claims situation where the adjuster fails to establish rapport with the insured is doomed to fail. Rapport is a relationship marked by harmony, conformity, accord, or affinity.

Rapport can be established by the professional complimenting the office decor if  possible to do so honestly. However, if the insured is relegated to a drab cubicle, rapport can be established by the professional commiserating with the difficulty of working in less than comfortable surroundings. The adjuster can gain rapport with the insured might also explain that his employer also forces the  adjuster to work in a similar situation.

The adjuster, to establish rapport, should delay questioning by making an attempt to find mutual interests and concerns with the person to be interviewed. The task of establishing rapport can take minutes or hours. It is imperative that to complete a successful adjustment sufficient time must be expended establishing rapport before the serious and detailed part of the interview begins. Regardless of the skill of the adjuster, if rapport is not established, the goal of the adjustment will not be reached.

Once rapport is established it is essential that the adjuster maintains rapport with the insured by setting up an ability to communicate regularly with the insured. The insured should be provided with the adjuster’s office telephone number, the adjuster’s cell phone number, and an e-mail address where the insured can reach the adjuster to resolve any questions that might come to mind.

The adjuster, even if not asked a question by the insured after rapport is established, should mark a diary to communicate with the insured at least once every thirty days even if the communication is nothing more than a telephone call that simply asks how the insured is doing. If possible, the adjuster should also fill in the insured on the progress of the claims investigation and any events happening.

Contact in person is preferable but case loads for most modern insurers does not allow for continuous personal contact. If such contact is not available the contact should be by telephone, mail, or e-mail.

For example, if the insured has been sued by a third party, the adjuster should explain what is happening in the lawsuit. When defense counsel files an answer to the suit the adjuster should deliver a copy of the answer to the insured, explain the meaning of the language in the answer, and what defense counsel expects to do next to protect the interests of the insured. Each communication should be noted in the file. At least every 30 days some communication must pass between the adjuster and the insured and noted in the adjuster’s file whether the communication is substantive or merely an effort to keep up the rapport between the insured and the adjuster.

For example, if the claim relates to a fire at the insured’s home, the adjuster, after establishing rapport should present to the insured a schedule of the time needed to determine the scope of damage, set a time for meeting with the insured, an independent contractor, and the insured’s contractor. The meeting should take place quickly with everyone ready to work. The adjuster, the experts and the insured should then agree on the scope of loss and the adjuster should explain how long it will take the contractors to create an estimate of repair. When the estimates arrive the adjuster should prepare a comparison of the estimates and meet with the insured to determine the differences between the two or more contractors. The insured and the adjuster should then agree on the contractor whose estimate covers the entire loss and a contract should be agreed to repair the house. As repairs proceed the adjuster should inspect the work and regularly advise the insured of the progress of the repair regularly until the repair is completed.

States, by Regulation, also require regular communication and will punish the insurer if the adjuster fails to communicate.

The Regulations set minimum, not maximum, standards. Adjusters should, and are expected to, exceed the minimum standards set by the Regulations. Insurers now find — in bad faith litigation — that trial lawyers will posit violation of the minimum standards set by the regulations as evidence of bad faith sufficient to allow a trier of fact to assess tort damages against the insurer. Since the Regulations are stated to be minimum claims handling standards, failure to comply will give a judge or jury the opportunity to contend that the failure to comply is evidence of tortious conduct sufficient to support a claim that the insurer committed the tort of bad faith.

The adjuster must be familiar with the Regulations in his or her state with regard to communications to the insured and work to exceed the requirements. The minimum standards set by the various states are just that: minimums. The adjuster who establishes and maintains rapport with the insured will resolve more claims quickly and without difficulty and will never face the wrath of a supervisor or auditor from the state.

The adjuster that fails to communicate regularly and substantively will have difficulty reaching agreement with the insured.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Claims Commandment IV

Zalma on Insurance Makes Top 50

This is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Understand The Policy

Insurance policies are contracts. To understand insurance claims the adjuster must
understand how all contracts, and specifically insurance contracts, are interpreted.
Rules of contract interpretation have developed over the last 300 years and are
applied by courts with the intent to fulfill the desires of all parties to the contract.
People and judges who are not conversant in insurance and the interpretation of
insurance contracts believe that the insurance policy is difficult to read and
understand.

As one court said in Delancy v. Rockingham Farmers Mutual, 52 N.H. 581 (1873).:

This [policy], if read by an ordinaryman, would be an inexplicable riddle, a mere flood of darkness and confusion … should some extremely eccentric person attempt to examine the involved and intricate net in which he was to be entangled, he would find that it is printed in such small type and in lines so long and crowded as to make the perusal of the document physically difficult, painful and possibly injurious.

The following rules govern the construction of contracts of insurance:

  1. If the terms of a promise are in any respect ambiguous or uncertain, it must beinterpreted in the sense in which the promisor believed at the time of making it,that the promisee understood it.
  2. If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. However, if the language of a policy or contract is subject to two or more reasonable interpretations, it is ambiguous.
  3. When a policy is interpreted, the provisions of an endorsement control the interpretation over the body or declarations of a policy when the two are in conflict.
    1. For example, if the language written to limit an insurer’s liability to the appraised value appears on the declarations page, while the valuation  condition that provides for an actual cash value adjustment appears on a form endorsed to the contract, the endorsement’s language would  control the interpretation of the contradictory language of the policy.
    2. However, the fact that the two sentences could have been written more clearly, did not mean that they were ambiguous.
  4. Consider  the reasonable expectations of the insured but, when doing so, include the understanding that every insurer is presumed to be acquainted with the practice of the trade he insures.
    1. More than 150 years ago the US Supreme Court in Hazard’s  Administrator v. New England Marine Insurance Co., 33 U.S. 557 (1834) adopted the rule.
    2. It concluded that “no injustice is done if insurers are presumed to know their insureds’ industry because it is part of their ordinary business.”
  5. In MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (2003), the California Supreme
    Court first stated the primacy of the “reasonable expectations” test when interpreting insurance policies. It decided that the reasonable expectations of the insured required coverage to exist for an ordinary act of negligence even if it involved pollutants.
    1. Where the language of the policy is clear, the language must be read accordingly, and where it is not, it must be read in the sense that satisfies the hypothetical insured’s objectively reasonable expectations.
    2. If you find the term is clear and unambiguous there will be
      no need to apply the reasonable expectations test.
    3. If you find any ambiguity, or determine the insured should be paid, the application of the reasonable expectations test will give a court the ability to construe the policy against the insurer and in favor of payment of the insured’s claim.
    4. Most states will apply the plain meaning test.
  6. Long-established insurance law supports the conclusion that insurers are
    presumed to know and be bound by the meaning of the terms used and customs
    adopted in their insureds’ industries.

Insurers, and insurance claims professionals, faced with a need to understand and apply the wording of a policy of insurance must now conduct their investigation to include:

 

  • a detailed investigation of the facts of the loss and policy acquisition;
  • a determination of the expectations of the insured and the insurer at the time the policy was acquired;
  • a determination of the purposes for which the policy was acquired; and
  • an examination of all communications between the insurer and the insured or their representatives.

To do so the insurer must at least conduct a detailed interview of the insured, the claimants, the brokers, and the underwriters. When there is a dispute over the meaning of common terms, the court will often find it necessary to inform upon the understanding of persons in the particular business insured so that the judge must consult the opinions of experts.  The expert testimony can be helpful in establishing that the insured’s or the insurer’s interpretation of the term at issue is different from that advanced by the other was reasonable. In California, this may be sufficient for a party to prevail because although insureds are treated differently so that even if [the insurer’s] interpretation is considered reasonable, it would still not prevail, for in order to do so it would have to establish that its
interpretation is the only reasonable one.

An insurance claims professional can never make, or recommend, a decision with regard to an insurance claim until he or she has read the entire policy as it relates to a loss, interpret the policy wordings in accordance with the rules of interpretation stated above, conduct a complete and thorough investigation to determine the reasonable expectations of the insured, and if unable to make a decision seek the advice of competent coverage counsel.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment III

Zalma on Insurance Makes Top 50

This is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Thou Shall Communicate Often

Insurance claims is a service business. The claims person provides a service to the insured and the insurer. Communication is essential to providing the service promised by the insurance policy.

In some states, like California, communications is required by regulation:

Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured’s policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer’s additional liability. [10 CCR 2695.4 (a)]

This means that the initial written contact with an insured in a first party property claim should advise the insured of all benefits, coverage, time limits, or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by a first party insured.

When a claims person receives any communication from an insured, third party claimant, or a representative of the insured or claimant regarding a claim that reasonably suggests that a response is expected, should immediately after receipt of that communication, furnish the claimant with a complete response based on the facts as then known by the claims person. Some regulations allow the claims person up to 20 days to respond. Good claims handling requires an immediate response. If the response is oral rather than written it should be noted in the claims person’s file or log.

Upon receiving notice of claim, every insurance claims person should immediately do the following :

 

  1. Acknowledge receipt of such notice to the claimant or insured.
  2. If the acknowledgement is not in writing, a notation of acknowledgement must be made in the insurer’s claim file and dated.
  3. Provide to the claimant or insured necessary forms, instructions, and reasonable assistance, including but not limited to, specifying the information the claimant must provide for proof of claim;
  4. Begin any necessary investigation of the claim.
    1. The investigation must be a “real,” meaning the claims person or investigator must actually contact the claimant, the witnesses and start collecting the documents needed to complete the claims investigation. Investigation and must be started immediately after receiving notice of claim.
    2. Merely reading a policy wording and notice of claim is not the beginning of an investigation or an investigation at all.
  5. Upon receiving proof of claim, every insurance claims person should  immediately accept or deny the claim, in whole or in part.
    1. The amounts accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety.
    2. Some states allow up to 40 calendar days to respond.
  6. If more time is required to determine whether a claim should be accepted and/or denied in whole or in part, the claims person should provide the claimant or insured written notice of the need for additional time.
    1. The written notice should specify any additional information the insurance claims person requires in order to make a determination.
    2. The written notice should state any continuing reasons for the insurer’s inability to make a determination.
    3. Thereafter, the written notice should be provided at least every thirty calendar days until a determination is made.
    4.  If the determination cannot be made until some future event occurs, then the claims person should comply with this continuing notice requirement by advising the claimant and/or insured of the situation and providing an estimate as to when the determination can be made.
    5. Effective diary systems are also essential to professional claims handling or the Regulations will be violated with regularity.
  7. Every claims person must conduct and diligently pursue a thorough, fair and objective investigation and should not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.

The claims person’s obligation is not limited to communication with the insured or the claimant. The claims person and the insurer have an obligation to communicate with the state, police agencies, or prosecutors. In California, and most states, such a communication is absolutely immune from suit. Pursuant to section California Civil Code Section 47(b), a privilege is stated that bars a civil action for damages for communications made “[i]n any (1) legislative proceeding, (2) judicial proceeding, (3) in any other official proceeding authorized by law, or (4) in the initiation or course of any other proceeding authorized by law and reviewable pursuant to [statutes governing writs of mandate],” with certain statutory exceptions.

The privilege established by this subdivision often is referred to as an “absolute” privilege, and it bars all tort causes of action except a claim for malicious prosecution. “The absolute privilege in section 47 represents a value judgment that facilitating the “utmost freedom of communication between citizens and public authorities whose responsibility is to investigate and remedy wrongdoing” is more important than the “ ‘occasional harm that might befall a defamed individual.’ “ (See Imig v. Ferrar (1977) 70 Cal. App. 3d 48, 55-56 [138 Cal. Rptr. 540].)”

To fulfill Commandment III the claims person must communicate promptly and often with the insured, the claimant and the insured (if a third party claim) and counsel for each. In doing so the claims person establishes a rapport with the insured and/or claimant and will make resolution of the claim easier. No claims person should ever misrepresent or conceal benefits, coverages, time limits or other provisions of the policy from the insured or the claimant.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Claims Commandment II

Zalma on Insurance Makes Top 50

This is an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

Commandment II

Thou Shall Always Conduct A Thorough Investigation

Investigation Is

Investigation is a search for truth. It is an art form where facts are established. It has been defined by the state of California, for example, as follows:

Investigation” means all activities of an insurer or its claims agent related to the determination of coverage, liabilities, or nature and extent of loss or damage for which benefits are afforded by an insurance policy, obligations or duties under a bond, and other obligations or duties arising from an insurance policy or bond. [California Code of Regulations, 10CFR2695.2(k)]

Notice provisions in insurance policies serve the important function of allowing the insurer the opportunity to make a timely and thorough investigation of the insured’s claim. American States Insurance Co. v. National Cycle, 260 Ill. App. 3d 299, 310-11, 631 N.E.2d 1292, 197 Ill. Dec. 833 (1994); Twin City Fire Insurance Co., 266 Ill. App. 3d at 7.

Courts will not subject an insurance company to a choice between liability under a bad-faith-failure-to-investigate theory for publication of a denial of coverage without an adequate investigation, and liability for a constructive denial imposed after it has conducted a more thorough investigation that confirms an earlier determination of no coverage, on the theory of delay coupled with a wrongful intent. Rather, courts required that an insurer complete a thorough investigation before it makes a decision with regard to a claim for defense or indemnity under an insurance policy. Initial conclusions based on a bare reading of a law suit or initial investigative interview are not enough.

Although an insurance company is entitled to make a thorough investigation to determine whether there is coverage under its policy of insurance, the company acts at its peril in refusing to defend its insured in that, if it is subsequently determined that the company erroneously denied coverage, the company will be liable for damages for breach of its agreement under the policy. Therefore, insurers should conduct their thorough investigation as soon as possible and if a defense is required before the investigation can be completed provide a defense to the insured under a reservation of rights.

When an insurer denies or delays payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability, the insurance company will not be liable in bad faith even though it may be liable for breach of contract. One court gave the following instruction to a jury:

In determining whether or not an insurance company had a genuine dispute as to whether or not a loss was covered, you may consider among the following: (1) Whether the insurance company was guilty of misrepresenting the nature of the investigation; (2) Whether the insurance company adjusters and investigators lied during their depositions or to the insured; (3) Whether the insurance company dishonestly selected its experts; (4) Whether the insurance company experts were unreasonable; and, (5) Whether the insurance company failed to conduct a thorough investigation.” [McCoy v. Progressive West Insurance, Co., 90 Cal.Rptr.3d 74, 171 Cal.App.4th 785 (Cal.App. Dist.2 02/04/2009)]

An insurer has a duty to conduct an appropriate and careful investigation prior to making a decision on a claim. However, if after conducting a thorough investigation of the facts and circumstances giving rise to a claim, the insurer can reasonably conclude that the claim is debatable or questionable, a there can be no bad faith even though it refused to pay the claim incorrectly.

How to Conduct a Thorough Investigation

The investigative interview is a structured conversation between a trained and experienced interviewer and an person who has no training in the interview. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps. Interviews happen everywhere. Interviewing is performed by almost everyone. Since interviewing is an art the most effective interview is one performed by someone with knowledge of the art.

Investigation to gather information is an artistic endeavor. The art is supplemented with scientific technique obtained from criminal investigators and professional psychologists but is performed by individuals without thinking about what it is they are doing. The art of the investigation must be honed until it becomes second nature much as a skilled typist does not think where to put his or her fingers while typing.

The art of uncovering the truth by a professional draws heavily from the police sciences. The police science of interrogation draws heavily upon human nature and the skills of the conversationalist. Because the interrogation is formal, in a confined space and conducted by a person in authority like a police officer or a lawyer examining a witness under oath in court, the techniques used are more formal and controlled than an insurance investigation.

Insurance investigators are compelled to get the information they need by intelligence, wit, skill and experience. They put people at ease. The skill of the professional causes the person being investigated to want to give information to the investigator. The most important skill of the professional is to cause the person being investigated to want to give information to the professional that the professional needs.

To conduct a thorough investigation the claims investigator should, at a minimum, the following:

  1. Read the loss notice and policy of insurance.
  2. If a lawsuit has been filed read the lawsuit in conjunction with the policy wording.
  3. Interview the person insured — preferably in person.
  4. Obtain a recorded statement from the person insured concerning the facts of the loss.
  5. Interview and obtain a recorded statement from every independent witness.
  6. Interview and obtain a recorded statement from the claimant if suit has not been filed.
  7. If suit has been filed interview the attorney for the claimant about the factual basis for the suit.
  8. View the scene of the incident.
  9. Obtain all documents that have relevance to the claim, like:
    1. The insured’s copy of the policy.
    2. The police or fire report, if any.
    3. Medical records.
    4. Financial records.
    5. The application for insurance.
    6. Contract(s), if any, between the insured and the claimant.
    7. All other records that might be relevant to the claim and policy.
  10. Consult with necessary experts like:
    1. Investigative engineers.
    2. Coverage counsel.
    3. Defense counsel.
    4. Medical professionals.
    5. Architects.
    6. Forensic accountants.
    7. All other experts that might be relevant to the claim and policy.
  11. If it appears that there is coverage for the claimed loss advise the insured of the insurer’s decision.
  12. If it appears that there is no coverage consult with management to review the facts gathered by the thorough investigation before a decision is made.

Conclusion

Failure to conduct a thorough investigation is a breach of the promises made by the policy of insurance to provide defense and/or indemnity to the person insured. Failure can also result in the insurer being sued for the tort of bad faith.

Insurers must, to comply with current law conduct:

  • A detailed investigation of the facts of the loss and policy acquisition.
  • A determination of the expectations of the insured and the insurer at the time the policy was acquired.
  • A determination of the purposes for which the policy was acquired.
  • An examination of all communications between the insurer and the insured or their representatives.
  • If the investigation is not conducted, the insurer faces suit for the tort of bad faith.
  • The thorough investigation requirement first enunciated by the California Supreme Court in Egan v. Mutual of Omaha Insurance Co., 24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (Cal. 08/14/1979) is essential when attempting to interpret a disputed policy of insurance.
  • In Egan, the Supreme Court concluded that “an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.”

 

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

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Claims Commandment I

Thou Shall Confirm Coverage

Zalma on Insurance Makes Top 50

This is the beginning of an effort to provide direction to every person involved in claims handling for insurers and the public and will continue until completed. Unlike the Old Testament I will not limit myself to just ten Commandments that should be followed by every claims person working to fulfill the promises made by an insurer by an insurance policy.

How to Confirm Coverage

When I was a young adjuster I worked for the Fireman’s Fund Insurance Company. Occasionally confused insureds and brokers would report to the Fireman’s Fund a claim meant for Fireman’s Insurance of Newark. The claim would often be adjusted and paid before anyone realized an error had been made.

When a loss or claim is reported to an insurance company the first task required of the insurer and its claim personnel is to confirm the existence of a policy. The task today is much simpler than it was when I was an adjuster where we had to pull out the actual underwriting file and review the daily report. Now, coverage can be confirmed by computer.

If the insurer’s computer system shows that a policy was in effect at the time the insured reported that a loss occurred the first step of confirming coverage was completed. Next, if available digitally, the entire policy must be accessed including the declarations page and all policy wordings, all endorsements and modifications to the standard policy language.

The claims person needs to have available a specimen of the policy as it would have been delivered to the insured so that it can be read, reviewed and understood to enable the claims person to explain the available coverages to the person(s) insured.

If the entire policy is not available electronically or cannot be recreated by the underwriting department the agent or broker should be asked to provide a complete copy of the policy to the adjuster. If the agent or broker does not have it a copy should be obtained from the insured.

Once the policy is obtained and available for review the claims person must read and understand the policy coverages and compare those to the wording of the policy to confirm that one of the policy coverages promises to indemnify the insured against the risk of loss of the type reported.

For example:

  1. If the policy is a property policy that insures the insured against the risk of loss of a dwelling by fire, lightning, windstorm and hail, and nothing more and the insured reports a claim for damage caused by earthquake the existence of a policy is confirmed but the existence of coverage is not.
  2. If the policy is a liability policy like a Commercial General Liability (CGL) policy and the insured reports that the mailman was bitten by the insured’s pit bull terrier during the policy period, coverage is confirmed. However, if the policy contains an exclusion for losses caused by dog bite or pit bulls, coverage is confirmed with a exclusion that might be applicable.
  3. If the policy is a CGL and the insured reports he was sued for slander by a business competitor during the policy period coverage is confirmed and there is available defense under the “Personal Injury” coverage part.
  4. If a policy is a National Flood Insurance policy in effect at the time that a water main breaks and floods the insured’s house, coverage is confirmed that the policy exists and a determination must be made to determine if the loss falls within the terms and conditions of the policy.
  5. If a policy is a CGL and the insured reports he was sued for intentionally punching a business competitor in the nose, coverage is confirmed that the policy was in effect but questions must be answered to determine if there is evidence that indicates there was no intentional act or that the insured was acting in self defense, or some other other not intentional act.

What these examples show is that the existence of a policy can be confirmed and it can be easily confirmed that it was in existence at the time of the loss. What cannot be established from the loss notice and policy wording is whether the coverage applies to the loss that was reported.

Communications with the Insured

Once coverage is confirmed the claims person must read the policy and the initial written contact with the insured should advise the insured all benefits, coverage, time limits, or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by an insured.

The letter should include, as a bare minimum, information like the limits of liability of the policy, any deductibles or self-insured retentions, advice concerning any specific exclusions or conditions that apply to the facts established by the notice of loss, a written notice that a proof of loss is required within 60-days of the letter with an attached proof of loss form, a requirement for the production of necessary documents, a reservation of rights (if called for because of a potential coverage problem like an exclusion that might apply), and any other information the insured needs.

The claims person should also be prepared to supplement the initial letter whenever he learns of different facts or additional coverages available to the policyholder or the insured.

Failure to properly, and in writing, advise the insured of the policy provisions, the requirement for documents, the problems with coverage based on the initial report of loss, can place a claims person inadvertently in violation of the state’s fair claims practices statutes and regulations and expose the insurer to litigation for bad faith claims handling.

More Required

Confirmation of coverage requires more than simply checking a computer. It requires an understanding of the policy wording, the facts of the loss and the law of the jurisdiction to determine if coverage for a particular loss is available to the insured. Simply reading the loss notice, allegations in a lawsuit, and the policy is never enough.

Conclusion

The first and foremost duty of a claims person is to confirm coverage. It is a beginning of claims handling and cannot, on its own, fulfill the obligation to confirm coverage before the adjustment begins.

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Stop Loss Insurance is Not Reinsurance

Self-Funded Employee Health Plan

is Not Insurance

Zalma on Insurance Makes Top 50

The Supreme Court of Texas was asked to resolve whether stop-loss insurance sold to self-funded employee health-benefit plans is “direct health insurance” or “reinsurance.” The distinction was important because, in Texas, direct insurance is subject to state insurance regulation, while reinsurance is not. Reinsurance is not regulated because it typically involves the reallocation of risk between two insurance companies rather than a consumer-insurance transaction. In  Texas Department of Insurance, Honorable Mike Geeslin v. American National Insurance Company and American National Life, No. 10-0374 (Tex. 05/18/2012) the parties disagreed about whether an employer who self funds a health-benefit plan for its employees is an “insurer” under the Texas Insurance Code, and therefore should be treated as a reinsured when purchasing stop-loss insurance.

Lower Court Decisions

The court of appeals concluded that an employer’s self-funded plan was clearly an insurer under the Texas Insurance Code and that a plan’s purchase of stop-loss insurance was also clearly reinsurance beyond the regulatory scope of the Texas Department of Insurance.

Facts

American National Insurance Company and American National Life Insurance Company of Texas (collectively American) are licensed to sell insurance in Texas. American sells stop-loss insurance to self-funded employee health-benefit plans, among other types of policies. Under a self-funded benefit plan, an employer assumes the risk of providing health insurance to its employees, instead of ceding the risk to a third-party insurance company. The employer then either sets aside funds for its employees’ covered medical expenses or pays for such expenses out of its general accounts. Self-funded plans typically hire third parties to administer the plan and often purchase stop-loss insurance to limit financial exposure to catastrophic losses.

During a routine audit, the Texas Department of Insurance discovered that American had sold stop-loss policies between January 1998 and December 2002 without paying taxes or complying with other regulatory requirements applicable to insurers. The Department later formally found that American had violated article 3.10(a) of the Insurance Code by “improperly recording the direct stop-loss policy premiums obtained from the self-insured employers as ‘assumed reinsurance,’” rather than as “direct written premium.”

After exhausting its administrative remedies, American sued the Department, seeking declaratory and injunctive relief. American contended that its stop-loss policies were reinsurance over which the Department lacked regulatory authority. The trial court granted the Department’s motion and denied American’s. American to appealed.

Argument

American argued that an employer who self funds a health-benefit plan for its employees is an “insurer” in the “business of insurance” under the Insurance Code and therefore a reinsured when purchasing stop-loss insurance. According to American, the plan’s purchase of stop-loss insurance is a redistribution of the risk assumed by the plan in the same sense as a reinsurance contract is a redistribution of risk from one insurance company to another. The Department responded that reinsurance is the redistribution of risk between sophisticated insurers in the business of insurance and that an employee health-benefit plan is neither as a matter of law. The Department also argued that although an employee health-benefit plan may in some ways act like an insurer with respect to the plan’s participants, the Insurance Code does not regulate it as one. Insurance purchased by the plan is therefore not reinsurance, according to the Department. It is instead direct insurance in the nature of health insurance because the stop-loss policies are purchased by the plans to cover ultimate claims associated with their health-care expenses.

Analysis

Under a stop-loss policy, the insurer agrees to reimburse a self-funded plan for healthcare costs that exceed a contractually predetermined amount. The obligation generally takes one of two forms: specific or aggregate. Specific stop-loss policies cover claims over a certain dollar amount per employee, while aggregate stop-loss policies provide a cap for an employer’s overall liability for all covered persons.

Reinsurance has been described as the transfer of all or part of one insurer’s risk to another insurer, which accepts the risk in exchange for a percentage of the original premium. Both direct insurance and reinsurance reallocate risk with the principal distinction being the nature of the purchaser. Insurance consumers reallocate their risk by purchasing direct insurance, both primary and excess, while insurance companies reallocate the risks they assume by purchasing reinsurance.

The Supreme Court noted that employers who self fund their employee health-benefit plans are clearly not insurance companies. However, the self-funded employee health-benefit plans perform a service similar to that provided by an insurer. The Texas Legislature broadly defined the terms “insurer” and “business of insurance” to capture all unauthorized activity.

The Supreme Court concluded that without question, “self-funded employee health-benefit plans operate much like insurers. Their activities not surprisingly then fit the definitions of ‘insurer’ and ‘business of insurance’ found in the chapter designed to prohibit the unauthorized business of insurance.” Most private self-funded plans also qualify as “employee welfare benefit plans” under the federal Employee Retirement Income Security Act (ERISA). ERISA prohibits states from deeming these self-funded plans “insurance compan[ies] or other insurer[s]” or “to be engaged in the business of insurance” for purposes of state insurance regulation. Simply put, states cannot regulate private self-funded insurance plans.

For more than a decade, the Department has categorized stop-loss coverage as direct insurance (not reinsurance) subject to assessment by the Texas Health Insurance Risk Pool.

The question faced by the Texas Supreme Court does not involve the extent of coverage under the group health-benefit plan, either directly or indirectly, or the contractual relationship between a plan and its stop-loss insurer. Instead, the questions to be resolved are:

  1. Whether the state can regulate stop-loss insurers who contract with such plans, as it does other direct health-care insurers by requiring them to contribute to the Pool and to submit their policies for approval, and
  2. Whether it has chosen to do so.

The answer to the first question is clearly yes under ERISA’s “insurance savings clause.” The answer to the second question is less clear, but the Supreme Court resolved that the Department’s longstanding interpretation of the statute is entitled to serious consideration.  The Legislature chose not to define the terms “stop-loss insurance” and “reinsurance” in the Insurance Code.

American, however, identified provisions in the Code where the term “reinsurance” is used in connection with self-funded plans in support of its argument that stop-loss insurance is reinsurance. Because the Insurance Code does not define these terms or use them consistently, the parties are left to emphasize the provisions most favorable to their respective interpretations. Those provisions yield competing plausible interpretations but no definitive answer under the Code. The Supreme Court, therefore, concluded that the Insurance Code is ambiguous on how stop-loss insurance should be treated.

Since the Department concluded that stop-loss insurance purchased by a plan does not involve two insurers and is not reinsurance the Supreme Court concluded that stop-loss insurance is direct insurance in the nature of health insurance because the stop-loss policies are purchased by the plans ultimately to cover claims associated with their health-care expenses. Finding that the Department’s construction was reasonable, was formally promulgated, and was not expressly contradicted by the Insurance Code, the Supreme Court agreed with the Department’s construction and held that stop-loss insurance sold to a self-funded employee health-benefit plan is not reinsurance, but rather direct insurance subject to regulation under the Insurance Code.

ZALMA OPINION

This dispute resulted from the failure of the Texas state legislature to define terms important to the obligation of the Texas Department of Insurance to regulate insurance.  The failure was resolved by the Supreme Court in a manner that allowed for regulation and the taxing of stop-loss insurers.

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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Clear Exclusion in CGL Must Be Applied

Policies Must Be Carefully Read Before Acquisition

Zalma on Insurance Makes Top 50

An injured party sued defendant-appellant Perry Stolberg (“Stolberg”), a developer, in a Massachusetts state court for injuries allegedly sustained in the course of construction work. The appellant tendered the defense of the suit to Certain Interested Underwriters at Lloyd’s, London (Lloyd’s), issuer of a commercial general liability (CGL) policy. Lloyd’s provisionally accepted the defense but repaired to the federal district court in an effort to obtain a declaration that its policy did not obligate it either to defend the suit or to indemnify the insured. The district court agreed and entered summary judgment accordingly. The First Circuit Court of Appeal was called upon to resolve the issue in Certain Interested Underwriters At Lloyd’s, London v. Perry Stolberg, No. 11-2251 (1st Cir. 05/16/2012) where Stolberg sought reversal claiming exclusions did not apply.

BACKGROUND

Stolberg owned property at 204-206 Norfolk Street in Cambridge, Massachusetts. He planned to renovate the premises for use as condominiums. Before starting the project, he purchased a CGL policy from Lloyd’s.

The CGL policy applies to bodily injury and property damage for which Stolberg is found to be liable, whenever the same results from qualifying “occurrences” or accidents happening during the policy period. It states that:

 [Lloyd's] will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. [Lloyd's] will have the right and duty to defend the insured against any “suit” seeking those damages. However, [Lloyd's] will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.

The policy contains a number of exclusions from its broadly worded coverage. The first – the Independent Contractors Exclusion (Contractors Exclusion) – provides:

This insurance does not apply to “bodily injury”, “property damage”, “personal and advertising injury” or medical payments arising out of operations performed for you by independent contractors or your acts or omissions in connection with your general supervision of such operations.

The second – the Independent Contractors’ Employees or Leased Workers Exclusion (Employees Exclusion) – provides:

This insurance does not apply to “bodily injury” or “personal and advertising injury” to . . . [a]ny employee or leased worker of independent contractors arising out of operations performed for you by said independent contractors or your acts or omissions in connection with the general supervision of such operations if you have rejected the obligations of any workers’ compensation or any similar law, or abrogated, waived or otherwise set aside common rights or defenses generally accorded an employer under any workers’ compensation, disability benefits or unemployment compensation law or any similar law[.]

The third – the Workers’ Compensation and Similar Laws Exclusion (Workers’ Compensation Exclusion) – states that the CGL policy does not apply to any obligation arising under workers’ compensation or similar laws.

Stolberg retained Allen Fox as the general contractor. Fox, in turn, engaged Robert Gatta, doing business as Simply the Best Construction (STBC), as a subcontractor. Jose Romero claims to have been employed by STBC as a day laborer on the job. He alleges that he sustained bodily injuries on or about October 6, when he toppled from a ladder at the site.

Romero sued the appellant for negligence and breach of duty in a Massachusetts state court. The appellant notified Lloyd’s. Lloyd’s provisionally agreed to furnish a defense, reserving the right to disclaim coverage and withdraw should it be determined that the policy did not apply. It then instituted this action seeking a declaration that it had no obligation to defend or indemnify the appellant in connection with Romero’s claims.

At the close of discovery, Lloyd’s moved for summary judgment, contending that Romero’s claims fell within the Contractors Exclusion. The appellant not only opposed the motion but also cross-moved for summary judgment, positing that the Employees Exclusion established coverage under the policy.

ANALYSIS

The First Circuit noted that the interpretation of an insurance policy is a matter of law. Ascertaining the meaning of an insurance policy is no different from the interpretation of any other contract, and courts must construe the words of the policy in their usual and ordinary sense. Ambiguity must be real to be construed against the drafter. A policy provision is ambiguous only if it is susceptible of more than one meaning and reasonably intelligent persons would differ as to which meaning is the proper one.

Lloyd’s asserted that the Contractors Exclusion is directly on point and that its unambiguous meaning dictates that no coverage is afforded for Romero’s claims. The exclusion precludes coverage for any injuries “arising out of operations performed for [the insured] by independent contractors.” Romero’s complaint alleges facts that brought his case within the ambit of the exclusion: that he was working for STBC when he fell, that STBC was a subcontractor on the appellant’s project, and that his injuries arose out of its operations.

Policy provisions should not be read in isolation and that the interplay between different policy provisions may shed light on their meaning.  The First Circuit concluded Stolberg’s interpretation of the CGL policy relied on mental gymnastics that it was not prepared to undertake. Contrary to Stolberg’s analysis, the purpose of a policy exclusion is to narrow the scope of coverage. Stolberg’s attempt to make the Employees Exclusion restore coverage depends on a finding that if the exclusion does not apply in a given situation, the policy must afford coverage for that situation regardless of other provisions of the policy.

Even if the Employees Exclusion leaves the door ajar for coverage for certain injuries so long as the insured has complied with the workers’ compensation laws the Contractors Exclusion nevertheless tightly shuts that door. The Contractors Exclusion broadly excludes coverage for any claims – including those brought by members of the general public – arising out of the operations of independent contractors. Romero’s claim clearly arose out of the operation of STBC.

Massachusetts requires most employers to carry workers’ compensation insurance and Stolberg carried such insurance. A related statute makes persons such as developers liable, in certain circumstances, to pay benefits to employees of independent contractors as if those employees were employees of the developer himself.  If the developer has failed to obtain the required workers’ compensation insurance, the injured employee may try to sue at common law on that theory.

The Employees Exclusion affords protection against this possibility. It ensures that the CGL policy will not apply to tort claims of this genre mounted by an independent contractor’s employees. Read in concert with the Workers’ Compensation Exclusion and the Contractors Exclusion, the Employees Exclusion provides comprehensive security. If an independent contractor’s employee files a claim for workers’ compensation benefits, the Workers’ Compensation Exclusion precludes coverage under the CGL policy. If that employee files a tort action premised upon the insured’s failure to obtain the required workers’ compensation insurance, the Employees Exclusion makes certain that the CGL policy will not be implicated. Meanwhile, the Contractors Exclusion exempts from coverage any injuries or damages arising out of an independent contractor’s operations, broadly limiting the insured’s liability for such occurrences. There is no other plausible reading of either this group of exclusions or the CGL policy as a whole.

In a last-ditch attempt to save the day Stolberg raised the doctrine of reasonable expectations claiming when he acquired the policy he expected to have coverage for accidents like that alleged by Romero. The First Circuit concluded that because the Contractors Exclusion in the CGL policy is unambiguous, its terms cannot be defeated by the appellant’s professed expectations and affirmed the trial court’s summary judgment.

ZALMA OPINION

Mr. Stolberg’s claim for defense and indemnity of Romero’s suit failed because of clear and unambiguous language of an insurance policy. His loss reminds every person in the construction or development business to read the insurance policy offered to them before acquiring it and to carefully shift responsibility for injuries on the job site to the general contractor and subcontractors. Stolberg, rather than fighting with his insurer on clear and unambiguous policy exclusions, could have obtained contractually before the general and the subcontractor appeared on the construction site a contract that required each to add Stolberg as an additional insured, prove that they carried workers’ compensation insurance for all employees, and agreed to indemnify Stolberg from any claims like that of Romero unless caused by Stolberg’s sole negligence.

Barry Zalma is A Member

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

 

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Insurance Policy Interpretation

Physician Heal Thyself — No Coverage

Zalma on Insurance Makes Top 50

When a professional is disciplined by a professional organization like a medical board or a state bar association the professional seeks defense from a professional errors and omissions insurer claiming that the disciplinary proceeding will make it more difficult to defend a not yet filed claim for damages. A California doctor tried to do so in Jehan Zeb Mir, M.D v. Admiral Insurance Company, Lemac & Associates, Inc., and Narver, No. A-1419-10T4 (N.J.Super.App.Div. 05/16/2012) when Jehan Zeb Mir (“Mir”), a physician, appealed from the trial court’s grant of summary judgment dismissing his complaint against his professional liability insurer, Admiral Insurance Company (Admiral), and granting motions to dismiss the complaint against insurance brokers Narver Associates and Lemac & Associates.

The appeal turned on the interpretation of a professional liability policy written by Admiral, covering the period May 1, 2002 to May 1, 2003. Plaintiff, who practiced medicine in California, obtained this professional liability insurance from Admiral, an insurer based in New Jersey. In his complaint, he contended that Admiral wrongfully refused to reimburse him for his legal costs to defend a disciplinary action filed against him by the California Medical Board. Mir also alleged that, if his claim was not timely transmitted to Admiral, it was the fault of the two brokers, whom he alleged were Admiral’s agents for purposes of submitting a claim.

FACTS

On January 20, 2003, Pomona Valley Hospital Medical Center (Pomona Hospital) reported to the California Medical Board that the Hospital had finally terminated plaintiff’s staff privileges based on a series of proceedings that started in November 10, 2000, when the Hospital summarily suspended plaintiff’s “vascular surgery privileges.” Plaintiff submitted a March 21, 2003 letter to one of the brokers, disclosing a “pending matter at Pomona Valley Hospital.” Through the broker, he later provided Admiral a copy of an August 31, 2003 administrative complaint filed by the California Medical Board.

The 2003 Board complaint alleged that plaintiff rendered inappropriate care to patient G.F. at San Antonio Community Hospital in June of 2000. The complaint further alleged that plaintiff improperly delayed G.F.’s treatment by ordering that she be transferred from San Antonio Hospital to Pomona Hospital instead of immediately operating on her and accused him of rendering improper treatment after she was transferred to Pomona Hospital.

In 2006, plaintiff sent a letter making a claim against the May 2002-May 2003 Admiral policy, alleging that Pomona Hospital had filed a complaint against him with the California Medical Board, based on his treatment of G.F., and contending that in 2003, the Board, in turn, filed a professional disciplinary action against him. Plaintiff sought reimbursement for over $250,000 in legal fees spent to defend against the Medical Board prosecution. Admiral responded that plaintiff’s claim was untimely, because it was not submitted during the policy period or the relatively short extended reporting period after the policy expired. Admiral also contended that the policy did not cover prosecutions brought by a professional licensing board, as opposed to malpractice suits for damages filed by patients.

After Admiral denied coverage, plaintiff sued Admiral and the two brokers in the Law Division in New Jersey, alleging breach of contract and other claims. All of the defendants filed motions to dismiss the complaint or for summary judgment. In its summary judgment brief to the trial court, Admiral admitted, solely for purposes of its motion, that plaintiff made a timely claim under the policy. Therefore, the only issue before the trial court was whether the policy covered the claim.

In an oral opinion issued October 15, 2010, the motion judge granted summary judgment dismissing the complaint against Admiral on the grounds that the policy did not cover professional disciplinary actions, as opposed to malpractice actions filed by patients. He then granted the motions to dismiss filed by the two insurance brokers.

INSURANCE POLICY INTERPRETATION

The only issue properly before us on this appeal is the interpretation of the insurance policy., and therefore that issue is not before us now. Moreover, if the policy does not cover pla For purposes of the summary judgment motion, Admiral declined to raise the timeliness of the claim intiff’s claim, the brokers cannot be liable for allegedly failing to properly transmit the claim to Admiral.

Since all facts relate to California the New Jersey court applied California law. California courts do not strain to find ambiguity in an insurance policy, but look to the wording and context of policy language to determine whether an ambiguity exists.

Admiral agreed to pay “damages, including loss payments, legal and claims expense” that the insured became legally obligated to pay “because of injury . . . caused by a medical incident”:

        I. Coverage — Insuring Agreement

        The Company will pay on behalf of the Insured all sums in excess of the deductible amount stated in the Declarations which the Insured shall be legally obligated to pay as damages, including loss payments, legal and claims expenses because of injury to which this insurance applies caused by a medical incident, occurring subsequent to the retroactive date, for which claim is first made against the Insured and reported to the Company during the policy period, arising out of the practice of the Insured’s profession as a physician, surgeon or dentist. [emphasis added.]

We next consider the scope of Admiral’s agreement to defend its insured. Admiral agreed to defend “any claim or suit against the Insured seeking damages to which this insurance applies” regardless of the ultimate merits of “any of the allegations of the suit”:

        II. Coverage — Defense and Settlement With respect to the insurance afforded by this policy, the Company shall have the right and duty to defend any claim or suit against the Insured seeking damages to which this insurance applies even if any of the allegations of the suit are groundless, false or fraudulent.

The policy defined the terms “claim,” “suit,” and “medical incident” as follows: 

     IX. Definitions

        “claim” means any notice of any act or omission of the Insured in the performance of professional medical or dental services alleged to have caused injury to any person, or any informal, formal or legal complaint or proceeding against the Insured regarding such an act or omissions, whether given or brought directly by a patient or claimant or by an attorney or other representative of a patient or claimant.

        “medical incident” means any act or omission arising out of the: (1) furnishing of professional medical or dental services by the Insured, any member, partner, officer, director or stockholder of the Insured, or any person acting under the personal direction, control, or supervision of the Insured for whose conduct the Insured may be held vicariously liable, or (2) service by the Insured as a member of a formal accreditation, standards review or similar professional board or committee.

        Any such act or omission, together with all related acts or omissions in the furnishing of such services to any one person shall be considered one medical incident.

        “suit” includes an arbitration proceeding to which the Insured is required to submit or to which the Insured has submitted with the Company’s consent.

Paragraph I of the policy unambiguously limits coverage to “damages” because of “injury” caused by a “medical incident.” As defined in Paragraph IX, a “medical incident” is an “act or omission” arising from the provision of “medical services.” Read together, these paragraphs make clear that the coverage is for damages brought about by alleged medical malpractice.

The language of Paragraph II, the coverage-defense paragraph, must be interpreted in that context and not in the abstract. Under Paragraph II, the duty to defend extends to “any claim or suit against the Insured seeking damages to which this insurance applies.

The insurer only agreed to provide indemnification for “damages.” The disciplinary proceeding for which Mir demands a defense does not seek damages.  Further, there was no “claim”  since it is defined as a notice or informal action filed by or on behalf a “patient or claimant” and arising out of injury caused by a medical incident. The disciplinary action was not an action by a patient.

The appellate court traced the development of California insurance coverage law and could find no basis to infer, from a standard malpractice policy like the one here, coverage for an administrative disciplinary prosecution. For example, the California courts have also held that a malpractice policy does not cover a doctor’s defense costs for a criminal case because the outcome of a criminal case could not result in damages payable under the policy since neither imprisonment nor a fine constitutes “damages” for insurance purposes.

The court also rejected the idea that an insurer might be obligated to defend an insured in an administrative or criminal proceeding solely because the outcome of that proceeding might make it more difficult for the insured to later defend against a lawsuit relating to the same issue. The fact that damaging, perhaps even irrefutable, findings will be made does not mean that a duty to defend arises in the criminal proceeding.

Based on California case law the appellate court concluded that the Admiral policy does not require either defense or indemnification for a professional disciplinary action. The promised coverage does not include a professional disciplinary action seeking to suspend or revoke plaintiff’s medical license, and the insurer did not undertake to provide a defense in an action for which there was no coverage.

ZALMA OPINION

Dr. Mir tried the impossible. He tried to change a malpractice policy into a total defense policy. He failed because the appellate court decided to read the policy as written. Although Dr. Mir needed the money to defend himself he could not change the wording of the policy and make it do what its clear and unambiguous language of the policy said it would and would not do.

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

 

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Intentional Harm to an Infant is Abuse

No Cover For Intentional Harm to Infant

Zalma on Insurance Makes Top 50

Kurt Schmoldt, Stacy Schmoldt, and Jane Doe, by her guardian ad litem (collectively, the “Schmoldt Plaintiffs”), appealed the trial court order that ruled that American Family Mutual Insurance Company (“American Family”) had no duty to defend and no duty to indemnify Christa Thorin with respect to the Schmoldt Plaintiffs’ claims against her for injuries sustained by Jane Doe. In Jane Doe, By Her Guardian Ad Litem, Susan A. Hansen, Kurt v. Christa Thorin and American Family Mutual Insurance, No. 2011AP997 (Wis.App. 05/16/2012) the Wisconsin Court of Appeal resolved the insurance coverage dispute by finding unambiguous the use of the word “abuse” in an exclusion.

Background

Jane Doe, the infant daughter of Kurt Schmoldt and Stacy Schmoldt, was injured while Christa Thorin was baby-sitting her. Thorin went outside and left Jane Doe in a crib inside the house. Also inside the house was Thorin’s thirteen-year-old son, Preston, who was home sick from school. In an attempt to quiet Jane Doe’s crying, Preston pushed Jane Doe’s head down in her crib and threw a toy phone onto her face, which resulted in injury to the baby. Preston stated during his deposition that he intended to toss the toy onto her face, and that he figured it would probably hurt her or cause her pain.

The Schmoldt Plaintiffs filed an action seeking compensation from Thorin and from American Family, the issuer of Thorin’s homeowner’s insurance policy, for the injury sustained by Jane Doe. American Family moved for summary judgment, arguing that exclusions for abuse, business pursuits, and intentional injury in Thorin’s insurance policy barred coverage.

Discussion

The Court of Appeal started its analysis with the language of the policy. It applied the universal rule of insurance interpretation to give the language its common and ordinary meaning, that is, the meaning understood by a reasonable person in the position of the insured.

The policy provision at issue in this case is found under “Exclusions – Section II” of the American Family policy that was issued to Thorin. The provision states:

        Coverage D – Personal Liability and Coverage E – Medical Expense do not apply to:

        1. Abuse. We will not cover bodily injury or property damage arising out of or resulting from any actual or alleged:

        a. sexual molestation or contact;

        b. corporal punishment; or

        c. physical or mental abuse of a person.

The Schmoldt Plaintiffs argued that the exclusion provision does not apply. They argue that the term “abuse,” as used in this section, is ambiguous and should be construed against American Family and in favor of coverage. The Schmoldt Plaintiffs asserted that abuse can be interpreted to include a wide range of intentional and unintentional acts and that, because the American Family policy has a separate exclusion for intentional injury, the meaning of the abuse exclusion is uncertain. The Schmoldt Plaintiffs also argued that, in some contexts, abuse can mean overuse of something or a course of conduct, such as “alcohol abuse” or “abuse of authority,” and that the meaning of the term in the American Family policy is unclear.

The Schmoldt Plaintiffs correctly point out that the meaning of the word “abuse” may differ slightly in different contexts. That fact does not, however, render the term ambiguous in the particular context of the American Family policy. The Court of Appeal concluded that the policy at issue, the term “abuse” is unambiguous. The fact that a separate exclusion within the policy prevents coverage for intentional injury does not render the abuse exclusion ambiguous but assists in giving context to the abuse exclusion.

The intentional injury exclusion prevents coverage for injury “caused intentionally by or at the direction of any insured,” even if the actual injury was “different than that which was expected or intended.” While there may be certain injuries caused by acts that would qualify as both abuse and as intentional injury, that fact does not create ambiguity.

The trial court found that the injury sustained by Jane Doe was bodily injury arising from physical abuse.  Preston stated during his deposition that he pushed Jane Doe’s head down and threw a toy phone at her face. He stated that he meant to throw the toy onto her face and that he figured it would probably hurt her or cause her pain. Jane Doe’s mother, Stacy Schmoldt, testified that her daughter had bruises on her face when she picked her up from Thorin’s home on the day of the incident. The Court of Appeal agreed with the trial court that the record supported the court’s finding that Preston caused bodily injury to Jane Doe.

Throwing a toy at a baby’s face and injuring the baby constitutes abuse in the common and ordinary meaning of the word. Even if “abuse” is read as the Schmoldt’s argue the abuse exception would still apply.

Since the physical abuse caused by Preston to Jane Doe fits within the abuse exception the Court of Appeal also concluded that the abuse exception precludes coverage for Thorin’s alleged failure to control or supervise Preston.

ZALMA OPINION

Insurance only applies, by definition, to fortuitous events. Intentionally throwing a toy at an infant with knowledge that the infant would be injured is not a fortuitous, contingent or unknown event – it is an intentional act of abuse by a child against another child. The policy clearly and unambiguously excluded the abuse.

Because the court found abuse it was not required to go further. However, since Preston was a resident of Thorin’s household and admitted that he intentionally caused injury to the infant, Jane Doe, the court could have rejected the claim for defense on that ground as well as on the ground that the injury resulted from a business pursuit of Ms. Thorin.

Insurance protects the insured against many risks of loss but not all. In this case to allow such wrongful and abusive conduct to be indemnified by an insurance policy that did not agree to cover such acts, would change insurance from a contract of indemnity to a form of welfare.

Barry Zalma, Inc.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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Clear & Unambiguous Policy Enforced

Not Disabled from “Own Occupation”

Zalma on Insurance Makes Top 50

Disability insurers are often chastised for not accepting an insured’s claim of disability. At the same time, people who are not disabled from their own occupation attempt to recover from their disability insurer when they are able to perform the duties of their occupation. When an insurer and the disabled person disagree, litigation will invariably follow.

Bobby Gene Hankins was denied long-term disability benefits by Standard Insurance Company. Hankins sought review of Standard’s determination under the Employee Retirement Income Security Act of 1974 (ERISA). The district court granted Standard’s motion for summary judgment, finding Standard did not abuse its discretion. The dispute was presented to the Eighth Circuit Court of Appeal for resolution in Bobby Gene Hankins v. Standard Insurance Company, No. 11-3495 (8th Cir. 05/14/2012).

Facts

Beginning in April 2002, Hankins served as the Director of Commercial Security Operations at Stephens Investment Holdings, LLC. The parties disagree as to how best to characterize the job. Standard determined it was primarily a managerial position, whereas Hankins likens it to being a member of a “private police force.” There is no genuine dispute over the actual duties of the job. Stephens generally describes the position as requiring Hankins:

        To plan, organize, direct and control the security policies, procedures and programs for all commercial locations in the area of facility security in order to ensure the safety and security of employees and assets; to provide investigation and other security services as required in this capacity.

Stephens further lists eighteen “Essential Duties and Responsibilities” for the position. Although many of those duties are purely administrative or supervisory, the list does include potentially physical requirements such as: “[a]ssist[ing] in responding to all emergency and crisis situations as necessary, including: transporting and assisting incapacitated persons, interceding in physical disturbances, subduing violent individuals, and assisting victims of offenses.”

To ensure his fitness for these physical requirements, Hankins had to undergo periodic physical evaluations that tested, inter alia, his ability to run or walk one-and a-half miles in under sixteen minutes, run 300 meters in under sixty-six seconds, and jump at least fifteen-and-a-half inches. While training for these physical evaluations on October 15, 2009, Hankins injured his hamstring. After a series of exams, his treating physician concluded that Hankins was unlikely to ever perform the running and jumping requirements for his evaluations, although he was capable of performing sedentary or light work.

Because Hankins was unable to complete his physical evaluations, Stephens terminated him from his position. On February 8, 2010, Hankins submitted a claim for disability benefits.

Stephens sponsored an employee insurance policy administered by Standard. The Standard policy provided benefits to employees who were disabled from performing their “Own Occupation.” The policy stated that Standard had “full and exclusive authority to control and manage the Group Policy, to administer claims, and to interpret the Group Policy and resolve all questions arising in the administration, interpretation, and application of the Group Policy.” The policy also offered the following pertinent definitions:

        Own Occupation means any employment, business, trade, profession, calling or vocation that involves Material Duties of the same general character as the occupation you are regularly performing for your Employer when Disability begins. In determining your Own Occupation, we are not limited to looking at the way you perform your job for your Employer, but we may also look at the way the occupation is generally performed in the national economy. . . .

        Material duties means the essential tasks, functions and operations, and the skills, abilities, knowledge, training and experience, generally required by employers from those engaged in a particular occupation that cannot be reasonably modified or omitted. . .

On March 9, 2010, Standard’s vocational case manager, Karol Paquette, submitted a report on Hankins’ “Own Occupation Review.” Paquette studied Arkansas law regarding the licensing requirement for private security personnel as well as the arresting authority of those private security personnel. Paquette compared Hankins’ job description to those contained in the Department of Labor’s Dictionary of Occupational Titles (DOT) and noted that, although Hankins’s actual job duties included some physical demands, those physical demands were not common in the national economy. She determined that the occupational listing in the DOT that most closely resembled Hankins’s job was “Security Manager (Alternate Title) Any Industry,” which the DOT characterized as a sedentary occupation. Relying on Paquette’s report, Standard determined Hankins was not disabled and denied Hankins’s claim on April 8, 2010.

Hankins brought suit in federal court to overturn Standard’s denial of benefits.

Analysis

The Eighth Circuit noted that the word “occupation” is sufficiently general and flexible to justify determining a particular employee’s “occupation” in light of the position descriptions “in the Dictionary rather than examining in detail the specific duties the employee performed. ‘Occupation’ is a more general term that seemingly refers to categories of work than narrower employment terms like ‘position,’ ‘job,’ or ‘work,’ which are more related to a particular employee’s individual duties.” A court cannot say that an insurer transgressed the boundaries of its broad discretion under its insurance policy and the ERISA plan to make disability determinations. In this case the Standard policy provided an explicit definition of “Own Occupation.”

Standard’s policy avoids the ambiguous meaning of “occupation” by explaining that it is not limited to the individual claimant’s actual and specific job duties. Standard’s policy states that it will determine an occupation based on how similar jobs are “generally performed in the national economy,” and it identifies similar jobs based on the “material duties” that are “generally required by employers.” It is clear from this definition that Standard’s use of the DOT to determine Hankins’s “Own Occupation” was in accordance with the plain language of the policy.

Hankins contends, however, that Standard abused its discretion because the occupation it considered did not include the physical requirements he believes were “material duties” of his job. The policy language does not focus on an individual claimant’s specific duties, but the essential duties that are “generally required by employers” a term broad enough to allow use of DOT.

There is substantial evidence supporting Standard’s denial of benefits. Its vocational case manager, Paquette, offered analysis of why she believed “Security Manager (Alternate Title) Any Industry” to be the closest fit based on the managerial and supervisory aspects of his job and noted that the physical standards required by Stephens were not generally required for private security managers in the national economy. Paquette researched Arkansas law and reasonably concluded private security officers had no greater arrest authority than ordinary citizens. The Eighth Circuit concluded that the trial court was correct and Mr. Hankins was not disabled for his “own occupation” as that term is defined by the policy.

ZALMA OPINION

Insurance contract are often incomprehensible. The use of “easy to read” policies written at a fourth grade level has made precision in contract drafting difficult.

As one court said: “The plaintiff [insurer] gave the [insured] coverage in a single, simple sentence easily understood by the common man in the market place. It attempted to take away a portion of this same coverage in paragraphs and language which even a lawyer, be he from Philadelphia or Bungy, would find it difficult to comprehend.” Peerless Ins. Co. v. Clough, 105 N.H. 76, 193 A.2d 444, 449 (1963).

Standard avoided the problem that the New Hampshire Supreme Court complained about. They made the policy clear and unambiguous and defined terms so that even a court trying to find some way to give coverage to a person claiming disability was compelled to follow the actual wording of the policy.

Barry Zalma, Esq.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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Statute Rewrites Policy

The Unquestioned Right Is Questioned

Zalma on Insurance Makes Top 50

Some states do not like insurance companies and have been known to eliminate the right of the insurer and insured to agree on a restrictive provision in a statute. Although most state courts, including that in Arkansas, allow insurers to create contract that shorten the time needed to file suit to a time less than the statute of limitations. However, Arkansas, by statute, eliminated that right by statute for property and life insurance policies.

FACTS

Kenneth Graham suffered serious injuries to his eyes when a can of oven cleaner exploded in his face. Graham sued Hartford Life and Accident Insurance Company (Hartford) seeking coverage under his life insurance policy for accidental dismemberment benefits. The district court dismissed Graham’s suit, concluding it was untimely because it was brought more than three years after the loss, outside the policy’s time limitations for bringing legal actions against Hartford. Graham appeals arguing he brought suit within Arkansas’s five-year statute of limitations for breach of contract actions, and Arkansas law provides “[a]ny stipulation or provision in [a property or life insurance policy] requiring the action to be brought within any shorter time or be barred is void.” Ark. Cod Ann. § 23-79-202(b).

Graham asked the Eighth Circuit Court of Appeal to enforce the Arkansas statute and declare the policy limitation of action provision void in Kenneth Graham v. Hartford Life and Accident Insurance, No. 11-2070 (8th Cir. 05/11/2012). Graham alleged that at the time of the accident that he was insured under an accidental death and dismemberment policy issued by Hartford. The policy provided life insurance in the event an accident resulted in Graham’s death. The policy also provided for certain benefits if Graham suffered from dismemberment, which included loss of sight.

The policy required Graham to file a proof of loss within ninety days after the date of loss. The policy further provided “[y]ou cannot take legal action against us . . . after three years . . . following the date proof of loss is due.” Graham filed a timely proof of loss with Hartford, but Hartford denied the claim. Graham then filed an appeal with Hartford, which was also denied.

On July 2, 2010, less than five years after his accident but outside the time period for filing legal actions as provided in the policy, Graham brought this breach of contract action against Hartford in federal district court. Hartford filed a motion for judgment on the pleadings arguing Graham failed to file the lawsuit within the time limits set forth in the policy. Notwithstanding the provisions of the statute the district court granted Hartford’s judgment on the pleadings. The district court relied on several Arkansas cases which generally allow insurance companies to contract for a shorter limitations period than the period provided by the applicable statute of limitations, as long as the period is reasonable.

ANALYSIS

The district court correctly recognized that Arkansas law generally permits insurance companies to contract for a shorter period of time within which policyholders may sue than the maximum period allowed by the state’s applicable statute of limitations, so long as the period of time allowed is still reasonable. The general rule has its limitations. A contractually shortened period must not contravene some statutory requirement or rule based upon public policy. Hartford’s policy provision, shortening the period for him to file suit to a period of less than five years, contravenes the statutory requirement.

The statute clearly provides an action on a claim or loss arising under a life insurance policy may be brought “at any time within the period prescribed by law for bringing actions on promises in writing.” The period prescribed by Arkansas law for bringing actions on promises in writing is five years.

The Arkansas Supreme Court specifically addressed the meaning of that portion of the statute  by stating that it is intended to nullify any limitation of the time within which a cause of action arising out of insurance policies may be instituted to a time shorter than the period fixed by the statute of limitation of the state applicable to such suits. In Arkansas the statute of limitation defining the time within which an insurance policy may be sued upon may not be shortened by any provisions contained in the policy. The effect of the statute is to make such provision void.

ZALMA OPINION

The California Court of Appeal, stated the rule that is followed in most states, that:

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.  App. 2d 581, 586 [281 P.2d 39]. [Citation.].)” (64 Cal. App. 3d at p. 273.)

However, every state has the right to express its public policy and if, as the Eighth Circuit concluded, it is best to refuse to allow an insurer the right limit its contractual obligations and shorten the time to suit. As the Eighth Circuit pointed out statutes can, and in this case, did change the terms of the policy agreed to by the parties.

Barry Zalma, Inc.

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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18 Years in Prison for Arson for Profit

Obvious Arson For Profit Deserves Jail

Zalma on Insurance Makes Top 50

Amateur arsonists do everything necessary to convince fire cause and origin investigators that a fire was not accidental. They use petroleum based accellerants to speed and spread the fire. They set more than one fire in locations where there is no source of an accidentally started fire. They set fires in unusual places, like closets, where a fire will self extinguish because of a lack of oxygen. Finally, they increase their insurance limits, thinking that higher limits will allow them to recover more when all they can recover, regardless of the limits, is what was lost.

Keesha P. Washington, an amateur and ineffective arsonist, was found guilty of aggravated arson, a Class A felony in Tennessee. As a result she was sentenced as a violent offender to eighteen years’ confinement. On appeal, Washington contended that the trial court erred by not holding a hearing to ensure that she knowingly and voluntarily waived her right not to testify and that her sentence was excessive. She appealed in State of Tennessee v. Keesha P. Washington, No. M2011-00227-CCA-R3-CD (Tenn.Crim.App. 05/09/2012), asking the Court of Criminal Appeals of Tennessee at Nashville to overturn the verdict.

Facts

Franklin Fire Captain Chris Brown testified that on May 30, 2006, he responded to a fire at the Defendant’s apartment and saw large amounts of smoke coming from the apartment. He said that the apartment’s front door was locked and that they had to kick down the door to enter the apartment. The firemen extinguished a burning pile of cloth or paper near a sofa before realizing that a second fire was burning in the hallway. He said that the “primary seed of the fire” was in a utility closet and that they put out the fire. Two additional fires, one near a television and another near a computer, had already extinguished themselves. He found a match in the center of the fire that burned near the television. He said that the fires had four separate points of origin and that he secured the scene while he waited for fire marshal investigators to arrive.

Neighbors testified about reporting the fire and multiple experts testified as to why their forensic investigations made it clear that the fire was caused intentionally.

Bobby Medlen testified that he worked as a claims representative for State Farm Insurance. He said that the Defendant had a renter’s insurance policy with State Farm and that she increased her policy limits for personal property from $25,000 to $50,000 on May 22, 2006. The Defendant submitted an insurance claim after the fire but later withdrew the claim on July 17, 2006.

The Defendant testified that she moved to Tennessee in February 2006 and that there were delays when she attempted to transfer her State Farm insurance policies from Michigan to Tennessee.  She said she did not ask to increase her renter’s insurance coverage on May 22, 2006. She said that she called State Farm that day to request a copy of her policy and that when a copy was faxed to her, she noticed it only had $25,000 in coverage. She said she called State Farm and told them her policy was supposed to have $50,000 in coverage.

She said that the smoke detector beeped and that she took it down to change the battery but found no place for a battery. She placed the smoke detector on the floor and intended to have maintenance install a new detector. She put her daughters in the car and smelled smoke when she returned to the apartment to get her computer and her bag. She opened the door to the hallway closet and saw a comforter and a box on fire. She removed the box and comforter, kicked them into the living room, and used a pillow to smother the flames. The Defendant acknowledged that she initially told Marshal King and Detective Adams that she did not know there was a fire in her apartment until she received a telephone call from the apartment complex manager. She agreed that she knew there was a fire before she left her apartment and that she told Marshal King and Detective Adams that she left the apartment because she “got mad and lost it . . . .” She agreed that although she initially told them that she did not know what caused the fire in the closet, she said later that she assumed the fire was caused by the HV/AC unit.

Washington was found guilty of aggravated arson and sentenced as a violent offender to eighteen years’ confinement.

The Defendant argued that a new type of hearing should be required because if a person is warned about their right to remain silent before giving a police statement they should be warned  before the defendant subjects themselves to cross-examination before a jury? Because such a hearing is not required by precedent the appellate court concluded the trial court did not breach a clear and unequivocal rule of law by not holding a hearing to ensure that the Defendant knowingly and voluntarily chose to testify.

A psychiatrist testified that the Defendant was a patient of his and that she had a history of serious mental illness. He diagnosed her with a severe form of bipolar disorder with “psychotic features.” He said the Defendant was using medication when she came to see him, including Lithium, Seroquel, and Lamictal, which were mood stabilizers.

The trial court found that the following enhancement factors applied pursuant to Tennessee Code:

  1. the offense involved more than one victim, and
  2. the Defendant had no hesitation about committing a crime when the risk to human life was high.

The court found a mitigating factor applicable because the Defendant had no previous criminal record and because the Defendant had a mental health condition. The Defendant contended that her sentence is excessive because the trial court applied incorrect law and mistakenly thought the presumptive sentence was twenty years.

After the evidence was presented, the trial court noted that the applicable range was fifteen to twenty-five years. The court explained its consideration of enhancement and mitigating factors and stated that it believed the sentence imposed was consistent with the purposes and principles of the sentencing act. Washington was unable to show that the trial court imposed an improper sentence or that it applied incorrect law.

ZALMA OPINION

As Forrest Gump’s mother once said “stupid is, as stupid does.” Ms. Washington, perhaps because of her mental illness, decided to profit from a fire at her new apartment in Tennessee.  By doing so she put at risk the tenants of the more than 200 apartments in the facility where she lived and the firefighters called to put out the fire. She was totally incompetent because she set four different fires, two of which self-extinguished before the fire department arrived. The fire department put out the fire before anyone was injured or more than $50,000 damage was done to her contents or the apartment structure.

She made a claim to her insurer thinking she could recover the limits only to have the insurer hire fire cause investigators and engineers whose testimony helped convict her. She was represented by counsel but claimed she was not properly advised by the court of her right to remain silent a warning opposite from that required by law.

Arson for profit, to be successful, requires a person who understands both insurance and the action of fire and smoke detectors. Fortunately for the public and the insurance industry people like Ms. Washington fail at their crime. Those who are professional arsonists are never even suspected. Regardless of her illness she knew what she was doing and was appropriately convicted.

 

Zalma Insurance Consultants

© 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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Insurance Fraud Is A Crime

Zalma’s Insurance Fraud Letter

May 15, 2012

Zalma on Insurance Makes Top 50

Continuing with the tenth issue of 16th  Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) reports on May 15, 2012 Barry Zalma comments on why faking the theft of a vehicle to collect insurance is becoming popular in the U.S.  Those who do so are not necessarily professional criminals. They are, rather, regular folks who had never committed a serious crime before but could not afford the monthly payments. They resolve their financial problems by selling the vehicle to the insurance company and again to a private buyer. Because they are not professional criminals they are often caught, prosecuted and convicted. The May 15, 2012 issue reports on the conviction of a person who helped a “friend” fake the theft of a vehicle only to end up in jail for aiding and abetting insurance fraud.

The issue also reports on the new PIP insurance fraud statutes enacted in Florida that will come into effect in June and adds an “Heads I Win, Tails You Lose” story about how a woman tried to get off Welfare by trying insurance fraud.

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

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

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

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Zalma Insurance Consultants will also serve insurers by auditing the files of their MGA’s, TPA’s and any entity having a binding authority issued by the insurer.

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com.
If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

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Appraisal

Complex Claims Should Be Resolved by Insurance Policy Appraisal

Zalma on Insurance Makes Top 50

“Appraisal” is a form of arbitration required by insurance policies that allows the amount of loss to be determined by a panel of three appraisers whose duty is limited to determining the amount of loss and nothing more. When appraisers exceed the duty to determine only the amount of loss and make legal determinations the duty is breached and the appraisal award can be vacated. In Amerex Group Inc USA V. Lexington Insurance Company USA, No. 10-4163-cv (2d Cir. 05/10/2012) the Second Circuit Court of Appeal was asked to resolve a longstanding insurance dispute between plaintiffs-appellants Amerex Group, Inc., and Amerex USA Inc. (“Amerex”), and their excess insurers, defendants-appellees Lexington Insurance Company and Westchester Surplus Lines Insurance Company (“Excess Insurers”).

Aafter nearly four years of investigation of its claim by the Excess Insurers and mediation between the parties, filed suit against the Excess Insurers. They responded to the complaint by moving to compel appraisal according to the terms of the insurance policies. The district court granted the Excess Insurers’ motion. In accordance with the parties’ contract, each side appointed a member of the appraisal panel (“Panel”), and, when the parties failed to agree on the appointment of the Panel’s umpire, the district court appointed one at their request. The fully-constituted Panel conducted its 30–month valuation and ultimately quantified Amerex’s loss at less than the value of its primary insurance contract, thus rendering the Excess Insurers’ policies inapplicable to Amerex’s claims. The Excess Insurers moved thereafter for partial summary judgment on the basis of this appraisal, and the district court granted the motion, dismissing Amerex’s complaint.

The Appeal

Amerex appealed both the order to compel appraisal and the subsequent order confirming the appraisal and dismissing its complaint.

Amerex distributes outerwear in the United States, acting as an intermediary between its wholesale customers and overseas clothing manufacturers. The company stored some of the clothing that awaited shipment to its customers in its warehouse in Avenel, New Jersey, on a large rack system that facilitated the clothing’s storage and organization.

On August 3, 2001, the rack collapsed, activating the warehouse’s sprinkler system, which flooded the premises. The water not only damaged Amerex’s merchandise, but also rendered its computer system inoperable for “one to three weeks,” and thus prevented Amerex from making promised deliveries. The damages associated with the collapse included lost merchandise, cancellation of orders, late charges for orders fulfilled, and lost business income.

The Insurance

To manage the risk of such losses, Amerex carried three insurance policies. The first, issued by Fireman’s Fund Insurance Company (“Fireman’s Fund”), served as Amerex’s primary insurance, and covered damages associated with the warehouse, business personal property, business income, and other such losses, up to a limit of $2.5 million. The second and third policies, issued by appellees, provided insurance in excess of the Fireman’s Fund policy. Each excess policy had a liability limit of $5 million, for a total of $10 million beyond the coverage provided by Fireman’s Fund.

The excess insurance policies contained substantially identical clauses that allowed either party to insist in writing on the appointment of an appraisal panel to determine the extent of losses associated with any claim. The appraisal clause does not specify any time limit for making such a demand, and instead focuses on the procedure used to appoint the Panel.

Two years after the rack collapse, on or about June 12, 2003, Amerex submitted its proof of loss to Fireman’s Fund and the Excess Insurers, claiming total damages of $8.8 million. Fireman’s Fund paid the full amount of its policy, $2.5 million. Amerex then sought coverage from the Excess Insurers for the remaining $6.3 million. The Excess Insurers investigated the claim until October 2005. During the course of this investigation, the Excess Insurers interviewed certain Amerex employees concerning the nature of the business and reviewed financial statements and other documents.

Ultimately, on February 21, 2006, the Excess Insurers rejected Amerex’s claim. The parties agreed to meet to discuss the terms of the rejection and the Excess Insurers’ claim analysis. During the meeting, the Excess Insurers’ consultants and forensic accountants discussed with Amerex the findings that led them to recommend rejecting Amerex’s claim. After that meeting, in April 2006, the parties agreed to mediate their dispute. In the mediation, the Excess Insurers provided significant documentary evidence to Amerex. Amerex’s own experts also presented their calculation of damages to the mediator. In April 2007, after conferring with the mediator, the Excess Insurers made a final offer. Without responding to that offer Amerex sued the excess insurers.

On June 4, 2007, after Amerex had filed its complaint, the Excess Insurers wrote to Amerex demanding appraisal and answered the complaint the next day, listing the appraisal demand among their affirmative defenses. The Excess Insurers then moved to compel an appraisal. The district court granted the Excess Insurers’ motion to compel appraisal on September 19, 2007. Subject to the terms of their contract, each party appointed one member of the Panel, and, when the parties could not agree on the Panel’s umpire, they petitioned the district court to make that appointment. The district court did so and then stayed the litigation pending resolution of the appraisal.

The Appraisal

In conducting the appraisal, the Panel reviewed documentary and testimonial evidence similar to that reviewed during both the Excess Insurers’ initial investigation and the subsequent mediation. The appraisal proceeding included the examination and cross-examination of witnesses, and a day exclusively set aside for Amerex’s rebuttal. On June 15, 2010, after almost two and a half years of review, the Panel issued its valuation decision, finding that Amerex’s damages amounted to approximately $1.3 million, just more than half of the value of Amerex’s insurance policy with Fireman’s Fund. Pursuant to the parties’ agreement, the Panel did not disclose most of its valuation methodology. It did, however, determine that the period of restoration concluded on October 31, 2001.

Because the Panel valued Amerex’s losses at less than the $2.5 million the company had already received from its primary insurance carrier, thereby precluding recovery from the Excess Insurers under the terms of their policies, the Excess Insurers moved in district court for summary judgment. The district court granted the Excess Insurers’ motion and dismissed Amerex’s complaint.

Analysis

Amerex contended that the Excess Insurers’ appraisal rights under the contract were waived, as their June 4, 2007, demand was untimely. The Second Circuit concluded that the Excess Insurers did not waive their appraisal rights by asserting them after Amerex initiated litigation because the appraisal demand would not  “result in prejudice” to the non-demanding party. Although the separation between the collapse and the appraisal demand was significant—almost six years—it is undisputed that much of the delay was due to Amerex’s inaction.

At the time the Excess Insurers made their demand, the district court expressed its expectation hat the appraisal process would facilitate a prompt resolution to an extended, complicated, wholly factual dispute concerning the extent of Amerex’s damages. Since a prompt resolution is the reason for the existence of the appraisal process the Second Circuit concluded that it was eminently reasonable for the district court to conclude that, if the value of the claim could be authoritatively fixed, the parties might well be able to resolve the dispute by settlement, without the need to address legal issues regarding coverage.

Scope of Appraisal

Amerex also contended that the district court should not have upheld the appraisal award because the Panel improperly decided questions of law.

While the dispute included legal arguments concerning the policy’s coverage, those disputes were not implicated in the appraisal’s resolution. The Panel instead focused solely on determining the extent of the damages, including calculating the relevant restoration period, and did not address whether the Excess Insurers’ policies covered those damages. The Panel did not address conflicting views of the applicable policies, but rather resolved factual questions regarding claims about the conflicting causes of the lost business income. Those were factual questions that can be resolved by a duly appointed appraisal panel, aided by the opinions of experts, including forensic accountants such as those who testified before the Panel below.

That an appraisal panel exercises judgement or produces a controversial result, however, does not turn factual disputes regarding damages into legal disputes regarding coverage. The complexity of the calculations of Amerex’s business losses required appraisers to do more than mechanistically consult objective market values.

Due Process

Finally, Amerex argued that the appraisal process itself turned into an arbitration that violated its due process rights. More specifically, Amerex alleged that it suffered a due process violation because the Excess Insurers could use the results of their investigation in the appraisal proceedings, while Amerex lacked a corresponding right to seek discovery from the Excess Insurers regarding their own investigation.

Amerex is correct that New York law recognizes significant differences between the authority and procedures applied in appraisals as opposed to arbitrations. Procedurally, the prevailing practice in appraisals is more informal and entirely different from the procedure governing arbitration.

While Amerex went into the appraisal with significantly less information about the Excess Insurers than the Excess Insurers had about Amerex, there was no violation of Amerex’s due process rights. It cannot be the rule that appraisals must furnish insured parties the right to extensive discovery from the insurers, as such a rule would turn appraisals into precisely the kind of quasi-judicial proceedings that New York law forbids.

ZALMA OPINION

This is an important decision upholding the true reason why insurance policies contain — usually required by statute — an appraisal provision that allows the amount of loss to be determined expeditiously by a panel of appraisers. That this appraisal panel took more than two years to reach a decision was still expeditious since litigation and extended discovery in such a complex case is even more time consuming and expensive.

The result of the appraisal showed that the excess insurers were correct and that the primary insurer, rather than fight an over $8 million proof of loss paid its $2.5 million limit which was $1.2 million more than the appraisal panel said they really owed. Fireman’s Fund overpaid and will, because of the passage of time, probably be unable to recover the overpayment but should, at least, look into the issue.

I have seen appraisals resolved in weeks and some that take, as did this case, years. Regardless, it is an important and expeditious method to resolve disputes over amount when there is no question of coverage. The insurer and the Excess Insurers tried to resolve the claim and could not. Appraisal resolved it and by making an award, and a judgment, less than the primary limit, destroyed any chance Amerex had to pursue a bad faith case against its insurers and proved that the proof of loss it submitted was excessive and not correct.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Posted in Zalma on Insurance | Leave a comment

Just For Fun

The Mortgagee

The story that follows is based on fact. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud.

As insurance companies become more sophisticated in the tools needed to defeat insurance fraud, the frauds become more complex. Those who earn a dishonest living stealing from insurance companies find that the simple, straightforward fraud, is no longer successful. They have become insurance scholars to learn better ways to steal from insurance companies.

The 1942 banking industry wrote a document known as the standard or union mortgage clause [Form 438 BFUNS] to protect mortgage holders from dishonest borrowers. The banks were concerned because occasionally their borrowers committed arson and the insurers refused to pay. The policy was declared void as a result of the arson and resulting fraud and neither the insured nor the mortgagee recovered.
As a condition of allowing their borrowers to buy insurance from particular companies, the banks insisted that the companies attach to their policies a union mortgage clause. The clause provided that if the borrower, by act or omission, caused the policy to be void, it would only be void as to the interest of the borrower and not the lender. Therefore, even if an insurer proved that  its insured burned the building down, it still must pay the mortgagee its interest. The contract between the mortgagee and the insurer was a separate and distinct policy. The insurer could only defeat it if the mortgagee had knowledge of an increase of hazard.

The union mortgage clause gave security to honest and reputable lenders. It also gave a dishonest lender the means to commit an arson for profit without the possibility of loss or criminal prosecution. The fraud would work with the insurance criminal first buying a distressed dwelling at a foreclosure sale for less than its true value. With a co-conspirator, he would arrange a mortgage on the dwelling for three times the amount paid. He would then buy a homeowners policy from an unsuspecting insurer, naming the mortgagee under a standard or union mortgage clause. Before the first installment was due on the premium financing the dwelling would burn to the ground. Gasoline would be found on the premises and the local fire arson unit would conclude that the fire was intentionally set. The building would be vacant and without contents. The named insured, the alleged borrower who had used a fictitious name in the purchase of the insurance, would disappear. He would not even give notice of the claim. The lender would submit a proof of loss claiming that its entire interest was destroyed. It would also make claim for the full policy limits, providing a copy of the mortgage instruments to establish its claim. The insurer, convinced that the insured set fire to the dwelling, and unable to reach him, would be thankful that it had no contents or additional living expenses to pay. It would write the named insured at his last known address denying his claim for failure to cooperate. They would pay the mortgagee’s claim in full.

Usually, the insurer, not wishing to get into the mortgage business, would not even request an assignment of the mortgage debt. The lender, paid more than the original price for the fire damage to the dwelling would issue a notice of foreclosure and sell the property at a foreclosure sale as an empty lot. The original named insured would share half the proceeds of the insurance policy with the mortgagee and would also receive 50 percent of the monies received from the foreclosure sale of the empty lot. The insurer, with no way of proving the conspiracy would close its file. The insurer believed that an arsonist had not succeeded in his crime. The insurer had no choice but to pay the “innocent” mortgagee.

This type of fraud continues. Unscrupulous lenders invest their profits in distressed properties, both residential and commercial. The losses they report are not always fire. Some more imaginative insurance criminals use the vandalism coverage to provide a more profitable fraud. First, they avoid the hazard of physical injury when setting an arson fire. They also avoid arrest if accidentally seen committing the arson. Second, by judiciously vandalizing the structure, the mortgagee and the named insured find that they can have a distressed property totally remodeled and restored at no cost. The borrower, shortly after taking possession, would take a three-pound sledge hammer and punch a single hole in every sheet of drywall in every room, a single hole in every cabinet door, a single hole in every passage way door breaks each porcelain fixture in the baths, break the lock and put a single hole in the front and rear entry door. He would also dent or damage the central heating system and cut jagged slashes through the carpeting.

The borrower, and named insured, would then disappear, since the entire transaction was a sham with fake names and identification. The mortgagee, claiming discovery of the damage on an inspection trip to decide why the payments had not been made, would report a vandalism claim. The mortgagee, knowledgeable about insurance, would have records showing that the premises were occupied less than thirty days before the discovery of the vandalism.

The insurer, in good faith, would agree to a scope of damage requiring the replacement of all of the drywall, the repainting of all of the rooms, the replacement of the carpet and all of the plumbing furnishings and fixtures. The mortgagee would agree to an actual cash value settlement. Then, using its own employed workmen, the mortgagee would repair the drywall with patching plaster, caulk fixtures and for one tenth of the cost of a reconstruction contractor would totally remodel the house. The mortgagee would then conduct a foreclosure sale and sell the remodeled house. The mortgagee would profit both the profit on the repairs and the profit on the sale of the now remodeled and restored house. The mortgagee and the borrower would split the proceeds equally and start the cycle over with a new house.

To defeat this type of insurance fraud, an adjuster must be professional, vigilant and exceedingly lucky.

(c) 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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No Coverage For Illegal Act

Is Shooting a Car and Killing Its Occupant An Occurrence?

Zalma on Insurance Makes Top 50

The Mississippi Court of Appeal was asked to determine whether a criminal act that caused the “accidental death” of a person can be an “occurrence” or “accident” as defined in an insurance policy and whether a criminal act exclusion applies in Rita Kees Lambert, Individually, and v. Safeco Insurance Company of America, No. 2011-CA-00166-COA (Miss.App. 05/08/2012).

FACTS

Rita Kees Lambert, individually and as a personal representative of all heirs at law and wrongful-death beneficiaries of her son, Brian Michael Kees, filed a wrongful-death suit in Rankin County Circuit Court against Al Ellis and John Does 1-10, alleging that Brian had suffered physical injuries and death as a result of Ellis’s gross negligence. The circuit judge assessed $75,000 in damages against Ellis. The circuit judge ultimately entered a final judgment finding that Ellis was not entitled to liability coverage under the homeowner’s insurance policy issued to him by Safeco Insurance Company of America (Safeco) for the $75,000 judgment entered against him as a result of Brian’s death. Lambert now appeals.

On August 13, 2005, Brian and his father, Michael Kees, attended a swimming party at Ellis’s home in Brandon, Mississippi. Ellis and Michael were billiards teammates. Ellis claimed that at some point during the pool party, Michael went into Ellis’s home and stole money. Michael exited the house with Brian and hurried to his car. After concluding that Michael had stolen money from him, Ellis retrieved his pistol and followed Michael outside. As Michael exited the driveway, Ellis fired his pistol at Michael’s car, which Ellis claimed was an attempt to disable and stop the car. Ellis stated that he did not know that Brian was in the vehicle. One of the bullets ricocheted off of the pavement and hit Brian. Brian later died as a result of the gunshot wound.

Ellis was arrested and charged with Brian’s murder. Ellis pled guilty to the lesser charge of manslaughter by culpable negligence, and he was sentenced to a term of incarceration, house arrest, and probation.

On August 15, 2005, Lambert, individually and as a personal representative of all heirs at law and wrongful-death beneficiaries of Brian, filed a wrongful-death suit in the Rankin County Circuit Court against Ellis and John Does 1-10. Ellis answered and denied liability for damages. On May 22, 2008, the circuit court entered an agreed order permitting Safeco, Ellis’s homeowner’s insurance carrier, to intervene in the wrongful-death action. On June 4, 2008, Safeco filed a complaint for declaratory judgment, asserting that Safeco’s homeowner’s insurance policy did not provide Ellis with liability coverage or a defense or indemnification for any claims arising out of Lambert’s wrongful-death suit. Safeco then filed a motion for summary judgment. Following a hearing, the circuit court denied Safeco’s motion, finding genuine issues of material fact on the issue of coverage.

Lambert moved for partial summary judgment on the issue of Ellis’s liability, which the circuit court granted. The circuit court also entered an agreed order, assessing $75,000 in damages against Ellis. After a bench trial on the remaining issue of whether Safeco owed liability coverage to Ellis for Lambert’s $75,000 award of damages, the circuit court entered its judgment in favor of Safeco, finding that Ellis was not entitled to liability coverage under Safeco’s homeowner’s insurance policy. Lambert filed her appeal on January 28, 2011.

DISCUSSION

On appeal, Lambert argues that the circuit judge erred by finding that Ellis is not entitled to liability coverage under his homeowner’s insurance policy, issued by Safeco, for the $75,000 judgment entered against him as a result of Brian’s death. Specifically, she claims that the circuit judge erroneously determined that the policy provides no coverage because:

  1. Ellis committed an illegal act;
  2. Ellis intended to discharge the firearm in the direction of the vehicle, actions that were not accidental and not an “occurrence” as required under the policy; and
  3. Ellis’s actions were intentional, thus barring coverage under the policy’s intentional acts exclusion.

ANALYSIS

Under Mississippi law, when the words of an insurance policy are plain and unambiguous, the court will afford them their plain, ordinary meaning and will apply them as written. Additionally, provisions that limit or exclude coverage are to be construed liberally in favor of the insured and strongly against the insurer.

In his final judgment on the issue of coverage, the circuit judge determined:

        The uncontradicted evidence shows that . . . Ellis knowingly and willfully discharged his weapon at the vehicle in which Brian . . . was riding, evincing a depraved heart regardless of human life, and the evidence is uncontradicted and undisputed that . . . Ellis in fact pled guilty to the crime of manslaughter by culpable negligence. It cannot be disputed by the parties that . . . Ellis did in fact and in law commit a crime and thus an illegal act. Accordingly, the court finds that the death of Brian . . . was caused by an illegal act committed by . . . Ellis, and therefore, pursuant to the Illegal Acts Exclusion in the subject Safeco policy, Safeco does not owe liability insurance coverage to . . . Ellis for the claims being made against him as a result of the death of Brian . . . .

Although there was no proof that Ellis intended to harm or kill Brian personally, the undisputed evidence showed that Ellis did intend the act of shooting a firearm towards and at the vehicle in which Brian was riding. Because Ellis intended the act of shooting his gun and shooting it at the Kees’ vehicle, Ellis’ actions were not an accident and thus not an “occurrence” as required under the subject Safeco policy.

Lambert argued that although Ellis intended to discharge his firearm, the uncontradicted evidence established that he did not intend the consequences of his act – Brian’s death. Lambert also pointed out that Ellis pled guilty to manslaughter by culpable negligence, which she claims is not a specific-intent crime. Lambert thus claimed that the record shows that Ellis lacked the requisite intent to commit an illegal act; therefore, the illegal-acts exclusion in the policy does not apply.

Ellis admitted that he indeed intended to discharge his firearm at the Kees’ vehicle, resulting in Brian’s death (although Ellis claims he only fired at the vehicle with the intention of disabling the car). That fact alone was sufficient for the Mississippi Court of Appeal and it affirmed the circuit judge’s finding that Brian’s death was caused by an illegal act committed by Ellis. Under the illegal-acts exclusion in the Safeco policy, therefore, Safeco could not not owe liability insurance coverage to Ellis.

The record supported a finding that because Ellis intended to discharge the firearm, his actions were not an “accident’ or “occurrence” as required by the policy.

ZALMA OPINION

The Mississippi court applied the facts to the policy wording and since the policy was clear and unambiguous it applied the policy wording. Had it ruled otherwise murderers could avoid the responsibility for their actions by passing that responsibility to an insurer by merely saying — “I didn’t intend to kill him, I was just shooting at his car.” When a policy excludes bodily injury as a result of criminal acts any criminal act should be sufficient. Shooting at a car — occupied or not — is an intentional act and is not, by any variation of the definition, an “occurrence.”

The judgment was small — only $75,000 — and Mr. Ellis should work hard until he earns enough to pay the heirs. His insurer did not agree to protect him from criminal and intentional acts and seeking such coverage was as wrongful as the shooting.

Barry Zalma, Inc.

(c) 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

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Potential of Coverage Not Unlimited

Intentional Act Never Covered

Zalma on Insurance Makes Top 50

Imaginative and creative lawyers, seeking to provide a defense to an insured person who intentionally and willfully caused damage to another will attempt to characterize the litigation, and the facts surrounding it, as negligent rather than intentional. Since insurance requires either a contingent or unknown event to work an intentional act known to cause damage to another should never be covered for defense or indemnity. In Chi Kin Hui v. Fire Insurance Exchange, No. A133238 (Cal.App. Dist.1 05/02/2012) the insured’s lawyers tried to convince the court that the person suing the plaintiff could include within the intentional act allegations concepts of negligence.

Chi Kin Hui appealed from a summary judgment entered against him on his complaint seeking insurance coverage for the defense of a claim for intentionally destroying vegetable crops by tearing out power blocks that operated the water supply to the crops. The applicable insurance policy provides liability coverage for property damage caused by an “occurrence,” defined as an “accident.”

FACTS

Hui owns as a tenant in common, 20 acres of agricultural land in Gilroy. One of the Gilroy cotenants, Quan Zhong Zhang, has farmed the land since 2001 and paid rent to Hui for the right to do so. In 2009, a dispute arose between the Gilroy cotenants which ripened into litigation.

In August 2009, Hui sued Zhang for breach of the co-tenancy agreement, seeking to eject Zhang from the Gilroy property. Hui also sought to foreclose on a deed of trust securing a purchase-money loan Hui extended to Zhang when Zhang bought his cotenancy interest from Hui. Zhang countered by filing a cross-complaint against Hui alleging a “course of defamation, libel and abuse of process” designed to drive Zhang from the property. Zhang stated multiple causes of action, including malicious damage to growing crops.

Zhang alleged that Hui “destroyed more than $30,000 in vegetable crops” being cultivated on the Gilroy property “by tearing out power blocks that operated the water supply to the crops and power to the residences.”

Hui tendered the defense of the Zhang cross-complaint to Fire Insurance Exchange, the insurer of Hui’s San Francisco property. Hui conceded that most of the claims in the cross-complaint are not covered by the Fire Insurance Exchange policy but contended that the property damage claim for crop destruction is covered. The Fire Insurance Exchange policy is a “dwelling” policy that covers physical loss to the San Francisco property and personal liability. Hui sought to invoke coverage under a provision covering “those damages which an insured becomes legally obligated to pay because of bodily injury or property damage resulting from an occurrence . . . . “

“Occurrence” is defined as “an accident . . . neither expected nor intended by a reasonable person in the position of any insured, which results in bodily injury or property damage.” The policy excludes coverage for property damage arising from the insured’s business pursuits or resulting from “an existing condition on an uninsured location.”

Claim Denied

Fire Insurance Exchange notified Hui that there was no coverage for the cross-complaint because the alleged property damage did not result from an accident and arose from Hui’s business pursuits and from existing conditions on an uninsured location. In September 2010, Hui brought this action for a declaration that Fire Insurance Exchange is obligated to defend the Zhang cross-complaint and for damages for breach of the insurance contract and bad faith insurance practices in denying a defense.

The Judgment

Fire Insurance Exchange filed a motion for summary judgment arguing that the Zhang claim “is not an ‘accident’ within the meaning of the policy and California law. It also arises out of both a business pursuit and an uninsured location, and is consequently excluded from coverage under the terms of the policy.” The trial court granted the motion upon concluding that “[t]he underlying acts referred to in the Zhang cross-complaint[] do not constitute an ‘occurrence,’ defined in the policy to mean an ‘accident.’ ” Judgment in favor of Fire Insurance Exchange was thereupon entered and Hui filed a timely notice of appeal.

Analysis

The duty to defend, which applies even to claims that are “groundless, false, or fraudulent,” is separate from and broader than the insurer’s duty to indemnify. However, where there is no possibility of coverage, there is no duty to defend. The duty to defend, although broad, is not unlimited; it is measured by the nature and kinds of risks covered by the policy.

In the context of liability insurance, an accident is an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause. The common law construction of the term “accident” becomes part of the policy and precludes any assertion that the term is ambiguous.

The Court of Appeal concluded that there was no possibility of coverage and, thus, no duty to defend. The alleged crop damage did not result from an accident. Zhang alleged that Hui maliciously destroyed more than $30,000 in vegetable crops being cultivated on the Gilroy property by tearing out power blocks that operated the water supply to the crops and power to the residences and did so as part of a concerted effort to destroy Zhang and to eject him from the property. Hui conceded that a nonaccidental, intentional tort is alleged but argued that crop destruction can happen accidentally so that he may ultimately be found liable for accidental damage that would be covered by the policy.

In California the bare allegations of the claimant’s complaint do not control as it does in states that apply the four or eight corners rules or the court would have been compelled on the wording of the complaint to deny coverage. However, in California, if the broad charge made, which claims an intentional or wilful tortious act, contains within it the potentiality of a judgment based upon non-intentional conduct, the insurer will be required to defend.

The duty to defend does not turn upon the characterization of the conduct pleaded by the third party but upon whether the alleged facts could support a claim that is within the coverage of the policy.

Coverage turns not on the technical legal cause of action pleaded by the third party but on the facts alleged in the underlying complaint or otherwise known to the insurer.

While a third party’s claim is broadly construed when evaluating potential insurance coverage, the claim must assert some facts or legal theory that bring the claim within the terms of the policy. There must be something in the existing complaint or other facts known to the insurer indicating a potential for coverage. An insured may not trigger the duty to defend by speculating about extraneous facts regarding potential liability or ways in which the third party claimant might amend its complaint at some future date.

Potential liability needed for an insured to obtain a defense is not judged by speculation about what facts or theories could have been alleged by the third party. Rather, the duty is determined by an examination of the facts and theories actually alleged by the third party and a determination of whether these known facts created a potential for coverage under the terms of the policy.  The Zhang cross-complaint does not contain any facts showing the possibility of a judgment based upon an accident.

An accident is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs after the act of the insured that produces the damage. Nothing in Hui’s complaint, the underlying cross-complaint, or the facts presented in opposition to the summary judgment motion suggest that the crop damage here was unexpected. The facts presented in support of the summary judgment motion indicate without contradiction that the damage was the direct and foreseeable result of Hui’s act of cutting electricity to the crops’ water supply. This was not an accident. The judgment denying defense was affirmed.

ZALMA OPINION

“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

Hui intentionally damaged Zhang’s growing crop. He was sued for the damage and sought coverage from the liability insurance provided by the insurer of his home. By doing so he attempted to subvert the meaning of insurance by stretching the phrase “potential liability” beyond reason. Fire Insurance Exchange should be commended for refusing to provide a defense to such intentional conduct and fight the case through the trial and appellate court.

Zalma Insurance Consultants

(c) 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Posted in Zalma on Insurance | Leave a comment

Private Limitation of Actions Provision Enforced

Failure to Read Policy No Excuse

Zalma on Insurance Makes Top 50

In more than 40 years of legal practice I have only interviewed two people who claimed they read and understood their insurance policy — both lied. Insurance policies, especially modern easy to read policies of insurance, are written at a fourth grade level. My eleven year old grandson has no problem reading and understanding an insurance policy. He, however, like most of the U.S. public, has no interest in reading a policy.

Failing to read an insurance policy can be very expensive and deprive a person insured of the rights paid for when the policy was acquired. In Brenda Perry v. Damon Kelty and State Farm Mutual Automobile Insurance Company, No. 2011-CA-000160-MR (Ky.App. 05/04/2012) Ms. Perry claimed she never received the full contract of insurance and was, therefore, not bound by a two-year private limitation of action provision and could file within the state’s 15-year statute of limitation.

THE FACTS AND ISSUES

Brenda Perry, appealed the order of the Jefferson Circuit Court, granting summary judgment in favor of Damon Kelty and State Farm Mutual Automobile Insurance Company, concerning Perry’s claim for underinsured motorist coverage.

Perry was the holder of an insurance policy issued by State Farm. Perry brought suit against State Farm for underinsured motorist coverage following a motor vehicle accident in which she and Kelty were involved on August 5, 2005. When that accident occurred, Perry was driving a 1994 Ford Thunderbird. In the trial court Perry conceded that a certified copy of the policy issued by State Farm, with all attachments and endorsements, was a true and accurate copy of the policy in effect on or about August 5, 2005, the date of the accident.

Perry received the Declaration Page for the policy, which confirmed the initial policy period from September 10, 2003, to March 8, 2004, and that the policy consisted of the Declaration Page, the policy booklet-form 9817.5, and any endorsements issued to her with any subsequent renewal notice. State Farm asserted that the Declaration Page also advised Perry of the endorsements to her policy, and specifically referenced Endorsement 6126GP, which provided that policy holders had to file a claim for underinsured benefits within two years from the date of the accident or from the last basic or added reparation payment made by any reparation obligor, whichever later occurred.

Perry admitted that she did not commence the action against State Farm for underinsured benefits within two (2) years of the August 5, 2005, motor vehicle accident, or within two years of the last basic or added reparation benefits.

On March 30, 2009, Perry issued summons against State Farm, commencing an action for underinsured benefits. State Farm asserted the affirmative defense of statute of limitations based upon what Perry asserts was an undelivered and unsigned contract with an amendment that reduced her right to sue from fifteen years to two years. State Farm moved for summary judgment.

Perry asserted, in her response, non-delivery of the written contract and of the amendatory endorsement. She argued that State Farm presented no evidence that the 1994 Ford Thunderbird insurance contract, along with its amendatory endorsement, was ever delivered, received, signed, and/or acknowledged by Perry. Regardless, the trial court granted State Farm’s motion for summary judgment on December 22, 2010.

ARGUMENT

On appeal, Perry made one argument – namely, that in the absence of a signed, written contract, the statute of limitations was fifteen years to bring suit, and not two years. Perry argued that the court below erred in entering its order of summary judgment. In making this argument, Perry acknowledged that the policy contract specified a term of two years in which to bring suit. Nevertheless, she argued that a genuine issue of material fact existed concerning her notice and receipt of the new insurance policy along with its amendatory endorsement limitations.

Perry argued that State Farm had the burden of proving that she had received and signed the new contract with the specified terms, and that she had accepted them, and that without such proof, the court must favor the insured. She asserted that her admission that the policy was in effect was not determinative of the underlying issue as to whether she was provided with a copy of the contract and put on notice of its new limitations and conditions. By so doing she asked the court to enforce those parts of the policy, that she claimed she did not receive but liked, and not enforce the part of the policy she did not like.

State Farm argued that Perry’s physical receipt of a copy of the policy, or lack thereof, is not material. Because Perry acknowledged receipt of the Declarations Page and the premium notices for her policy, all received from September of 2003 until her motor vehicle accident in August of 2005. Further Perry availed herself of the policy terms and conditions when she commenced her action, albeit untimely, against State Farm for underinsured benefits. Receipt of the Declaration Page, which identified the contents of her policy, and her affirmative action of paying premiums, as well as her citation to a provision of the written policy to support an action for benefits, confirm Perry’s acceptance of the policy.

The two-year limitation to commence an action for underinsured benefits set forth in Perry’s policy is the same limitation as that set for an action against a tortfeasor in the Kentucky Motor Vehicle Reparations Act, as codified at Kentucky Revised Statutes. Kentucky courts, like those in most states, have previously held that a two-year limitation of this nature for suits against an underinsured carrier is not unreasonable.

The appellate court concluded that that the limitation contained in the policy is clearly set forth in Endorsement 6126GP, which was referenced in the Declaration Page that Perry admittedly received. Failure to read or become aware of the content of the limitation provision cannot serve as a basis for invalidating the condition or no contract condition could ever be enforced.

ZALMA OPINION

If, as Perry attempted, an insured could claim they did not receive a policy and could then select, like in a cafeteria, parts of the policy that they like and ignore parts of the policy they did not like. The Kentucky court enforced the law and refused to allow a person who sat on her rights by claiming she did not receive or read the policy. She took advantage of the coverage, paid premiums, and made a claim based on the validity of the contract except for the limitation provision.

The court was kind. The suit was frivolous and the parties should have been punished for taking up the time of the court.

Barry Zalma, Esq., CFE

(c) 2012 – Barry Zalma

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

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

He can be reached at any time at 310-390-4455 or by e-mail at zalma@zalma.com.

Posted in Zalma on Insurance | 1 Comment

Court Refuses to Rewrite an Insurance Policy

Evidence is Required to Prove Exclusion Applies

The Indiana Court of Appeal was called upon to resolve an insurance dispute over an exclusion for causing an accident while under influence of a controlled substance. In Shawn A. Keckler, Kari Felda, Special Administrator To the Estate of v. Meridian Security Insurance Company, No. 43A03-1112-PL-551 (Ind.App. 04/24/2012). The insurance issue arose when Shawn Keckler, Kari Felda (as Special Administrator to the Estate of Ryan Holloway), Janice Norman and DeWayne Scott (as the mother and father of Bryant Scott), Timothy and Sara Boganwright, and Indiana Farm Bureau Insurance Company (“Farm Bureau”) (collectively, “the Appellants”) appealed the trial court’s entry of summary judgment in favor of Meridian Security Insurance Company (“Meridian”) in Meridian’s declaratory judgment action.

Issues

The Appellants raise five issues, which the court combined and restated as whether the trial court properly concluded as a matter of law that an exclusionary clause in Meridian’s umbrella insurance policy that insured Nathan Creighton at the time of a severe automobile accident caused by him precludes any and all claims by the Appellants against Meridian’s policy and whether public policy requires exclusion of coverage for the Appellants’ claims.

Facts

Shortly after noon on June 29, 2008, Creighton was driving a car westbound on State Road 25, an undivided two-lane road in Kosciusko County, when he approached a vehicle that was stopped in the westbound lane in front of him and waiting to make a left turn southbound onto County Road 1300 West. Creighton, who was eighteen years old, had three passengers in his car: Scott, Holloway, and Keckler. Instead of stopping behind the turning vehicle, Creighton attempted to pass it on the left, crossing into the oncoming eastbound lane of State Road 25. This caused an immediate head-on collision with a pick-up truck driven by Timothy Boganwright, who was traveling eastbound on State Road 25. Scott and Holloway were pronounced dead at the scene of the accident. Both Keckler and Creighton sustained brain injuries and have no memory of the accident. Boganwright also was injured, but his injuries were not as severe.

Police obtained a search warrant to test Creighton’s blood and urine at the hospital for drugs and alcohol. The test results were negative for alcohol but positive for cannibinoids, i.e., marijuana. Creighton later was charged with and pled guilty to one count of Class D felony operating a vehicle with a controlled substance in the body resulting in serious bodily.

At the time of the accident, Creighton’s primary insurer (through his father) was Progressive, with a global policy limit of $500,000. Creighton also was an insured under his father’s umbrella policy issued by Meridian, with a coverage limit of $1,000,000.  After lawsuits were filed by the people injured in the accident, Meridian filed a separate declaratory judgment action against the Appellants asserting that it was not required to provide coverage for any injuries caused by Creighton because of the following exclusionary clause in the policy:

The coverages provided by this policy do not apply to . . . “Bodily injury” or “personal injury” arising out of . . . [t]he use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance(s) as defined by the Federal Food and Drug Law at 11 USCA Sections 811 and 812. Controlled substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician . . . .

Keckler filed a motion for summary judgment against Meridian, in which the other Appellants joined, and Meridian responded with a cross-motion for summary judgment. As part of its designation of evidence, Meridian submitted the deposition of a toxicologist, Dr. Daniel McCoy. Dr. McCoy reviewed Creighton’s hospital test results as well as depositions given by Creighton and Keckler, which were inconclusive on any time frame in which Creighton might have last smoked marijuana before the accident.

Dr. McCoy explained that the test performed by the hospital was “generic” and did not indicate whether the cannibinoids in Creighton’s system were THC, or carboxy THC, or a combination of the two. THC is the psychoactive ingredient in marijuana, while carboxy THC is not psychoactive but is a metabolite of THC, or “a residual non-active drug that hangs on or keeps or it stays around for a longer period of time.” Carboxy THC can be detected within a person’s body for days after smoking marijuana, while the psychoactive effect and detectable amount of THC peaks at about twenty to thirty minutes after usage and then declines. Also, a person who frequently smokes marijuana may have carboxy THC in their system essentially “all the time.” Dr. McCoy opined that, for normal activities, the psychoactive effect of marijuana is felt for three to six hours, although testing of persons having to perform complicated tasks, such as pilots, has indicated that marijuana may affect the performance of such tasks for as long as twenty-four hours.

Dr. McCoy testified that the driving maneuver Creighton made in crossing into the oncoming lane of traffic was “consistent with marijuana use.” Dr. McCoy agreed that he did not know, based on the hospital test result, “when Mr. Creighton would have last used marijuana,” and also that there could not be any testing now performed, even if a sample of Creighton’s blood still existed, that could reliably determine the last time he had smoked marijuana.

On November 7, 2011, the trial court entered summary judgment in favor of Meridian. The trial court concluded that the facts do not demonstrate that the possession or transportation or marijuana within the Dodge Intrepid driven by Nathan S. Creighton was the efficient and predominating cause of the accident. However, the trial court ruled that Meridian was not required to provide any coverage for the accident, observing that the general public policy of Indiana is that no illicit drug use shall occur while driving a vehicle and that under the criminal law, there is no accepted agreement as to the quantity of a controlled substance needed to cause impairment.

Analysis

This case turned upon an exclusionary clause in Meridian’s policy. Interpretation of an insurance policy is a question of law that is appropriate for summary judgment. Meridian’s policy excludes coverage for any claim for personal injury “arising out of . . . [t]he use, sale, manufacture, delivery, transfer or possession by any person” of a controlled substance, including marijuana.  Meridian argues solely that the accident and the injuries suffered by Boganwright, Holloway, Keckler, and Scott arose out of Creighton’s “use” of marijuana.

In Indiana, the phrase “arising out of” as used in insurance policies long has been construed to mean that one thing must be the “efficient and predominating” cause of something else. Additionally, when there is more than one possible cause of an otherwise insurable injury, it generally is a question of fact as to what the predominant cause of the injury was in order to determine if the injury “arose out of” an activity that is excluded from coverage.

In order to invoke the controlled substances exclusionary clause in its policy, Meridian was required to establish that Creighton’s use of marijuana was the efficient and predominating cause of the injuries to Boganwright, Holloway, Keckler, and Scott. Meridian failed to meet the burden. Persons of average intelligence reading Meridian’s policy and its exclusion for injuries “arising out of” the use of marijuana would presume that, for the exclusion to have effect in the case of a car accident, there must be some evidence that the accident was caused by or at least related to marijuana’s impairing or psychoactive effects, or possibly use of the drug while driving.

Surprisingly, case law regarding criminal convictions for operating a vehicle with a controlled substance in one’s blood, or for operating a vehicle while intoxicated resulting in death or serious bodily injury, have little to no application in the context of interpreting insurance even though the conviction is determined beyond a reasonable doubt.

Regardless of the lack of conclusive, undisputed evidence that the accident arose out of Creighton’s use of marijuana, Meridian essentially contended that the court should read a “public policy” exclusion into its insurance policy.

The Court of Appeal insisted on following Indiana law that a court may not rewrite an insurance contract. The power to interpret insurance policies does not extend to changing their terms. Reading a “public policy” exception into Meridian’s policy would be a rewriting of the policy, in contravention of established law that prohibits such rewriting.

The insurance policy in no way saves the insured from the consequences of his criminal act. Creighton has been penalized for that act. Denying insurance coverage here, on the other hand, would have drastic consequences not only for Creighton, but also for “innocent” injured parties seeking recompense for the injuries he caused.

ZALMA OPINION

I agree with the Court of Appeal that it is up to the Supreme Court or the Legislature to create a public policy. No one, as the trial court agreed, should be allowed to recover from an insurance policy for an accident that resulted from that persons use of a psychoactive controlled substance like marijuana. By placing a burden on the insurer that could not be met — to determine the efficient proximate cause of the accident was the marijuana — when the authorities failed to get adequate testing because what they got was sufficient to convict the driver beyond a reasonable doubt.

Once a person is convicted of a criminal act of operating a vehicle with a controlled substance in the body resulting in serious bodily should have been sufficient for proving the requirement of the exclusion. The concern for those injured is an attempt to make insurance a governmental entitlement rather than a contract between two people.

One must be concerned for the victims of the accident but that is not a reason to change the terms of the contract of insurance.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

 

Posted in Zalma on Insurance | 1 Comment

Third Party Beneficiary Can Sue Insurer for Bad Faith

Med Pay Is For Benefit Of Injured

Zalma on Insurance Makes Top 50

Patricia Meleski appealed a trial court’s non-final order dismissing on summary judgment her bad-faith claims against Partners Mutual Insurance Company. In Patricia Meleski v. Schbohm LLC and Partners Mutual Insurance Company, No. 2010AP2951 (Wis.App. 05/01/2012) the Wisconsin Court of Appeal was asked to determine whether a non-insured may assert bad-faith claims against an insurance company when the company’s obligation to the non-insured is fixed, and the non-insured contends the company refuses in bad faith to discharge that obligation.

FACTS

Meleski sued Schbohm, LLC, and Partners Mutual, Schbohm’s insurance carrier. Meleski’s complaint alleged that she was hurt when she fell on Schbohm’s property. She claimed personal-injury and medical-expense damages. This appeal concerns only the medical-expense damages.

The Partners Mutual policy promised to “pay medical expenses … for ‘bodily injury’ caused by an accident” either “[o]n premises” Schbohm owned or rented, or “[o]n ways next to premises” Schbohm owned or rented. Partners Mutual does not dispute the applicability of this insuring clause.

Partners Mutual also promised Schbohm that it would pay the medical expenses “regardless of fault.” Meleski claims that Partners Mutual nevertheless stonewalled her, and refused, in the words of her complaint, to pay her “medical expense claim, without reasonable proof to establish” that it “was not responsible for payment.” The circuit court dismissed her bad-faith claims because, as it opined in an oral decision, those claims, in its view, could only be asserted by someone in “privity of contract” with the insurance company.

PRIVITY NOT REQUIRED

Although insurance policies issued to an insured are contracts between the carrier and the insured, they also can create third-party-beneficiary duties running from the insurance company to a non-insured.

Where one person, for a consideration moving to him from another, promises to pay to a third person a sum of money, the law immediately operates upon the acts of the parties, establishing the essential of privity between the promisor and the third person requisite to binding contractual relations between them, resulting in the immediate establishment of a new relation of debtor and creditor, regardless of the relations of the third person to the immediate promisee in the transaction; that the liability is as binding between the promisor and the third person as it would be if the consideration for the promise moved from the latter to the former and such promisor made the promise directly to such third person, regardless of whether the latter has any knowledge of the transaction at the time of its occurrence; that the liability being once created by the acts of the immediate parties to the transaction and the operation of the law thereon, neither one nor both of such parties can thereafter change the situation as regards the third person without his consent.

The tort of insurance-company bad faith is based on a breach of a duty imposed as a consequence of the contractual relationship. Although generally limited to the breach of good faith and fair dealing the insurance company owes its insured, it is not so limited. The key is whether a person seeking to assert a bad-faith claim against an insurance company is in a contractual relationship with that insurance company. Since third-party beneficiaries of contracts are in such a relationship – that is, they are in the class that the insurance contracts were designed to benefit.

Meleski is such a claimant.

The right of a third party claimant to maintain an action for bad faith against the insurer has been recognized only where the claimant has a fixed claim, whether as a result of statutory entitlement, for example under the worker’s compensation statutes, or as a result of an unsatisfied judgment against the insured.

Since the policy obligated Partners Mutual to pay medical expenses irrespective of anyone’s fault, Meleski’s medical-expenses claim became fixed or vested.  Partners Mutual, therefore, is obligated to treat Maleski in good faith. Failing to do so, as Meleski alleged, Partners Mutual is subject to her bad-faith action because she became, at the moment she fell, a fixed third-party beneficiary of the Partners Mutual insurance contract with Schbohm.

The Wisconsin Court of Appeal, as a result, allowed Meleski to enforce her third-party-beneficiary rights against Partners Mutual. Of course it will be up to a jury or judge sitting as a fact-finder to determine whether Partners Mutual acted in bad faith in rejecting Meleski’s claims for medical damages, as she contends.

ZALMA OPINION

Med pay insurance is a no-fault coverage that provides medical payments to anyone on the premises of the insured regardless of responsibility for the injury. The med pay coverage is not for the benefit of the person insured but for the benefit of a visitor on the insured’s premises.

There are, as the court noted, many reasons why an insurer would refuse to pay a med pay claim that is not bad faith such as fraud, excessive billing or medical charges not related to the injury. Meleski believes she is entitled to payment and Partners Mutual believes she is not. The judge or jury will determine who is right.

Since med pay coverages are usually small this may be a classic tempest in a tea pot that should have been resolved amicably and without the use of the courts.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | 1 Comment

You Only Get What You Ask For

Flood Insurer is Not A Fiduciary

James Grissom purchased flood insurance for his home in Pascagoula, Mississippi under the Federal National Flood Insurance Program (“NFIP”). Grissom was eligible for a preferred risk insurance policy, but did not know about his eligibility. Following the destruction of his home in Hurricane Katrina, Grissom sued Liberty Mutual for negligent misrepresentation to recover the difference between the coverage he had and the coverage he could have purchased under the preferred risk policy. The district court concluded that Grissom’s claim was not preempted by federal law and sent the case to the jury which awarded Grissom $212,900 in compensatory damages. Liberty Mutual appealed in James P. Grissom, v. Liberty Mutual Fire Insurance Company No. 11-60260 (04/23/2012)  and asked the Fifth Circuit Court of Appeal to reverse.

FACTS

In 1977 Grissom first purchased flood insurance through the Federal Emergency Management Agency’s (“FEMA”) Write Your Own (“WYO”) flood insurance program under the National Flood Insurance Act. Liberty Mutual was Grissom’s WYO insurance provider when Hurricane Katrina severely damaged his property. This court has previously discussed the WYO program:

By enacting the National Flood Insurance Act of 1968, Congress established the Program to make flood insurance available on reasonable terms and to reduce fiscal pressure on Federal flood relief efforts. Within the Program, the WYO program allows private insurers to issue flood insurance policies in their own names. Under this framework, the Federal government underwrites the policies and private WYO carriers perform significant administrative functions including “arrang[ing] for the adjustment, settlement, payment and defense of all claims arising from the policies.” WYO carriers must issue policies containing the exact terms and conditions of the [Standard Flood Insurance Policy ("SFIP")] set forth in FEMA regulations. Additionally, FEMA regulations govern the methods by which WYO carriers adjust and pay claims.

In 1989 a preferred risk policy became available for the flood zone on which Grissom’s home was located, but Grissom is unsure if he was ever explicitly offered the preferred risk policy. There is no indication that Liberty Mutual affirmatively informed Grissom he was eligible for preferred coverage. In 2004 he renewed his Liberty Mutual policy with covered total loss of up to $121,200 for a $531 premium. Had he been enrolled in the preferred risk policy, he would have had $350,000 in total covered loss for a $317 premium. The 2004 renewal notice from Liberty Mutual mentioned the existence of preferred rate policies, but did not indicate whether Grissom was eligible.

In August 2005, Grissom’s home was destroyed by Hurricane Katrina. Liberty Mutual paid Grissom’s $121,200 claim, the policy maximum. Grissom then sued Liberty Mutual in Mississippi state court to recover the difference between the coverage he had and the coverage he could have had under the preferred risk policy.  Liberty Mutual appeals.

DISCUSSION

  1. The issues on appeal were:
  2. whether the district court erred by determining this was a policy procurement case rather than a claims handling case subject to federal preemption;
  3. whether the district court erred by allowing this case to go to a jury when federal funds were at risk; and
  4. whether Mississippi law recognizes negligent misrepresentation in the insurance context.

Federal Preemption

Federal law preempts state law tort claims arising from claims handling by a WYO according to multiple Fifth Circuit decisions. Federal law, however, does not preempt state-law procurement-based claims. The dispute is whether Liberty Mutual’s failure to inform a current customer, Grissom, he might be eligible for a richer insurance policy constitutes “claims handling” or is “insurance procurement.”

The key factor to determine if an interaction with an insurer is “claims handling” is the status of the insured at the time of the interaction between the parties. If the individual is already covered and in the midst of a non-lapsed insurance policy, the interactions between the insurer and insured, including renewals of insurance, are “claims handling” subject to preemption. Grissom was insured by Liberty Mutual at the time of his interactions with Liberty Mutual. He filed a claim for coverage which was granted and paid in full.

Only after Grissom discovered his eligibility for additional subsidized coverage did he raise the negligent misrepresentation claim to obtain additional covered payments. Grissom is alleging that while he was already insured, his insurer should have been more proactive in informing him of his eligibility for additional subsidized flood insurance coverage. Because Grissom’s dispute with Liberty Mutual relates to his renewal of a policy already in place—claims handling, not the initial procurement of the insurance policy — the Fifth Circuit concluded that Grissom’s state law claim is preempted.

Federal Funds

Liberty Mutual alleges that the district court erred in submitting this case to the jury because the federal government would be required to pay any damages award and has not affirmatively and unambiguously granted the right to a jury trial for such matters. Grissom does not dispute that if federal funds are at stake a jury trial is inappropriate. However, he alleged FEMA is not obligated to pay damage awards that result from omissions by WYO insurance companies because the insurance company receives a commission for signing up insureds. By submitting the case to the jury, the district court implicitly determined that the Arrangement which forms a contract between WYO insurers and FEMA does not require FEMA to either defend or indemnify Liberty Mutual.

The NFIP establishes private insurers “as fiscal agents of the United States.” [42 U.S.C. § 4071(a)(1).] The federal government pays flood insurance claims and reimburses costs, including defenses costs, for adjustment and payment of claims by private insurers in the WYO program. The federal government will both indemnify and defend WYO insurers in the program for many insurance and litigation expenses unless the litigation is grounded in actions by the WYO Company that are significantly outside the scope of this Arrangement, and/or involves issues of agent negligence.

The right to a jury trial has not been extended by the government to WYO cases because the line between between a WYO company and FEMA is too thin to matter for the purposes of federal immunities. Because FEMA is presumed to be paying both the litigation expenses and any resulting damage award, the Fifth Circuit concluded that the district court erred in submitting this case to the jury.

Negligent Misrepresentation by Insurer in Mississippi

Although the state law claim is preempted, Grissom’s negligent misrepresentation by an insurer claim also does not find a basis in Mississippi law. In Mississippi, a plaintiff must meet five factors to succeed in a claim of negligent misrepresentation:

  1. a misrepresentation or omission of a fact;
  2. that the representation or omission is material or significant;
  3. that the person/entity charged with the negligence failed to exercise that degree of diligence and expertise the public is entitled to expect of such persons/entities;
  4. that the plaintiff reasonably relied upon the misrepresentation or omission; and
  5. that the plaintiff suffered damages as a direct and proximate result of such reasonable reliance.

Mississippi follows the legal principal that the purchase of insurance is an arms-length transaction and no fiduciary duty arises between an insurance company or its agents and the purchaser of the insurance. In Mississippi, a claim of fraud by omission arises only where the defendant had a duty to disclose material facts purportedly omitted. Insurance Agents in Mississippi do not have an affirmative duty to advise buyers regarding their coverage needs. Liberty Mutual was not required to provide advice to insurance customers. Because Liberty Mutual was not offering insurance advice, was not a fiduciary of Grissom, and did not offer any statement to Grissom to imply the lack of alternative insurance options, Mississippi law would not recognize negligent misrepresentation as a cause of action against Liberty Mutual and the submission of negligent misrepresentation to the jury was error.

The Fifth Circuit reversed the ruling of the district court with instructions to dismiss Grissom’s claim.

ZALMA OPINION

Flood insurance is not insurance in the usual sense but is a federal entitlement program that is called “insurance.” It is treated differently than the type of policies actually issued by an insurance company. In this case, Liberty Mutual, did not underwrite and insurance policy but simply acted as a representative of the federal government and took a fee for handling the issuance of the policy and the handling of claims.

More importantly, the Fifth Circuit accepted the rule in Mississippi and most states that the relationship between an insurance agent and his or her customer is not a fiduciary relationship and does not remove from the person to be insured the duty to take care of his or her needs. The insurer and the agent are only obligated to obtain for the insured that which the insured asked for and not to force them to buy more or better insurance. Mr. Grissom got the insurance he ordered. He was not interested in a better insurance coverage until Katrina destroyed his house. Although hindsight is always 20/20 an insurer should not be required to pay for what hindsight told Mr. Grissom he should have bought.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | 1 Comment

Collateral Source In Colorado

Colorado Allows Doctor’s Billing Rather Than True Value of Services

Zalma on Insurance Makes Top 50

The Supreme Court of Colorado was asked to review an unpublished decision of the Court of Appeal in in Sunahara v. State Farm Mutual Automobile Insurance Co., No. 09CA0599, slip op. (Colo. App. May 6, 2010) (not selected for official publication), to determine whether the court of appeals erred under Colorado’s collateral source doctrine when it admitted evidence of the amounts paid by Respondent State Farm Mutual Automobile Insurance Company (State Farm) for medical expenses that Petitioner Jack Sunahara incurred as a result of a car accident in Petitioner v. Respondent, 2012 CO 30 (Colo. 04/30/2012).

Facts

A vehicle driven by Raymond Mallard collided with Sunahara in a parking lot. Sunahara alleged that the accident resulted in injuries to his back and shoulders that required surgery and other medical treatment. He carried a motor vehicle insurance policy with State Farm at the time of the accident that included underinsured motorist (UIM) coverage. Sunahara reported the incident to State Farm pursuant to that policy. State Farm opened a claim file, made initial liability assessments, and established reserves and settlement authority for the case. State Farm then covered Sunahara’s medical expenses, paying approximately $14,000 in full satisfaction of the medical bills even though Sunahara’s healthcare providers billed him over $50,000 for their services.

Sunahara subsequently sued Mallard for negligence. The action settled and Mallard’s insurance company paid Sunahara $100,000 in damages — the limit on Mallard’s policy.

Seeking additional damages, Sunahara then filed a UIM claim with State Farm pursuant to the UIM portion of his insurance policy. Sunahara’s UIM coverage had a $2,000,000 limit and provided that State Farm would pay damages for bodily injury that Sunahara was legally entitled to collect from the owner or driver of an underinsured motor vehicle. State Farm argued in response to Sunahara’s claim that Sunahara was at least partially at fault for the accident with Mallard, and that it was not required to pay Sunahara any damages pursuant to the UIM policy.

Sunahara filed a motion in limine to exclude evidence of the discounted amount State Farm paid to satisfy Sunahara’s medical bills. The trial court denied the motion, reasoning that the $14,000 paid was admissible for the purpose of determining the reasonable value of Sunahara’s medical expenses. The jury returned a verdict in Sunahara’s favor, but also found that Sunahara was 25 percent at fault for the accident. It awarded him $0 in past economic damages, $50,000 for non-economic damages, $50,000 for physical impairment, and $11,000 for future economic damages.

Admissibility of Evidence of the Amounts Paid by a Collateral Source

The Supreme Court concluded that the court of appeals erred under the common law evidentiary component of the collateral source rule when it affirmed the trial court’s admission of evidence of the amounts paid by State Farm to cover Sunahara’s medical expenses because a trial court may not admit evidence of the amounts paid by a collateral source to reimburse healthcare providers for medical expenses incurred by an insured plaintiff.

Colorado’s collateral source rule consists of two components:

(1)     a codified post-verdict setoff rule; and

(2)     a pre-verdict evidentiary component, described by the common law.

The second component remains in effect, applies in this pre-verdict case, and excludes evidence of collateral source benefits because such evidence could lead the fact-finder to improperly reduce the plaintiff’s damages award on the grounds that the plaintiff already recovered his loss from the collateral source.

Under the proper legal standard, evidence of the amount paid by State Farm to satisfy Sunahara’s medical bills is inadmissible because it is evidence of a collateral source benefit.

The Supreme Court concluded that Sunahara is entitled to a new trial on the issue of damages because the trial court’s erroneous admission of the amounts paid evidence prejudiced Sunahara’s economic damages award.

In a dissent, three justices stated they would hold that the fact that a medical provider accepted an amount less (here, $14,000) than the amount billed (here, $50,000) as full payment is admissible because it is relevant to the reasonable value of medical services provided, and does not run afoul of the collateral source doctrine because the identity of who paid the medical provider (in this case, plaintiff’s health insurer) is irrelevant.

They disagreed with the majority’s assertion that because the jury knew plaintiff’s medical providers accepted less than $50,000 in payment for the medical bills, it awarded no past economic damages. The majority does not consider an alternative explanation of the jury’s award – namely, that the nature of the plaintiff’s injuries was hotly contested at trial by both sides, including the fact that he had significant pre-existing injuries to both of his shoulders and his lower back.

ZALMA OPINION

The decision of the Colorado Supreme Court is an invitation to fraud. Just because a doctor or health care provider bills $50,000 for its services but agrees to accept only $14,000 as full payment for their services that is clear and convincing evidence of the true value of the services rendered. If Mr. Sunahara had no insurance, was billed $50,000 by his doctors and they agreed to accept $14,000 from him as the true value of his services, he should not be allowed to collect from a tortfeasor an additional $36,000 because his doctor overbilled.  That fact should not be kept from a jury any more than when a house is destroyed shortly after a sale could the owner assert its value was the $1 million asking price when it sold for $150,000. That the house was over priced is not an example of its true value, the true value is what the seller was willing to take from the buyer and that the buyer was willing to pay.

Since it costs nothing for the doctor to bill $50,000 for $14,000 in services because he is still paid what he is owed, that bill should be questioned. The collateral source rule should not, nor can it, prevent the defendant from calling the doctor as a witness and forcing the doctor to testify to the amount he is willing to accept as the true value of his services.

I had some medical problems lately and just reviewed the report from Medicare and my insurer on what they were billed and what was accepted by the health care providers. The true value of the services I received, like the true value of what Sunahara received, was what the providers accepted, not what they billed which, in my case, was about as excessive as that in this case.

Recently, the California Supreme Court, in Rebecca Howell v. Hamilton Meats & Provisions, 257 P.3d 1130, 52 Cal.4th 541, 129 Cal.Rptr.3d 325 (Cal. 08/18/2011), found that “[a]n injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial. In so holding, we in no way abrogate or modify the collateral source rule as it has been recognized in California; we merely conclude the negotiated rate differential–the discount medical providers offer the insurer–is not a benefit provided to the plaintiff in compensation for his or her injuries and therefore does not come within the rule.” To rule otherwise, as did the Supreme Court of Colorado, allows the plaintiff to be unjustly enriched and recover as economic damages more than he was obligated to pay.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Happy Law Day – A New Method to Defeat Arson-For Profit

Free Zalma’s Insurance Fraud Letter May 1, 2012

In this, the ninth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), ZIFL reports on:

1.    Barry Zalma reports on an interesting appellate decision that convicted a person for failing to advise his insurer that he intentionally caused a fire at his property. The arson and the failure to disclose the arson to the insurance carrier occurred at different times. The arson occurred at the time of the fire. The failure to disclose the arson to the insurance carrier occurred in the following days and months as the insurance adjuster investigated the insurance claim. Because the two crimes constituted a course of conduct divisible in there is no reason to preclude punishment for both crimes. The California Statute, therefore, requires that an insured who has attempted an insurance fraud, advise his or her insurer of the fact or make no claim at all. Failure to do so is a criminal act. This is a weapon against fraud that is seldom used but should be used often when evidence of fraud exists.

2.    Chapter VIII of the serialized novel “Murder and Insurance Don’t Mix.”

3.    Zalma on Insurance – the blog and Zalma Books.

4.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 400 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

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

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

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

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

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WHO IS FIRST NAMED INSURED?

It is Important to Honor Substance Over Form

Zalma on Insurance Makes Top 50

In the Maryland motor vehicle insurance law, the phrase “first named insured” makes what the Court of Appeals of Maryland calls “a cameo appearance” in
Kelly Swartzbaugh, et al. v. Encompass Insurance Company of America, No. 100 (Md. 04/25/2012) It serves only to identify the person who has authority to accept or waive certain types of coverage under a policy. Because Maryland statutes fail to define the phrase “first named insured” the highest court in Maryland was called upon to explain its meaning and determine if a waiver of uninsured motorist or underinsured motorist cover when waived by the applicant could be ignored because the person signing the waiver was not named first in line in the policy applications.

Motor Vehicle Insurance

Since the early 1970s, Maryland’s compulsory motor vehicle insurance law has been designed to ensure that those who own and operate motor vehicles registered in the State are financially able to pay compensation for damages from motor vehicle accidents. That law makes automobile liability insurance a prerequisite to the registration of a motor vehicle. The law specifies certain types of coverage that a policy must contain. As a result, policies will generally contain similar or identical provisions in order to comply with Maryland law, although there is no standard automobile insurance policy in Maryland.

Required Coverages

A policy must provide protection against damages caused by uninsured motorists, sometimes referred to as “UM coverage.”  It is well-settled that UM coverage includes coverage for accidents involving under-insured, as well as uninsured, motorists.

Waivers of UM Coverage

With respect to UM coverage, State law allows for waivers of the coverage that the law otherwise specifies. In particular, under the State insurance code, UM coverage under a motor vehicle insurance policy is by default equal to the liability coverage under the policy.  This level of coverage may be waived, however, in favor of a lesser amount at least equal to the minimum coverage required by the motor vehicle law. The waiver must be in writing on a form devised by the state that complies with certain statutory standards concerning format and content.  The waiver is to be executed by the “first named insured.” Again, the waiver of higher limits of coverage will reduce the premium owed for the policy.

FACTS

The facts are straightforward and not in dispute. This case concerns an insurance policy purchased by Kenneth and Lynne Swartzbaugh and its potential coverage of an accident involving their daughter, Kelly Swartzbaugh. In July 1998, Lynne, who handled the family finances with respect to insurance and related items, applied for insurance coverage for the family with a local independent insurance broker. She ultimately purchased a “package” policy that included both homeowners and motor vehicle insurance with Respondent Encompass Insurance Company. With respect to motor vehicle insurance, the policy provided liability coverage in the amounts of $250,000 per person and up to $500,000 per accident. As later amended, it listed three vehicles, and named Kenneth, Lynne, and Kelly as drivers. Lynne executed a waiver of higher UM coverage on the standard form.

By its terms, consistent with Maryland law, the waiver remained in effect until withdrawn. In March 2008, Kelly was injured while a passenger in an accident involving an under-insured driver. The driver’s insurer tendered the limits of his policy. Because the higher limits of UM coverage on the Petitioners’ own motor vehicle policy had been waived, she was unable to collect further damages from Encompass under that policy’s UM coverage. The Petitioners then brought a declaratory judgment action in the Circuit Court for Carroll County, seeking a declaration that the waiver was ineffective on the ground that Lynne was not in fact the “first named insured” on the policy. The circuit court disagreed and ruled that the waiver signed by Lynne was valid and enforceable.

Analysis

Petitioners challenge the effectiveness of Lynne’s waiver of enhanced UM coverage. The effectiveness of the waiver turns on whether Lynne was properly considered the “first named insured” with respect to the Petitioners’ motor vehicle insurance policy at the time she executed the waiver in 1998. The determination of this question is, in part, a matter of statutory construction — for it is the statute that specifies that the waiver is to be made by the “first named insured.”

Neither the State motor vehicle law nor the insurance code explicitly requires any particular individuals to be named in, or insured under, a motor vehicle insurance policy. The law literally requires that vehicles, not specific individuals, be covered.  Neither the motor vehicle law nor the insurance code necessarily dictates the identity of the individuals to be insured under a policy, much less designates who should be “first named insured.”

A motor vehicle insurance policy also typically covers various classes of individuals who are not specifically named in the policy. For example, some individuals insured under a motor vehicle policy are covered by “omnibus” clauses that describe categories of individuals, such members of the policyholder’s family or permissive users of the automobile. Thus, it appears likely that the concept of a “named insured,” at least in the context of an automobile insurance policy, distinguishes those individuals covered by the policy who are specifically named in the policy, in contrast to those who are covered but only generally described and not named.

The Court of Special Appeals found no evidence in the legislative history that, in requiring the waiver to be made by the “first named insured,” the Legislature was expressing a policy choice keyed to name order.  The court concluded that the parties to an insurance policy could designate the “first named insured” in the policy documents, regardless of the order in which insured individuals are listed.

In a space labeled “Policyholder,” Kenneth’s name appears above Lynne’s, though this does not appear to be a complete listing of named insured individuals as Kelly’s name does not appear in this section of the policy. All three Petitioners are named as “rated drivers” in several places in the policy, but the order of names differs — Kenneth’s name appears first in one instance and Lynne’s name appears first in another.

The one place in the policy documents that expressly uses the phrase “first named insured” is the form for the waiver of enhanced UM coverage. Lynne signed this form.

The UM coverage waiver form that Lynne executed was devised by the state in compliance with the legislative directive. On that form, the signatory avers that he or she is the “first named insured/applicant” and the line for signature identifies the signatory as the “First Named Insured.” This is consistent with the view that the individual who acted for the other insured parties in applying for insurance coverage would presumably be “first named insured” for purposes of a waiver once the policy was issued.  The highest court in Maryland noted that if one could always identify the first named insured simply by reference to name order, a certification of that status would be unnecessary. The certification on the waiver form thus anticipates the possibility that one who is named later on other policy documents might act for the other insured parties.

The highest court in Maryland agreed with the intermediate appellate court that the use of the phrase “first named insured,” at least in the context of motor vehicle insurance, has a notion of primacy. The policy underlying the waiver provision was to allow insurance consumers to make an informed choice between enhanced UM benefits at a higher premium and a lower level of benefits with a correspondingly lower premium.

The Court concluded that the named insureds are entitled to determine who will exercise that choice and serve as primary or first named insured. In the absence of a specific designation in the policy documents, the waiver form fills that gap by requiring the individual who executes the form to certify his or her status as “first named insured.”

Lynne fit the statutory definition of a “named insured.” There is no question that Lynne was the household member in charge of procuring and making decisions about insurance. She decided to waive the enhanced UM coverage in favor of a lower premium. She certified herself to be “first named insured/applicant” in the waiver form.

In Maryland, in the context of motor vehicle insurance policy, the phrase “first named insured” refers to a person insured under the policy and specifically named in the policy who acts on behalf of the other insured parties and is designated as “first named insured” in the policy documents. The injured party was, therefore, limited to a recovery of the limits chosen for UIM coverage.

ZALMA OPINION

This is a case that wended its way through all available courts in Maryland because, after the accident, with 20/20 hindsight, the insured sought to revoke the waiver for which they received a major premium discount, and force their insurer to pay limits it did not agree to pay at the time the policy was issued.

Insurance is a contract where the insured only obtains the coverage sought and should never be allowed to change the terms of the policy after an accident to provide coverage they refused but which, after the accident, they determined they needed.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Punish Only Those In Case

Limitations on Punitive Damages

When a lawyer asks for punitive damages against an insurer for bad faith conduct he or she will always ask the jury to “teach the insurer a lesson” to stop it from doing the same to others. The argument has been successful in thousands of bad faith suits brought from California to Florida and from Texas to Wyoming. The United States Supreme Court has weakened, if not destroyed, that argument in Philip Morris USA, v. Williams, Personal Representative of Estate of Williams, Deceased, on Certiorari to the Supreme Court of Oregon, No. 05-1256 decided February 20, 2007.  The plaintiff’s lawyer convinced the jury to award $79.5 million in punitive damages with a similar argument when he asked the jury to:

        [t]hink about how many other Jesse Williams in the last 40 years in the State of Oregon there have been. … In Oregon, how many people do we see outside, driving home … smoking cigarettes? … [C]igarettes … are going to kill ten [of every hundred].

This is the same argument made by insurance bad faith lawyers – that the insurance company (like the tobacco companies) is hurting everyone they insure and must be punished sufficiently to protect the world of insurance buyers:

        Think about how many other John Smith’s in Oregon have had their claims wrongfully denied. How many people do we see outside, driving home, whose financial lives were destroyed by ABC Insurance Company not living up to its promises.

The U.S. Supreme Court has put a stop to that practice. Juries can no longer be confused. They must be cautioned that no matter how awful they think the insurers actions were the punishment they can impose is limited to a consideration of the harm done to the plaintiff alone. This ability to punish is also limited by the Supreme Court’s findings in State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408, 416 where due process is limited to a single digit multiplier of compensatory damages.

In the Phillip Morris case a jury found that Jesse Williams’ died because he smoked cigarettes manufactured by Philip Morris who knowingly and falsely led him to believe that smoking was safe. The jury awarded the estate $821,000 in compensatory damages for deceit and $79.5 million in punitive damages, The Oregon  Supreme Court rejected Philip Morris’ arguments that the trial court should have instructed the jury that it could not punish Philip Morris for injury to persons not before the court, and that the roughly 100-to-1 ratio the $79.5 million award bore to the compensatory damages amount indicated a ”grossly excessive” punitive award.

The US Supreme Court, perhaps because of errors made in the trial court, reversed and remanded the case back to Oregon because the “punitive damages award based in part on a jury’s desire to punish a defendant for harming nonparties amounts to a taking of property from the defendant without due process.”  It did not rule on the 100-to-1 ratio of punitive damages to compensatory damages because it was not necessary to reach that point.

The Supreme Court has ruled in the past that the Constitution imposes certain limits, in respect both to procedures for awarding punitive damages and to amounts forbidden as ”grossly excessive.” (Honda Motor Co. v. Oberg, 512 U.S. 415, 432 (1994);  Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443 (2001);  BMW of North America, Inc. v. Gore, 517 U.S. 559, 568; and  Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 443.

In a decision made by the bare majority of the court with Justice Bryer writing for the majority stated the rule:

“In our view, the Constitution’s Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties or those whom they directly represent…”

The Due Process Clause prohibits a State from punishing an individual without first providing that individual with the ability to present all available defenses. A defendant, like an insurer, faced threatened with punishment for injuring nonparty victims who have the right to bring their own individual suits is unable to defend against the charge since it cannot bring in evidence of its proper claims handling with regard to the unnamed and unknown victims. As Justice Bryer pointed out doing so would establish a “near standardless dimension to the punitive damages…” calculations of the jury.

Noting that the Supreme Court could find no authority supporting the use of punitive damages awards for the purpose of punishing a defendant for harming others the court also recognized that evidence of actual harm to nonparties can help show that the conduct also posed a substantial risk of harm to the general public, and so was particularly reprehensible.

The Oregon Supreme Court was unable to formulate a method by which evidence of reprehensibility could be admitted and still protect against a violation of the defendant’s due process right to not be punished for harm done to nonparties. Justice Bryer concluded that Oregon’s Supreme Court was wrong, such a method can be formulated:

        In particular, we believe that where the risk of that misunderstanding is a significant one-because, for instance, of the sort of evidence that was introduced at trial or the kinds of argument the plaintiff made to the jury-a court, upon request, must protect against that risk. Although the States have some flexibility to determine what kind of procedures they will implement, federal constitutional law obligates them to provide some form of protection in appropriate cases.

        [W]e remand this case so that the Oregon Supreme Court can apply the standard we have set forth. Because the application of this standard may lead to the need for a new trial, or a change in the level of the punitive damages award, we shall not consider whether the award is constitutionally ”grossly excessive.” We vacate the Oregon Supreme Court’s judgment and remand the case for further proceedings not inconsistent with this opinion.

The insurer faced with an argument that the jury teach a lesson to the insurer must demand that the court protect against the risk of a misunderstanding and make it clear that punishment can only be directed at the damages caused to the plaintiff and require the court to advise the jury that it cannot seek to punish Philip Morris for injury to other persons not before the court.

Barry Zalma, Esq.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Eight Corners Rule Strikes Again

Natural or Probable Consequences of an Intentional Act Not an Occurrence

Zalma on Insurance Makes Top 50

On September 27, 2011 I wrote about a holding of the Virginia Court of Appeal at http://zalma.com/blog/?p=1792 where the court concluded that an intentional act cannot be an occurrence. The parties appealed to the Supreme Court of Virginia who, in The AES Corporation v. Steadfast Insurance Company, No. 100764 (Va. 04/20/2012), was called upon to decide whether the trial court and Court of Appeal erred because the pleadings included reference to the word “negligence.”

The Supreme Court of Virginia considered whether the suit against The AES Corporation (AES) did not allege an “occurrence” as that term is defined in AES’s contracts of insurance with Steadfast Insurance Company (Steadfast), and that Steadfast, therefore, did not owe AES a defense or liability coverage.

Background

AES is a Virginia-based energy company that holds controlling interests in companies specializing in the generation and distribution of electricity in numerous states, including California. Steadfast is an Illinois-based company and indirect subsidiary of Zurich Financial Services, a global insurance provider. AES paid premiums to Steadfast for commercial general liability (CGL) policies from 1996 to 2000 and 2003 to 2008.

In February 2008, the Native Village of Kivalina and City of Kivalina (Kivalina), a native community located on an Alaskan barrier island, filed a lawsuit (the Complaint) in the United States District Court for the Northern District of California against AES and numerous other defendants for allegedly damaging the village by causing global warming through emission of greenhouse gases. AES requested Steadfast provide a defense and insurance coverage, pursuant to the terms of the CGL policies, for the claims alleged in the Complaint. Steadfast provided AES a defense under a reservation of rights and filed a declaratory judgment action, which is the subject of this appeal, in the Circuit Court of Arlington County.

In the declaratory judgment action, Steadfast claimed that it did not owe AES a defense or indemnity coverage for damage allegedly caused by AES’s contribution to global warming based on three grounds:

  1. the Complaint did not allege “property damage” caused by an “occurrence,” which was necessary for there to be coverage under the policies;
  2. any alleged injury arose prior to the inception of Steadfast’s coverage; and
  3. the claims alleged in the Complaint fell within the scope of the pollution exclusion stated in AES’s policies.

The parties subsequently filed cross-motions for summary judgment, both claiming that whether Steadfast had a duty to defend AES against the Complaint could be decided by examining the “eight corners” of the Complaint and the CGL policies. The circuit court denied AES’s motion for summary judgment and granted Steadfast’s motion for summary judgment, holding that the Complaint does not allege an “occurrence” as that term is defined in the CGL policies, and thus, the allegations in the Complaint are not covered under those policies.

The Insurance Policies

In each of the CGL policies AES purchased from Steadfast, Steadfast agreed to defend AES against suits claiming damages for bodily injury or property damage, if such damage “is caused by an ‘occurrence.’ ” The policies define “occurrence” as follows: ” ‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The policies specify that Steadfast has no duty to defend or indemnify AES against damage suits to which the policies do not apply.

The Complaint

The complaint alleged that Kivalina is located on the tip of a small barrier reef on the northwest coast of Alaska, approximately seventy miles north of the Arctic Circle. As pertinent to this appeal, in the Complaint, Kivalina alleges that AES engaged in energy-generating activities using fossil fuels that emit carbon dioxide and other greenhouse gases, and that the emissions contributed to global warming, causing land-fast sea ice protecting the village’s shoreline to form later or melt earlier in the annual cycle. This allegedly exposed the shoreline to storm surges, resulting in erosion of the shoreline and rendering the village uninhabitable.

The Complaint alleged that AES “intentionally emits millions of tons of carbon dioxide and other greenhouse gases into the atmosphere annually.”  The Complaint further alleges that AES “knew or should have known of the impacts of [its] emissions” of carbon dioxide, but that “[d]espite this knowledge” of the “impacts of [its] emissions on global warming and on particularly vulnerable communities such as coastal Alaskan villages,” AES “continued [its] substantial contributions to global warming.” Kivalina then dedicates sixteen pages and sixty-six paragraphs of its sixty-nine page Complaint to explaining global warming.

The Complaint alleges a civil conspiracy by power, coal and oil companies to mislead the public about the science of global warming.  The Complaint then states three claims for relief against AES. Two causes of action are for nuisance and the other is for concert of action. The first claim for relief is entitled “Federal Common Law: Public Nuisance.”  The second claim for relief asserted against AES is entitled “State Law: Private and Public Nuisance.” The last claim for relief against AES is entitled “Concert of Action.” Kivalina alleges that the “[d]efendants have engaged in and/or are engaging in tortious acts in concert with each other or pursuant to a common design” in creating, contributing to and/or maintaining a public nuisance, specifically, global warming.

Analysis

Both AES and Steadfast agree that it is a well-established principle, consistently applied in this Commonwealth, that only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured. This principle is commonly known as the “eight corners rule” because the determination is made by comparing the “four corners” of the underlying complaint with the “four corners” of the policy, to determine whether the allegations in the underlying complaint come within the coverage provided by the policy.

The relevant policies provide coverage for damage resulting from an “occurrence,” and define an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The terms “occurrence” and “accident” are synonymous and refer to an incident that was unexpected from the viewpoint of the insured. The Supreme Court has held in the past that an “accident” is commonly understood to mean an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated.  An accidental injury is one that happens by chance, unexpectedly, taking place not according to the usual course of things, casual or fortuitous.

Kivalina alleges that AES intentionally released tons of carbon dioxide and greenhouse gases into the atmosphere as part of its electricity-generating operations. The Virginia Supreme Court has held in numerous cases that an intentional act is neither an “occurrence” nor an “accident” and therefore is not covered by the standard policy. If a result is the natural or probable consequence of an insured’s intentional act, it is not an accident.

However, even though the insured’s action starting the chain of events was intentionally performed, when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision. In such a context, the dispositive issue in determining whether an accidental injury occurred is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been reasonably anticipated or the natural or probable consequence of the insured’s intentional act. For coverage to be precluded under a CGL policy because there was no occurrence, it must be alleged that the result of an insured’s intentional act was more than a possibility; it must be alleged that the insured subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.

Resolution of the issue of whether Kivalina’s Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that were not natural or probable consequences of AES’s deliberate act of emitting carbon dioxide and greenhouse gases.

AES notes that the Complaint alleges that AES intentionally or negligently created the nuisance, global warming, and that the defendants’ concerted action in causing the nuisance constitutes a breach of duty.

Applying the “eight corners” rule, the Supreme Courts precedent required it to consider the terms of the relevant insurance policies and the allegations in the Complaint. The policies issued to AES do not provide coverage or a defense for all suits against the insured alleging damages not caused intentionally. Likewise, the policies in this case do not provide coverage for all damage resulting from AES’s negligent acts. The relevant policies only require Steadfast to defend AES against claims for damages for bodily injury or property damage caused by an occurrence or accident.

In the Complaint, Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.

Allegations of negligence are not synonymous with allegations of an accident. In this instance, the allegations of negligence do not support a claim of an accident. Even if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.

The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury or property damage is the relevant intentional or negligent act alleged in the complaint. The complaint alleges that AES was “negligent” only in the sense that it “knew or should have known” that its actions would cause injury no matter how they were performed.

Under the CGL policies, Steadfast would not be liable because AES’s acts as alleged in the complaint were intentional and the consequences of those acts are alleged by Kivalina to be not merely foreseeable, but natural or probable. Where the harmful consequences of an act are alleged to have been not just possible, but the natural or probable consequences of an intentional act, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an “accident” even when the complaint alleges that such action was negligent.

Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases are something that AES knew or should have known about. If an insured knew or should have known that certain results were the natural or probable consequences of intentional acts or omissions, there is no “occurrence” within the meaning of a CGL policy. Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

ZALMA OPINION

Although global warming is the gravamen of the complaint filed by the village of Kivalina this is not a pollution or global warming case. This is a case that explains the meaning of the term “occurrence” as used in a CGL policy of insurance and that there is no possibility that an intentional act can be an “occurrence.”

Fortuity is an essential element of every insurance policy. If the event is not fortuitous there can never be coverage.

Barry Zalma

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Expert Report Not Part of Claims Handling

No Bad Faith

When it took more than 20 months to resolve a claim for the theft and burning of a vehicle, Rocky Walker and Kristi Walker (“Walkers”) sued their insurer for bad faith even though the claim was eventually paid. The trial court granted summary judgment for the insurer because there was no evidence of bad faith, Progressive Direct Insurance Company and the Walkers appealed. The Tenth Circuit, in Rocky Walker; Kristi Walker v. Progressive Direct Insurance Company, Tenth Circuit, No. 11-5122, March 23, 2012 [http://scholar.google.com/scholar_case?case=4098360186012591787&q=%22rocky+walker%22&hl=en&as_sdt=2003] was called upon to resolve the dispute.

FACTS

Plaintiffs Rocky and Kristi Walker appealed from the district court’s decisions granting summary judgment in favor of defendant Progressive Direct Insurance Company and denying the Walkers’ motion to alter or amend the judgment.

The Walkers were covered by a Progressive insurance policy for their 2003 Chevrolet Tahoe. On July 29, 2008, Ms. Walker called Progressive to report that their vehicle had been stolen while they were out of town on vacation. The vehicle was recovered, but it had been burned and suffered damage.

On August 22, Progressive decided to refer the claim to its Special Investigations Unit (“SIU”) because:

(1)     the vehicle was for sale at the time of the loss,
(2)     the column was not compromised,
(3)     the vehicle was a “gas guzzler”; and
(4)     both sets of keys were in the Walkers’ possession at the time of loss.

An expert for Progressive testified by affidavit that these factors are “generally recognized indicators of insurance fraud.”

On August 25, Progressive notified the Walkers that there were certain coverage issues with their claim and that it was being investigated by the SIU.

On September 9, Progressive requested that the Walkers provide them with a key for inspection and copies of vacation photographs to prove that they were out of town when the theft occurred. As of September 16, Progressive had not received the requested items so it again asked the Walkers to provide them. On September 25, Progressive received copies of the vacation photos and a key. Upon review of the photos, it appeared as though the photos had been altered.

On October 7, Progressive’s claim file notes that a “possible issue surfaced with the keys.” The Walkers’ stated that they had only two keys to the vehicle and had both keys in their possession at the time of the theft, but a Progressive employee discovered the existence of a third key. On that same day, a Progressive employee left a voicemail message for Ms. Walker asking for a call back, requesting receipts and further documentation from their vacation, advising her that the vacation photos did not seem to be original photos, and informing her that Progressive would like to speak with the other parties who accompanied the Walkers on vacation. Progressive did not hear back from Ms. Walker. On October 16, Progressive sent a letter to the Walkers by regular and certified mail following up on its request for receipts from the Walkers’ vacation.

Progressive’s claim file notes that the origin of the third key remained unresolved as of November 3. The next day, however, the claim file notes that Progressive had authorized coverage for the loss and that the documentation had shown the Walkers were not in town on the date of loss. On November 17, Progressive notified the Walkers that it had completed its coverage review, had resolved the coverage issue, and would be providing coverage for their loss.

On June 12, 2009, the Walkers brought suit in state court asserting that Progressive acted in bad faith in the handling of their insurance claim. Progressive removed the action to federal court and then moved for summary judgment. The district court granted summary judgment in Progressive’s favor.

ANALYSIS

To establish a bad-faith claim, the Walkers must show, among other things, that Progressive’s actions were unreasonable under the circumstances and that Progressive failed to deal fairly and act in good faith in the handling of the Walkers’ claim. When considering a motion for summary judgment on a bad-faith claim under Oklahoma law, a district court must first determine, under the facts of the particular case and as a matter of law, whether insurer’s conduct may be reasonably perceived as tortious.

In Progressive’s motion for summary judgment, it argued that the Walkers’ had failed to offer any evidence showing that its actions were unreasonable or taken in bad faith. The Walkers alleged that Progressive conducted an untimely and improper investigation based on Progressive’s handling of two issues—the existence of the third key to their car and the authenticity of the vacation photos. Specifically, the Walkers argued that Progressive’s actions were unreasonable because the insurance company could have discovered easily that the pictures were valid and that the third key was created after the loss. The Walkers also complained that Progressive allowed the “key” issue to be presented to its expert, Barry Zalma, who used that to accuse the Walkers of fraud in his expert report.

With respect to the third-key issue, the district court stated that the Walkers’ “reliance on Zalma’s use of the third key in his expert report is misplaced, as this report was prepared in the course of this litigation and was not part of Progressive’s investigation, making it inapplicable to [the Walkers'] bad faith claim.”  Finally, the court explained that an insurer’s investigation need only be reasonable, not perfect.

THE EXPERT REPORT

Although not detailed in the opinion the affidavit of the expert stated:

A red flag or fraud indicator means facts, circumstances or events which, singly or combination, support an inference that insurance fraud may have been committed and a thorough investigation is required.

In this case SIU investigators were assigned after the insurer discovered the following generally recognized indicators of insurance fraud: (1) the subject vehicle is “for sale” at the time of loss; (2) the steering column is not compromised; (3) the subject vehicle is a gas guzzler; (4) all keys are in the insured’s possession after the reported loss; (5) an auto theft where the allegedly stolen vehicle was also burned; (6) the vehicle was reportedly stolen from a location not the place where the vehicle is normally garaged; and (7) when the vehicle was recovered there were no parts missing.

The affidavit presented in support of the Motion for Summary Judgment did not accuse the Walkers of fraud and was written to explain to the court the reasons for an SIU investigation.

The Tenth Circuit noted that the Walkers’ brief contained a meager five pages of argument; there were no citations to the district court record in any of the argument sections and many of the assertions are conclusory and fail to sufficiently explain how the district court erred. For example, the Walkers offer no legal authority for their argument and no citations to the record to demonstrate how Progressive failed to address their undisputed material facts.

The Walkers’ bad-faith claim was based on Progressive’s handling of the existence of the third key and its position that the vacation photos were not originals. Finally, the Walkers present a mere two sentences in support of their claim that the district court abused its discretion.

The Walkers also argued that it was twenty months before Progressive determined the origin of the third key and that Progressive’s expert accused them of felony insurance fraud in his expert report. This argument has no relevance to the Walkers’ bad-faith claim. The fact that the origin of the key was not determined until March 2010 did not impact the timeliness or the reasonableness of the investigation into the Walkers’ claim.

Once Progressive verified that the Walkers were out of town during the date of loss, it authorized coverage for the claim, even though the origin of the third key remained unresolved.

The Tenth Circuit agreed with Progressive that “it was irrelevant when Progressive determined the origin of the third key because Progressive agreed to pay for the repairs to the vehicle in November 2008. Likewise, the Tenth Circuit agreed with the district court that the expert report prepared for the litigation in February 2010 is inapplicable to the Walkers’ bad-faith claim, which was based on Progressive’s investigation from the date the claim was submitted on July 29, 2008, until coverage was authorized on November 17, 2008.

ZALMA OPINION

Because of the extent of insurance fraud in the United States insurance companies have been forced by state statutes to create Special Investigation Units (SIU) to thoroughly investigate suspicious claims in an effort to reduce the effect of insurance fraud. In this case the SIU did a complete investigation and decided to pay the claim although there were multiple red flags of fraud.

The insurer, having done what the law required, completing a thorough investigation finding the claim was a covered loss. Progressive paid the claim and was sued for bad faith. The court rightly looked at what was done and saw no bad faith because it cannot be an act of bad faith to conduct a complete investigation. I am pleased that I was able to assist the court in understanding the issues and why, when multiple red flags exist, an insurer is justified in doing a thorough investigation.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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ENDORSEMENT SUPERSEDES POLICY WORDING

Pollution Exclusion Endorsement Applies

Zalma on Insurance Makes Top 50

When seeking to insure major risks, like a manufacturing facility, a professional broker will submit a manuscript policy to cover all the risks of loss faced by the insured. Insurers, however, are not obligated to accept all of the provisions of the manuscript policy wording and will usually amend the policy by endorsement to fit the risk the insurer is willing to take.

It is axiomatic that an endorsement supersedes the body of an insurance policy if the endorsement and the body of the policy are in conflict. In PBM Nutritionals, LLC v. Lexington Insurance Company, et al., No. 110669 (Va. 04/20/2012) the Virginia Supreme Court was asked to decide whether a pollution exclusion endorsements in a commercial property insurance policy precluded coverage for a multi-million dollar infant formula loss resulting from the infiltration of filter elements into the formula during the manufacturing process and whether the endorsements superceded the provisions in the body of the policy.

Background

PBM Nutritionals, LLC (PBM) filed a declaratory judgment action in the Circuit Court of the City of Richmond against Lexington Insurance Company (Lexington), Arch Insurance Company (Arch) and ACE American Insurance Company (ACE) (collectively the Insurers). PBM sought insurance coverage for its loss resulting from infiltration of filter elements into the infant formula it manufactured between January 22 and January 30, 2009. The Insurers claimed that the “Pollution Exclusion Endorsements” in their policies excluded coverage for PBM’s infant formula loss because the formula was “contaminated.”

The trial court found that the Insurers were not liable under the policies for PBM’s infant formula losses.

Facts

PBM manufactures and produces infant formula at a facility located in Burlington, Vermont. PBM manufactures its infant formula by mixing dry ingredients with hot, filtered water. To heat the water, PBM uses a heat exchanger, a vessel in which steam heats water flowing through tubes. A butterfly valve regulates the steam by opening or closing to allow more or less steam into the heat exchanger. Once heated, the water is released from the heat exchanger and passes through water filters, to ensure its cleanliness before it enters the liquefying tank where it mixes the dry ingredients. Industrial dryers then dry the created mixture into finished infant formula.

On December 14, 2008, PBM conducted a routine cleaning and discovered a defect in the butterfly valve. The defect allowed steam to leak into the steam tube when the valve was in the closed position. PBM ordered a replacement valve, but it did not arrive until late January 2009. Until January 20, 2009, PBM continued to manufacture infant formula and conduct routine cleanings. PBM’s testing revealed no problems with the infant formula produced during this period.

Between January 20 and January 22, 2009, PBM conducted an extensive cleaning of the system in preparation for the manufacture of its Profylac brand infant formula. PBM can complete a routine cleaning in 4 to 6 hours, but a Profylac cleaning takes between 42 and 46 hours. During this Profylac cleaning, water was sealed inside the heat exchanger water tube and in the filter housing. Because the butterfly valve was leaking, steam seeped into the heat exchanger and superheated the water in the water tube and the filter housing. Unable to withstand the superheated water, the water filters disintegrated into their constituent components of cellulose, melamine and other filter materials, which infiltrated the water.

After the Profylac cleaning, PBM began to manufacture its Profylac formula, unaware that it was using superheated water that contained melamine and other filter materials to mix the formula ingredients. When PBM tested the batches of Profylac made during this period, it discovered that 4 of the 25 batches contained levels of melamine that exceeded the Food and Drug Administration (FDA) limit of one part per million. The other 21 batches had melamine levels within the FDA limit, but PBM feared they contained disintegrated filter components.

The parties stipulated that the “[e]levated levels of melamine detected in infant formula batches made between January 22, 2009 and January 30, 2009 are evidence of the disintegration of the water filters and the infiltration of melamine and other filter media into the infant formula.” After notifying its insurance companies, PBM elected to destroy all batches manufactured after the Profylac cleaning. It sought insurance coverage for the formula it had to destroy.

The Insurance Policies

At the time of the loss, PBM had insurance policies with four different insurance companies. Specifically, PBM had property damage and business interruption policies with the Insurers. PBM also had a contamination insurance policy with Dornoch LTD with whom it settled.

The manuscript form policy sought by PBM’s broker contained a provision entitled “Pollution.” This provision, Paragraph 9(H), states:

        9. PERILS EXLUDED

        This policy does not insure:

        H. Pollution. The Insurers will not cover loss or damage solely and directly caused by or resulting from the presence, release, discharge or dispersal of “pollutants” unless the presence, release, discharge or dispersal is itself caused by a peril insured against.

        Definition: Wherever in this policy the word “pollutant(s)” occurs, it shall be held to mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. (Emphasis added)

The three insurers issued their own pollution exclusions. None of the pollution exclusions contained an exception for “insured perils” as contained in Paragraph 9(H) of the sought after manuscript form policy. The circuit court held that the pollution exclusion endorsements are clear and unambiguous and have the “effect of superseding Paragraph 9(H) to the extent that they conflict.”

Analysis

PBM claimed that the trial court erred in ruling that it was not entitled to insurance coverage from the Insurers for the unsafe formula that PBM destroyed. First, PBM argues that the circuit court erred by construing two directly conflicting policy provisions in favor of the Insurers and not the insured.

Under Virginia law, an insurance policy is not ambiguous merely because courts of varying jurisdictions differ with respect to the construction of policy language. Additionally, where the exclusion is not ambiguous, there is no reason for applying the rules of contra proferentem or liberal construction for the insured.

An exception that serves to negate the applicability of one particular exclusion does not create a “conflict” with another policy exclusion that operates to bar coverage. An exception to an exclusion only has bearing on that exclusion’s applicability-it is without force with respect to other provisions of the policy. An exception to an exclusion does not, nor can it, create coverage where none exists.

The exception to the pollution exclusion in Paragraph 9(H) does not in and of itself provide coverage. If coverage is excluded under the pollution exclusion endorsements, the exception to exclusion in Paragraph 9(H) does not restore that coverage. As a result, Paragraph 9(H) has no application to the pollution exclusion endorsements and the provisions of the policies do not conflict.

Pollution exclusions operated to preclude coverage. The law of this Commonwealth and the plain language of the insurance policy provide the answer. It is a basic tenet of Virginia law that the courts, when interpreting a contract, construe it as written and do not add terms the parties themselves did not include. A court should never insert by construction, for the benefit of a party, a term not expressed in the contract.

The endorsements are broad, but not unlimited.  According to their plain language, the pollution exclusions are not restricted to traditional environmental pollution

Since the parties stipulated that the formula contained disintegrated portions of filters that made the product unfit for human consumption and unmarketable as a result of the infiltration. As a result, the evidence established that the formula was “contaminated” as defined in the policies because disintegrated filter components caused a loss of value or marketability of the formula.

ZALMA OPINION

The Supreme Court of the state of Virginia applied a basic rule of insurance policy construction by applying the words of clear and unambiguous endorsements concerning pollution to its interpretation. The insured purchased a policy covering the risk with what appeared to be an inadequate limit of $2 million and sought to get additional coverage from policies that did not take the risk of pollution by contamination of the baby formula.

Clear and unambiguous policy wording in an endorsement must take precedence over the body of the policy and regardless of the need of the plaintiff the court refused to change the wording of a clear and unambiguous policy endorsement to help thee insured.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Red Flags Of Insurance Fraud

Investigating Insurance Fraud

Zalma on Insurance Makes Top 50

Suspicious insurance claims have common attributes that insurers and fraud investigators have collated into lists to be used to determine whether further investigation is required.  Continually growing, these lists are known as the “red flags” or “indicators” of fraud.  There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit.

Standing alone, the red flags are not capable of establishing fraud they are useful in determining whether further investigation is required and, when presented in exceptional numbers, may lead to a conclusion that fraud was attempted.

Some common read flags of fraud can be found if the questions below are answered in the affirmative:

Personal Property

  • Does the claim include a large amount of cash?
  • Does the claim include numerous family heirlooms?
  • Was all of the property inherited from a deceased relative (especially one in a foreign country)?
  • Does the claim include any of the invoices or receipts for the items claimed lost?
  • Does the insured have invoices or receipts for all of the items claimed lost?
  • Does the insured have invoices for items claimed lost, but not for the items not stolen?
  • Are the receipts suspicious in any way (e.g., have no invoice number, charge no sales tax)?
  • Is the insured willing to accept an inordinately small settlement rather than document all claimed losses?
  • Has any of the property lost or destroyed been advertised for sale?
  • Does the claim include the loss of numerous appraised items?
  •  If Yes, was the property appraised by someone without expertise in the field?
  • Is the appraisal handwritten?
  • Does the appraisal misspell items (e.g., Porcelin, Koogeran, Emerrild, karatt, carot, Rollex, or Carteer)?
  • Is sterling silver described as having a Hallmark EPS (electro-plated silver)?
  • Has the name of the appraiser been rubber stamped on the document?
  • Is the appraisal dated?
  • Is the appraisal signed?
  • Is the name of the appraiser legible and printed on the form?
  • Does the gem stone appraisal reflect color, cut, and quality?
  • Does the diamond appraisal show color, cut, quality, and carat weight?
  • Does the jewelry appraisal show the carat quality (e.g., 14 K, or 18 K)?
  • Does the art appraisal state the name of the artist, the medium used, the material on which the art was painted, the date the art was created, or the provenance of the piece?
  • Does the oriental carpet appraisal show the city of origin, the materials used (e.g., silk, wool), the design, the dimensions, quality, or age?
  • Was the appraisal performed free of charge?
  • Was the appraisal performed from photographs?
  • Is the appraisal more than 18 months old?
  • Is the appraiser located more than 30 miles from the insured’s home or business?
  • Is the loss claimed for the total contents of the business or home including items of little or no value?
  • Are the policy limits in excess of the values at hand?
  • Are the losses questionable, e.g., a home stereo stolen out of a car, or a fur coat stolen on a trip to Tahiti?
  • Are the losses items of significant value that were recently purchased?
  • Is the claim of a value that is beyond the apparent means of the insured, e.g., a $15,000-a-year janitor claims that he bought, for cash, and then had stolen a $40,000 diamond ring?
  • Has a claim been made for extremely valuable and unique items that are difficult to sell, but not for those items which are valuable but easy to sell?

Commercial Property

  • Were there extensive commercial losses at a site where few or no security measures are in effect?
  • Did the loss occur when the security devices fail to work?
  • Are there radically differing accounts of the accident or manner in which the loss occurred?
  • If a commercial loss primarily involves seasonal inventory or equipment, is the claim at the end of the selling season, e.g., ski inventory claimed stolen in the spring, farm machinery stolen in the fall?
  • Do the claimed commercial losses include old, outdated, or otherwise unmarketable inventory?
  • Are the facilities outmoded?
  • Is the claimant approaching retirement age?
  • Would the claimant like to retire?
  • Is the claimant ill?
  • Did the claimant have a renovation loan approved before the loss, but work had not begun?
  • Is the property in receivership or foreclosure?
  • Is a major investment required for a change in technology?
  • Did the loss occurred on a holiday, weekend, or after hours?
  • Were fire doors left open?
  • Were work orders canceled just prior to the loss?
  • Is the business failing to meet production quotas or deadlines?
  • Is the business’s inventory is obsolete or overstated?
  • Is the business’s storage area too small for the amount of claimed inventory?
  • Is the unit value of items overstated on the inventory?
  • Are receipts unnumbered or on generic forms?
  • Do receipts include pre-printed information?
  • Is the claimed loss not directly related to the claimant’s business?
  • Is the business in a bad location or deteriorating neighborhood?
  • Was the property over-insured?
  • Is there evidence that valuable property was recently removed from the premises or relocated to a safer place within the premises?
  • Was there any departure from long-standing routine (failure to activate alarm system; shut-down of sprinkler system; discharge of security guard)?
  • Is there evidence of unlawful entry?
  • Does it appear that evidence of unlawful entry has been manufactured?
  • Is there any indication that the business is having financial difficulties or has immediate need for funds?
  • Is the real property heavily mortgaged?
  • Does business property secure multiple and substantial debts?
  • Is there recent history of late payments or default on loans?
  • Do the principals in the business have a history of business failures?
  • Has there been a recent expansion of business facilities that has caused the insured to incur substantial debt or other over extension?
  • Is there an overlapping ownership of related businesses with inventory moving readily between businesses without adequate documentation?
  • Is the economic climate poor for this particular business?

Financial Indicators

  • Has the insured’s business shown decreasing revenue?
  • Does the insured’s business show increasing production costs for labor, materials, sales, general, and administrative overhead?
  • Has new technology made the insured’s current process or equipment inefficient and/or out of date?
  • Is the insured’s business suffering from increased competition?
  • Is the insured’s business producing new products, making inventory obsolete?
  • Have new competitors moved into the insured’s neighborhood?
  • Does the insured’s business require a high level of research and development expenditure?
  • Does the insured’s business reflect a low level of research and development expenditure?
  • Is the insured’s business showing a poor financial position in the industry?
  • Is the insured paying for a costly lease or rental agreement that is not covered by earnings?
  • Has the insured entered into contracts with customers that are not profitable?
  • Has the insured lost key customers?
  • Do the insured’s records show a failure to record depreciation?
  • Do the insured’s inventory records show excessive spoilage or defects?
  • Do the insured’s records show double payments of bills?
  • Does the insured pay personal expenses with corporate funds?
  • Does the insured maintain numerous bank accounts?
  • Do the insured’s bank records show a low or overdraft cash balance?
  • Do the insured’s records reveal poor or negative cash flow from operations?
  • Do the bank records reflect frequent NSF (bounced) checks?
  • Are there large or frequent currency transactions?
  • Do the records reflect a trend in accounts receivable growth?
  • Has the insured pledged assets for multiple loans?
  • Do the books and records reflect hypothetical assets?
  • Do the insured’s records show multiple liens on assets?
  • Are assets insured for more than their fair market value or replacement cost?
  • Does the insured factor accounts receivable?
  • Was inventory removed prior to loss?
  • Did the inventory at time of loss only include slow moving items?
  • Was their overstocking caused by overproduction or obsolete items?
  • Do books and records reflect increased borrowing by the insured?
  • Do books and records reflect large or numerous overdue accounts payable?
  • Do books and records reflect inability to pay current bills for utilities, payroll, or vendors?
  • Do books and records reflect multiple loans to or from officers or employees?
  • Do books and records reflect severe credit limits imposed on the insured by lenders or suppliers?
  • Has the insured reported frequent C.O.D. purchases?
  • Do books and records show payment of bills by cashier, certified check, or money order?
  • Were withholding taxes, payroll taxes, or sales taxes deposited tardily?
  • Has the insured overstated asset values in a proof of loss statement?
  • Is the insured a guarantor or co-maker of a note with loan in default?
  • Was there a sale or auction of assets shortly before the report of the loss?
  • Has the insured acquired excessive business interruption insurance?
  • Do the books and records reflect much litigation against the insured’s business or owners?
  • Do the books and records reflect an extraordinary write-off?
  • Are there bankruptcy proceedings of the owner, firm, or affiliated business?
  • Are there frequent or unusual inter-company transactions with an affiliated company?
  • Does the insured maintain two or more sets of books?
  • Do the books and records contain false or altered documents or records?
  • Does the insured’s business maintain weak internal controls?
  • Has the insured’s business license been revoked or suspended?
  • Are there large, unexplained differences between book and taxable income?
  • Do the books and records reflect duplicate sales invoices?
  • Has the insured over-documented losses with a receipt for every loss and/or receipts for older items of property?
  • Does the insured’s loss inventory differ significantly from the police department’s crime report?
  • Can the insured recall the place and/or date of purchase for newer items of significant value?
  • Has the insured provided receipt(s) with incorrect or no sales tax figures?
  • Has the insured provided receipt/invoices from the same supplier with sequence numbers in reverse order of purchase dates?
  • as the insured provided two different receipts with the same handwriting or typeface?
  • Has the insured provided a single receipt with two different handwritings or typefaces?
  • Has the insured provided a credit card receipt with an incorrect or missing approval code?
  • Has the insured provided copies of checks with no coding in the bottom right corner?

Arson for Profit

  • Did the fire occur on a holiday or weekend?Did the fire start late at night?
  • Did the fire occur during renovation?
  • Is there an absence of accidental or natural causes at the point of origin?
  • Was there an unusual presence of combustible material on the premises?
  • Was there unusual handling of combustible materials normally present on the premises?
  • Were there multiple separate fires?
  • Was there a fire where there is no natural source of ignition available?
  • Did the fire start immediately following a family argument?
  • Did the fire start in a bed?
  • Did the fire spread unnaturally?
  • Is there excessive fire damage?
  • Is there evidence of extreme heat?
  • Was the entry for fire fighters blocked by vehicles or contents pushed up against entry doors?
  • Was the view into the structure blocked?
  • Was there a short period of time between exit of occupant and fire?
  • Is this the second fire in same structure?
  • Is there presence of burned or unburned newspapers at point of origin?
  • Was there structural damage prior to the fire?
  • Are the insureds’ movements unaccounted for at the time of the loss?
  • Is there an unexplained absence of typical household items or non combustible items at fire scene?
  • Were contents, such as major appliances, removed prior to the fire?
  • Was valuable or sentimental property recently moved to a safe place?
  • Had contents been substituted?
  • Were contents out of place or unassembled?
  • Were personal items or important papers absent?
  • Is there evidence of other crimes?
  • Is the property overinsured?
  • Is the insured under economic duress or will he or she gain some economic advantage from the fire?
  • Do the alleged contents of the structure seem improbable (such as a Picasso oil painting in a low-income apartment)?
  • Were pets absent from the home at the time of the fire?
  • Is the insured missing receipts, photos, or other evidence of the items allegedly destroyed in the fire?
  • Does the insured have receipts, photos, and documentary evidence of every items allegedly destroyed in the fire?
  • Was the insured recently divorced or separated?
  • Is the insured unusually calm?
  • Is the claimant suspicious of public officials?
  • Are there large, outstanding utility bills or property taxes?
  • Did the fire alarm, burglar alarm, or sprinkler system fail to work at the time of the loss?
  • Is the property loss site claimed by multiple mortgages or chattel mortgages?
  • Does the contents list include items of high value recently purchased?
  • Does the contents list include serial numbers that owners do not typically record?
  • Is there no proof provided for recent expensive purchases?
  • Is the value of items is inconsistent with claimant’s income?
  • Is the face value of policy greater than market value of property?
  • Do receipts show incorrect tax or no sales tax?
  • Are receipts in whole dollar amounts?
  • Are receipts generic with no store logo?
  • Were receipts and owners manuals destroyed in the loss?
  • Does the insured indicate distress over prospect of examination under oath?

Auto Claims

  • Does physical damage to one vehicle not match the physical damage to other vehicles involved in the same accident?
  • Does the damage to the vehicle appear to have been applied by a blunt object like a light pole, wall, or a hammer rather than by another vehicle?
  • Do the witnesses and parties have conflicting versions of the same accident?
  • Did a third party report the claim?
  • Did the accident occur on private property near the residence of those involved?
  • Does the Vehicle Identification Number (VIN) match the damaged vehicle?
  • Are all damaged vehicles in a reported accident taken to the same repair shop?
  • Are the repair shops used not actually equipped to make repairs listed on the estimate?
  • Is there no lienholder listed for an expensive, late model vehicle?
  • Does the owner want to retain salvage of the vehicle?
  • Was the vehicle repaired before the loss was reported?
  • Did the accident occur shortly after one or more of the vehicles was purchased or registered?
  • Is the letter from the lawyer dated the day of the accident or shortly thereafter?

 Life Insurance Fraud

  • Is the policy’s effective date close to the date of death?
  • Is the deceased not well-known by relatives?
  • Did the deceased live alone?
  • Are there many small policies with coverages that are available in mass offerings, i.e., in magazines and mail-in and television advertisements?
  • Are the agent’s “loss ratios” unusually skewed, considering the size of the market and the types of people insured?
  • Were numerous life insurance policies purchased on the deceased?
  • Were different carriers used in securing coverage for no apparent reason?
  • Is the coverage amount excessive considering the social position of the deceased?
  • Was the death certificate obtained by the beneficiary?
  • Was the claim made shortly after the expiration of the con testability period?

Conclusion

Red flags of insurance fraud are important tools in the work of the insurance industry to reduce the amount of insurance fraud. They are not evidence. They are often contradictory. If three or more red flags appear in an investigation there is sufficient information to refer the claim to the insurer’s SIU and to do a more thorough and complete investigation.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

If this post is interesting to you you might find useful his E-book, “Zalma on Rescission in California.” Mr. Zalma also recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Just For Fun

Help, My House Is Falling Into The Sea

The story that follows is based on fact but is fiction. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. If you like the story it is one of more than 80 in my e-book “Heads I Win, Tails You Lose”, available for a reasonable price at www.zalma.com/zalmabooks.htm.

Career criminals are not the only people who perpetrate insurance fraud. The temptation has become so great that almost anyone will try.

Zalma on Insurance Makes Top 50

A few years ago residents of a hillside community received a letter from the county engineer informing them that their houses sat on an active landslide. The engineers concluded that an unusual amount of irrigation water, water from septic systems, and rainfall lubricated an ancient landslide under their homes. The slide was moving. The engineers were concerned because it was moving at the rate of three inches a year. The houses sitting on the landslide were also moving a few inches a month. Within ten years the houses would be torn apart by the movement if nothing was done to stabilize the hillside.

Homeowners, living on the hill, noticed cracks in the plaster walls. Concrete block walls split at the mortar seams. Cracks formed in the foundation systems. Since the homes on the hill were all valued from  $500,000 and $5,500,000, the monetary value of the potential loss of 300 homes on the landslide was enormous. Many of the homeowners gathered and hired counsel to pursue persons responsible for their damage.

On advice of counsel, the homeowners reported claims to their insurers. Most of the insurers denied the claims. The insurers concluded that the predominant cause of the damage was the excluded peril of earth movement.

The claims were fairly and reasonably rejected. Some of the homeowners accepted the decision of their insurers. Some of the homeowners sued their insurers. The imaginative homeowners, like the insured, found a better way.

The insured was a real estate lawyer. He had experience in dealing with insurers for commercial developers he represented. He knew that, in addition to the basic retail insurance market, there was a surplus and excess lines insurance market that would insure almost anything.

Without informing his broker of the landslide situation on the hillside he asked the broker to seek a specialty insurance policy for his home. He wanted insurance that covered him for both earthquake and earth movement, landslide, mudslide or other types of earth movement normally excluded by homeowners policies. He explained to the broker a concern that the wild fires that often devastate hillside communities remove vegetation from the hillsides and increase the hazard of mudflow and landslide. He had invested a great deal of money in his home and wanted to protect against that risk.

The broker found a policy offered by a surplus lines insurer. The policy insured dwellings only for the perils of earthquake and earth movement. The premium was a reasonable 3.75 percent of the value of the dwelling with a deductible equal to 5 percent of the total amount at risk. All the insurer required, by way of application, was the name of the insured, the address of the property to be insured, and the amount of insurance requested.

After receiving a signed application from the insured the insurer agreed to insure any property because it did not fall within certain specified earthquake fault areas. The insured obtained a $$2,500,000 policy for a premium of only $9,375.00. At the time the insured bought the policy he had received and read the letter from the County. He knew there was a landslide actively affecting his house. At the time he bought the policy the insured had already seen cracks in his plaster walls. When he bought the policy the insured applied the old maxim “ask me no questions – I’ll tell you no lies.”

His experience as a real estate attorney convinced the insured that if he told his prospective insurer his house was sitting on an active landslide they would not insure him. The insurer did not ask. The insured did not offer the information.

After the policy had been in effect for three months and the cracks in the plaster had grown to a size that he could place his index finger inside the crack he reported a loss to the earth movement insurer. He presented a claim for the total loss of the house. He demanded payment of policy limits less the deductible.

The insurer sent its adjuster to meet with the insured. They retained a geologist to inspect the property and determine the cause of the damage. The geologist learned of the active landslide from the public records kept by the city and County. He informed the insurer that thirteen months before it issued the policy the county had sent notice to all homeowners, including the insured, advising the homeowners of the active landslide.

After completing its investigation, with the advice of counsel, the insurer did the following:

1.    It advised the insured that the policy was rescinded from its inception because of the concealment of a material fact. The insured had concealed the fact of the landslide. With notice the insurer returned the $9,375.00 premium.
2.    It advised the insured that even if it had not rescinded the policy it would have denied his claim as one that was not fortuitous. Its investigation showed that the landslide had started before the inception of the policy. It further advised the insured that the loss in progress rule barred any recovery.
3.    The insurer recommended that the insured present his claim, if he still wished to pursue it, to the insurer who insured him a against earth movement at the time of the loss.

The insurer, reasonably concluded that although the loss was progressive and continuous it was fairly certain that a loss had occurred on or before the insured learned of the landslide.

Of course, the insured did not have earth movement insurance at the time of the notice and bought the insurance from the surplus line insurer in an attempt to recover for the loss that had already occurred.

The insured, if asked, would testify that he had no intent to defraud his insurer. He would testify that the insurer, if it had asked him, would have been told the truth. All he was doing was taking an economic advantage over a lazy insurer who did not bother to ask. What the lawyer/insured would have said sounds reasonable. It wasn’t true. He knew of a material fact that would affect the decision of his insurer to insure him. He concealed that fact from the insurer. He intended to conceal the fact from the insurer. Had the insurer known the truth it would not have issued a policy for a loss that was in progress. The insured attempted a fraud. His action in fraudulently getting an earth movement policy was reprehensible. His actions in buying the earth movement policy were no less a fraud than if he set the house aflame and made claim on his fire insurance.

Insurance is, as the lawyer should have known at the time, is: “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

 As a lawyer the intentional concealment of a material fact with the intent to deceive an insurer to its detriment is fraud and grounds for disbarment. For that reason the insured accepted the denial and did nothing further about the claim. Had the insurer not done the miniumum investigation and retained the services of a competent engineer it would have paid the $2,500,000.00 claim.

(c) 2012 – Barry Zalma

Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Posted in Zalma on Insurance | 1 Comment

NEVER, EVER, LIE ON AN INSURANCE APPLICATION

A Lawyer Who Steals From His Client Is Not Entitled to Insurance Coverage

Insurer Has an Unquestioned Right to Select Whom it Will Insure

Zalma on Insurance Makes Top 50

Often forgotten by courts in the United States is the fact that an insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to risks faced by the applicant. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39].)

The right of an insurer to select whom it would insure was presented to the Sixth Circuit Court of Appeal when asked to resolve a dispute between a lawyer and his insurer when the insurer sought to rescind a malpractice liability policy it issued to the lawyer. The insurer based its claim of rescission on the incomplete responses to questions on the applicable insurance applications. The Sixth Circuit affirmed the trial court’s grant of rescission in Continental Casualty Company v. Law Offices of Melbourne Mills, Jr., Pllc; Melbourne Mills, Jr, No. Nos. 10-5813/5814 (6th Cir. 04/13/2012).

Facts

Lawyer Melbourne Mills, Jr. was successfully sued for millions of dollars for legal malpractice. The trial court granted Continental summary judgment, holding that Mills’s failure to disclose an ongoing state bar association inquiry constituted a material misrepresentation when the policy renewal application specifically asked if “any attorney [was] subject to any disciplinary inquiry . . . during the expiring policy period.”

In 2010, the Kentucky Supreme Court issued an order which permanently barred Mills from the practice of law in Kentucky.

Mills and others represented a group of over 400 plaintiffs in a class action suit against American Home Products for injuries related to the use of the diet drug Fen-Phen. At the outset of the suit, it was agreed that the lawyers’ fees would be determined by contingency fee contracts, limited to 30% of the clients’ gross recovery. In May 2001, American Home Products agreed to settle the class action for almost $200 million. The plaintiffs in the action together received only $74 million, or 37% of the settlement. The lawyers received $53 % including Mills who received $23 million. The remaining 10% was used to establish The Kentucky Fund for Healthy Living, Inc. Mills served as a member of the Fund’s Board of Directors, for which he allegedly received a monthly compensation of $5,350.

In early February 2002, Mills learned that the Kentucky Bar Association (“KBA”) was investigating complaints filed against him in connection with the Fen-Phen class action. The Inquiry Commission Complaint stated that Mills was under investigation for fees obtained in settlement of certain claims regarding the use of Fen-Phen and other pharmaceuticals that were divided with other counsel not in his firm, as well as allegations concerning a paralegal in Mills’s office who was conducting the unauthorized practice of law as part of the work on the class action.

On February 11, 2002, Mills’s attorney, William Johnson, attended a hearing of the KBA’s Inquiry Commission with respect to an application for a subpoena duces tecum that was served on Mills.

The Application

In August 2003, Mills applied to renew his professional liability insurance with Continental for the 2003- 2004 year. Continental had insured Mills’s law office for many years prior to this application.

Question 3 of the application asked: “Are there any claims, or acts or omissions that may reasonably be expected to be a claim against the firm, that have not been reported to the Company or that were reported during the expiring policy period?” In response, Mills checked “NO.”

Question 4 of the 2003 application read: “Has any attorney been disbarred, suspended, formally reprimanded or subject to any disciplinary inquiry, complaint or proceeding for any reason other than non-payment of dues during the expiring policy period?” Again, Mills checked “NO.”  According to Mills, at the time of the 2003 application, he did not know the status of the 2002 KBA investigation; in his own words, the case “lay in limbo for years at a time. Just nothing was done.”

The Policy

In August 2003, Continental issued an insurance policy, entitled Lawyers’ Professional Liability Policy, to the Law Offices of Melbourne Mills, Jr. The policy contained various exclusions, including a Dishonesty Exclusion which stated:

This Policy does not apply . . . to any claim based on or arising out of any dishonest, fraudulent, or criminal or malicious act or omission by an Insured except that this exclusion shall not apply to personal injury. The Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal or malicious act or omission has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of the Company’s rights under this Policy.

The Malpractice Suit

In 2005, the Fen-Phen class action members asserted legal malpractice claims against Mills and others in Abbott, et al. v. Chesley, et al. The Boone County Circuit Court determined that the attorneys “breached their fiduciary duties to the Plaintiffs when they paid themselves fees over and above the amount to which they were entitled to under their fee contracts with their clients.” As a result, the class plaintiffs were awarded $42 million. Continental initially provided Mills a defense in this case; however, Continental also fully reserved its rights, including the right to rescind the policy.

Because the trial court found that “Mills knew that a bar complaint had been filed against him in early 2002,” and the “KBA’s investigation was ongoing,” the district court held that Mills’s response to Question 4 constituted a material misrepresentation. The trial court noted that the “ongoing KBA inquiry into Mills’s actions with respect to the Fen-Phen Action is precisely the type of information Continental needed to evaluate its potential for current and future risk.”

In addition to the grant of summary judgment to Continental, a money judgment for $233,674.49 was entered against Mills, which was the amount of the defense costs Continental paid on his behalf in the initial class action.

On June 10, 2010, the same day that the money judgment was entered, the district court also granted Continental leave to file supplemental authority, namely:

(1)     the May 20, 2010 Order of the Kentucky Supreme Court which disbarred Mills from the practice of law in Kentucky, and

(2)     the August 27, 2009 Findings of Fact and Conclusions of Law of the Trial Commissioner, which the Kentucky Supreme Court used to reach its decision to disbar Mills.

The trial court took judicial notice of the Order of the Supreme Court disbarring Mills and the Findings of Facts.

Analysis

Because Mills made a material misrepresentation in his malpractice insurance application with Continental, the policy was properly voided under Kentucky law. According to Kentucky statute, K.R.S. § 304.14-110, a misrepresentation voids an insurance policy if the misrepresentation is “material” to the acceptance of risk or if the insurance company would not have issued the policy if the true facts had been made known. Though this standard is disjunctive, Mills’s response to Question 3 was both a misrepresentation that was material to Continental’s acceptance of risk and, if Continental had known of the investigation against Mills, Continental would not have issued the policy or would not have issued the policy at that rate.

Mills’s answer to Question 3 of the 2003 application was a material misrepresentation. Question 3 of the application asked. Mills’s answer to Question 3 was a misrepresentation because in August of 2003, when he was filling out the application, Mills knew of not only the ongoing KBA investigation, initiated in February 2002 but unresolved at that time, but also all of the acts surrounding the Fen-Phen class action settlement negotiations, which reasonably could have – and ultimately did – lead to a malpractice claim. Even though the class action members did not bring the legal malpractice suit until 2005, in August 2003 Mills still knew that, collectively, the lawyers in the Fen-Phen class action paid themselves over $126 million. According to one uncontested document put forth by the class members, the lawyers were limited to fees of a little over $60 million. Mills knew that the clients had not been told all of the pertinent facts regarding the settlement offer and the fee splitting arrangement, and that the KBA had subpoenaed the financial records from the case as a result of the 2002 inquiry.

Mills was aware that he had engaged in conduct that led to the disbarrment of him and two of his co-counsel. Mills knew that his conduct was egregious and that his “acts” and “omissions” could have “reasonably be[en] expected” to lead to “a claim against the firm.” Mills was unquestionably required to disclose this information to Continental when filling out the policy renewal application.

Mills’s failure to disclose his actions in response to Question 3 was also material to Continental’s acceptance of risk. The lie had an impact on Continental’s decision to issue the policy at the rate that it did. A misrepresentation is material if there is sufficient evidence that the insurance company would not have issued the policy or would have issued a different policy if it had knowledge of Mills’s actions and omissions under.

Mills’s failure to disclose the circumstances surrounding the Fen-Phen class action and the ongoing KBA investigation was material to Continental, which likely would not have issued the policy, or would have issued a different policy, had it known of Mills’ acts and omissions during this time. The Sixth Circuit, therefore, affirmed the trial court’s order of rescission.

ZALMA OPINION

The conduct of ex-attorney Mills was reprehensible taking funds belonging to his clients and using them to pad his personal fortune. He then added insult to injury by attempting to get his insurer to pay his victims after obtaining the insurance by a calvilcade of lies.

By misrepresenting material facts in the application he breached the covenant of good faith and fair dealing and deprived his insurer of the right to make a reasonable and wise discrimination as to whether it wished to insure or not insured him. Had he told the truth the insurer would not have taken the risk it took. Rescission is an equitable remedy and it would simply be unfair for the insurer to be required to pay a multi-million dollar judgment on a policy it would not have written had the insurer been told the truth.

 

(c) 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

If this post is interesting to you you might find useful his E-book, “Zalma on Rescission in California.” Mr. Zalma also recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | 1 Comment

NO COVER FOR ACCIDENT IN RENTAL CAR

Permission of Owner Required to Cover Rental Car

Zalma on Insurance Makes Top 50

Sometimes trial courts feel sorry for plaintiffs injured by a totally negligent driver and ignore the provisions of an insurance policy to provide payment to the injured persons.

The Louisiana Court of Appeal was called upon to resolve a dispute that arose from a trial verdict that ignored the clear and unambiguous provisions of an insurance policy. Safeway Insurance Company (“Safeway”) asked the court of appeal to reverse the trial judgment because the trial court found that the company’s insurance policy provided coverage for Timothy Peaker when he drove a rented car into the plaintiffs, Jennifer Partain; her minor child, Luke Wesley Partain; Heather Case; and her minor child, Gavon McCoy. In Jennifer Partain, et al. v. Timothy Peaker, et al. , No. 46,978-CA (La.App. Cir.2 04/11/2012). The Court of Appeal resolved the coverage dispute concerning a provision of its policy that the driver was not operating the vehicle with the permission of its owner. The trial court avoided the motion of Safeway and made a finding of coverage.

FACTS

The accident occurred on April 14, 2006, on the parking lot of Wal Mart in Minden, Louisiana. Peaker was driving a 2005 Mazda that had been rented by Sarah Yocum from Enterprise (“Enterprise”), a car rental company, on April 12, 2006. Peaker was not designated as an additional driver on the rental car agreement. Peaker drove the vehicle into the plaintiffs, who were walking on the lot.

On November 22, 2006, the plaintiffs filed suit for their damages against Peaker; his insurer, Safeway; Louisiana Farm Bureau Mutual Insurance Company (“Farm Bureau”), the uninsured/underinsured (“UM”) insurer of Partain; and Allstate Insurance Company, the UM insurer of Case.

On July 3, 2008, Safeway filed a motion for summary judgment, citing the provision in Peaker’s policy which specified that coverage for a non-owned vehicle was provided to the named insured “provided the non-owned automobile is being used by the named insured with the permission of its owner.” The motion was never ruled upon.

Trial on the matter was held on April 18, 2011. On June 1, 2011, the trial court signed and filed a judgment finding Peaker to be 100 percent at fault in causing the accident. Damage awards were made to all the plaintiffs.

Safeway appealed the trial court judgment, claiming that the trial court erred in finding that its policy provided coverage to Peaker in this case. There was no transcript of the trial so the parties, for the purposes of the appeal, stipulated to facts.  In their joint stipulation, the parties agreed that:

  1. Peaker was 100 percent at fault;
  2. that claims against Peaker were dismissed to the extent that he was not insured;
  3. that the Safeway policy filed in connection with the motion for summary judgment was adopted by reference and introduced into evidence;
  4. that the plaintiffs will not appeal the amount of damages;
  5. that the issues on appeal will be limited to insurance coverage, and specifically, whether the trial court correctly held that Safeway’s policy insured Peaker while operating the rental vehicle at the time of the accident.

The parties stipulated the testimony of Jagot, the branch manager of Enterprise where the vehicle was rented, and the testimony of Peaker. Jagot testified that he was employed by Enterprise as a branch rental manager and had access to the records dealing with the lease of the rental car involved in this case. He was personally familiar with the terms and conditions of the lease agreement between Enterprise and Yocum. On April 12, 2006, Jagot leased a 2005 Mazda to Yocum, who lived in Princeton, Louisiana.

Yocum was picked up and delivered to Enterprise. She filled out and signed the lease agreement. A copy of the lease agreement was produced that was signed by Jagot and Yocum. Yocum paid in cash. Jagot did not remember Peaker being present. Jagot specifically asked Yocum if there would be any other drivers and she said there would be none. If Yocum had identified Peaker as an additional driver, and if he had a valid driver’s license, he would have been listed on the rental agreement as an additional driver. If Peaker did not have a valid driver’s license, he could not have been listed as an additional driver.

Jagot walked out to the car with Yocum, did a walk-around inspection, and gave her instructions. Jagot never authorized Peaker’s use of the vehicle and was not aware that Peaker would be a driver. Yocum was the only authorized driver of the vehicle. Jagot did not authorize Peaker to drive or operate the leased vehicle. Peaker did not have permission of Enterprise to operate the car on April 14, 2006. Peaker was not an authorized driver of the vehicle under the lease agreement executed on April 12, 2006.

Peaker stated that on April 14, 2006. According to Peaker, both he and Yocum talked to the Enterprise employee at their home. The Enterprise employee drove them to the Enterprise office in Bossier. Yocum filled out and signed the lease agreement at Enterprise. Peaker believed they did it that way because his driver’s license was not valid.

INSURANCE COVERAGE

The Court of Appeal concluded that when a party rents a vehicle and fails to designate any additional drivers in the rental car agreement, the rental car agency that owns the vehicle has not conferred express permission on any person other than the lessee to drive the vehicle. Therefore, insurance policy provisions like the one contained in Peaker’s contract of insurance with Safeway do not provide coverage for the nonpermissive use of a non-owned vehicle.

In this case, the record does not support the trial court’s finding that Peaker had the express or implied permission of Enterprise to operate the rented vehicle.

Peaker claims that he accompanied Yocum to Enterprise where she filled out the rental car agreement. Peaker acknowledged that Yocum rented the car because Peaker did not have a valid driver’s license and would not, therefore, be eligible as a driver on the rental agreement.

No one from Enterprise instructed Peaker in the operation of the vehicle. Yocum drove the vehicle away from Enterprise, not Peaker. Peaker gave a conflicting statement by saying that when Yocum asked him to drive the car, he did not think he should be driving because he lacked a valid driver’s license, but that he thought he had permission to drive the vehicle.

CONCLUSION

Because Peaker was not listed as an additional driver on the policy, it was clear to the Court of Appeal that he did not have the express permission of Enterprise to use the vehicle. The record also does not support the finding that Peaker had implied permission to drive the vehicle. The testimony of the rental agency that they would not have agreed to Peaker as an additional driver if he did not have a valid drivers’ license was telling.

The Court of Appeal noted that it was unfortunate that Peaker caused an accident resulting in injury to four people under circumstances precluding coverage by his insurance policy with Safeway. However, Peaker clearly used this vehicle without the express or implied permission of the owner, Enterprise. Under the terms of the Safeway insurance policy, there is no insurance coverage to Peaker for this accident.

The Court of Appeal reversed the trial court judgment against Safeway and found that Safeway provided no insurance coverage in this case.

ZALMA OPINION

The Court of Appeal should be commended for apply the law and the conditions of the policy of insurance. It is unfortunate that people were injured while innocently walking through  a WalMart parking lot by a person operating a vehicle without a valid license but the unfortunate nature of the accident does not make an insurer pay for risks of loss it did not agree to pay.

A contract must be honored as written. Emotion and the need of those innocently injured must be ignored. Courts and insurance companies are not welfare agencies.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Posted in Zalma on Insurance | 2 Comments

FIFTH AMENDMENT DOES NOT APPLY TO INSURANCE CLAIM

Admit Arson-for-Profit to Insurer or Go To Jail

Another Weapon Against Insurance Fraud

Insurance fraud is a serious problem in the United States estimated to take from $80 billion to $300 billion a year. No one knows for sure how much insurance fraud takes. The California Legislature enacted a comprehensive set of criminal statutes regarding insurance fraud and arson-for-profit. The privilege against self-incrimination arises only when testimony is compelled. The testimony, no matter how incriminatory, must be compelled within the meaning of the Fifth Amendment for it to apply.

An insurance claim can only be made if there is a contract of insurance; a property damaged by a peril insured against, and the presentation of a claim to an insurer. No one is compelled to buy fire insurance or to make a claim to an insurance company. California makes it a criminal activity to “Conceal, or knowingly fail to disclose the occurrence of, an event that affects any person’s initial or continued right or entitlement to any insurance benefit or payment, or the amount of any benefit or payment to which the person is entitled.” [California Penal Code Section 550 (b)(3)] (Emphasis added)

Although, in Gruenberg v. Aetna Insurance Co., 9 Cal. 3d 566, 510 P.2d 1032, 108 Cal. Rptr. 480 (Cal. 06/11/1973) the California Supreme Court found that an insurer should delay an examination under oath of its insured who claimed the Fifth Amendment protection until he could resolve a criminal charge while claiming testifying before his insurer might incriminate him, the Supreme Court did not eliminate the right to an examination but only compelled its delay.

Concealing Involvement in Arson-For-Profit is a Crime

On April 12, 2012, the California court of Appeal refused to reverse a conviction for arson and insurance fraud of James Kurtenbach. In doing so the Court of Appeal, in The People v. James Kurtenbach, No. D058933 (Cal.App. Dist.4 04/12/2012), found that a statute that makes it a criminal act to conceal from an insurer the fact that the insured committed, or conspired with others to commit, insurance fraud or arson for profit does not violate the Fifth Amendment to the U.S. Constitution.

A jury convicted James Kurtenbach of conspiracy to commit arson, arson causing great bodily injury,  concealing or knowingly failing to disclose an event affecting an insurance benefit and vandalism. The jury also made true findings that in committing the arson Kurtenbach used a device designed to accelerate the fire and acted for pecuniary gain. The trial court imposed a prison sentence of 15 years eight months. Kurtenbach contended, among many things, that his conviction for concealing or knowingly failing to disclose an event affecting an insurance benefit violated his federal constitutional privilege against self-incrimination.

FACTUAL BACKGROUND

A house that Kurtenbach owned as a rental property was destroyed by fire in the early morning of October 31, 2008. The fire began with a powerful explosion and quickly proceeded to engulf the entire house in flames and destroy it. A neighboring house sustained over $100,000 in damage. Joseph Nesheiwat, who was in the house to ignite the fire, died in the explosion and fire.

Nesheiwat was an employee at a gas station that Kurtenbach owned. In their investigation of the incident, the police obtained information leading them to suspect that Kurtenbach had solicited Nesheiwat to burn down the house. According to arson experts, the fire was fueled by gasoline.

Kurtenbach’s homeowner’s insurance agent had filed a claim for Kurtenbach after she learned of the fire from a source other than Kurtenbach, and that Kurtenbach thereafter spoke with an insurance adjuster about facts relating to the claim. Kurtenbach’s last communication with the insurance adjuster was in December 2008, when Kurtenbach informed the adjuster that he was represented by legal counsel. The insurance fraud claim – based on the allegation that Kurtenbach concealed or knowingly failed to disclose an event affecting an insurance benefit was presented to the jury. The jury made true findings that in committing the arson, Kurtenbach used a device designed to accelerate the fire and acted for pecuniary gain. The trial court sentenced Kurtenbach to prison for a term of 15 years eight months.

THE FIFTH AMENDMENT

Kurtenbach was charged with, among other counts, concealing or knowingly failing to disclose an event affecting an insurance benefit based on the fact that while his insurance carrier was investigating whether to provide coverage for the damage caused by the fire, Kurtenbach did not inform the carrier that the fire was caused by an arson that he planned. He claimed the Fifth Amendment protected him from this count.

To qualify for the Fifth Amendment privilege, a communication must be testimonial, incriminating, and compelled.  The United States Supreme Court has held that, in certain instances, a defendant may invoke the Fifth Amendment privilege against self-incrimination as a defense in a criminal prosecution that is based on the defendant’s failure to comply with a statute requiring the disclosure of incriminating information.

However, the United States Supreme Court set limitations on the circumstances in which a defendant may successfully invoke the Fifth Amendment privilege against self-incrimination as a defense to a prosecution for failing to comply with a statute requiring the disclosure of incriminating information.  Tension between the State’s demand for disclosures and the protection of the right against self-incrimination must be resolved in terms of balancing the public need on the one hand, and the individual claim to constitutional protection on the other. In conducting this balancing, the Court determined that the self-incrimination defense is not available when the incriminating disclosure is required for compelling reasons unrelated to criminal law enforcement and as a part of a broadly applied regulatory regime.

A defendant may invoke the privilege against self-incrimination as a defense when a statute requiring the disclosure of incriminating information is directed to a highly selective group inherently suspect of criminal activities in an area permeated with criminal statutes, but the defense is not available when a statute requires disclosure in an essentially non-criminal and regulatory area of inquiry.  Importantly, the analysis does not focus on whether the disclosures required of the specific defendant will require an incriminating statement. Instead, the inquiry is whether, in general, the statutory requirements will result in the disclosure of incriminating information.

Considering the applicable legal principles, the Fifth Amendment privilege against self-incrimination does not provide a defense to Kurtenbach’s conviction under the insurance fraud statute.

First the disclosures required by the insurance fraud statute will not usually reveal incriminating information, as some of the most common disclosures covered by the statute would be, for example, material facts concerning an insured’s medical condition as relevant to disability or health insurance, the material facts concerning the operation of an automobile in the case of automobile insurance, the circumstances of an injury or ability to work as relevant to worker’s compensation insurance, or the existence of other insurance policies as relevant to the availability of coverage under the policy at issue. It is the rare case when – as here – the required disclosure would be the admission to a crime.

Second, as it is an antifraud provision with criminal penalties, the activity it regulates is the making of insurance claims. Seeking benefits from an insurance carrier is an essentially legal activity. The clear intent of the statute is to criminalize the making of false or fraudulent claims the ultimate objective of which is to obtain benefits to which the offender is not entitled. The part of the statute relating to concealment or failure to disclose functions as an integral part of that antifraud provision. Because it is part of a broader antifraud provision the part of the anti-fraud statute satisfies the requirement that it was enacted for a compelling purpose other than to force a disclosure to be used in criminal law enforcement.

Kurtenbach had no right to rely on the Fifth Amendment privilege against self-incrimination as a defense to his conviction for concealing or knowingly failing to disclose that he committed arson because he was not compelled to make a claim to his insurer. Since the privilege against self-incrimination arises only when testimony is compelled and the testimony, no matter how incriminatory, was not compelled within the meaning of the Fifth Amendment.

The statute applies only when a person is attempting to obtain insurance benefits. There was no requirement that Kurtenbach pursue a claim for insurance benefits. The evidence supported a finding that Kurtenbach had an opportunity to withdraw that claim, but did not do so, and actually met with and discussed the claim with the insurer’s adjuster.

The jury found that Kurtenbach failed to disclose the arson in order that he could obtain benefits to which he would not be entitled if he had disclosed that fact. Kurtenbach was not compelled by the statute to disclose the arson. Instead, he voluntarily put himself within the reach of the statutory disclosure requirements by attempting to obtain insurance benefits. In the absence of legal compulsion to make an incriminating disclosure, the Fifth Amendment privilege against self-incrimination does not apply.

The arson and Kurtenbach’s failure to disclose the arson to his insurance carrier occurred at different times. The arson occurred at the time of the fire. The failure to disclose the arson to the insurance carrier occurred in the following days and months as the insurance adjuster investigated the insurance claim. Because the two crimes constituted a course of conduct divisible in time statutes do not preclude punishment for both crimes.

ZALMA OPINION

This decision provides insurers and prosecutors a powerful weapon against those who would commit insurance fraud or arson-for-profit. It makes clear that a person who commits insurance fraud is obligated to advise the insurer of the fraud or make no claim. If an insurer or prosecutor can prove the fraudulent act the making of the claim without disclosing the fraud is a criminal act. The Fifth Amendment will not protect the criminal who remains silent.

The Statute, therefore, requires that an insured who has attempted an insurance fraud, advise his or her insurer of the fact or make no claim at all. Failure to do so is a criminal act. This is a weapon against fraud that is seldom used but should be used often when evidence of fraud exists.

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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How To Take The Profit Out of Insurance Fraud

Zalma’s Insurance Fraud Letter  April 15, 2012

In this, the eighth issue of the 16th year of publication Zalma’s Insurance Fraud Letter (ZIFL), ZIFL reports on:

1.    Barry Zalma submits a proposal for taking the profit out of insurance fraud by applying the K.I.S.S. (“Keep It Simple, Stupid”) method of dealing with fraud perpetrators. By avoiding the temptation to file massive lawsuits naming multiple insurance fraud perpetrators and large amounts the insurer who does so defeats its purpose. Zalma suggests simple one count suits or prosecutions many times rather than a massive, difficult to prove suit.

2.    Chapter VII of the serialized novel “Murder and Insurance Don’t Mix.”

3.    A summary of a decision of the Sixth Circuit Federal Court of Appeal on the effect, even after an incontestability clause in a life or disability policy, of a lie in the application that allows the insurer to void the policy.

4.    Zalma on Insurance – the blog and Zalma Books.

5.    As usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 377 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-books “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and “Zalma on Insurance Fraud – 2012″ both of which are available from Zalma Books at http://www.zalma.com/zalmabooks.htm.

If you or your client face a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert or consultant, contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

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

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

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

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

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GAMESMANSHIP NOT ALLOWED

Good Faith Requires Professional Claims Handling

The California Court of Appeal was asked to resolve a dispute between two insurers concerning the apportionment of the costs to defend and indemnify co-insureds. Axis Surplus Insurance Company and Glencoe Insurance Ltd. provided general liability insurance in favor of Pacifica Pointe L.P. Pacifica was sued in a construction defect suit and tendered claims to both Axis and Glencoe. Axis agreed to defend Pacifica subject to a reservation of rights. Glencoe declined the tender, but monitored the construction defect suit and asked Pacifica to inform it once it satisfied the self-insured retention (SIR) under the Glencoe policy.

Pacifica and Axis paid a total of $1 million to settle the construction defect suit. Although Glencoe refused to participate in the settlement, it approved of Pacifica contributing its SIR ($250,000) as part of the settlement, which Pacifica did.

After settling the construction defect suit, Axis sued Glencoe for declaratory relief and equitable contribution to recover at least a portion of the $750,000 it paid in settlement. After a bench trial, the court found in favor of Axis and allocated a 60/40 split of Axis’s settlement payment to the advantage of Axis.

Glencoe appealed. The Court of Appeal, in Axis Surplus Insurance Company v. Glencoe Insurance Ltd, No. D058963 (Cal.App. Dist.4 04/11/2012), resolved the dispute.

FACTUAL HISTORY

In September 2004, Pacifica purchased the Carmel Pointe apartments. It subsequently converted the apartments to condominiums, and in turn, sold the condominiums to individual owners. A homeowners’ association called the Carmel Pointe Homeowners Association (Association) then was created. The Association filed a construction defect suit against Pacifica. The Association brought claims for breach of warranties, negligence, nuisance, negligent misrepresentation, and intentional misrepresentation arising out of the condominium conversion project at Carmel Pointe.

The Axis policies provided primary coverage with limits of liability of $5 million and $10 million and with defense expense outside the limit of liability. The Axis policies contained an “other insurance” clause, which provided for the sharing of a loss with a coinsurer by equal shares if the coinsurer also provides for sharing by equal shares. The Axis policies provided coverage for liability for property damage caused by an occurrence during their respective terms.

Axis accepted Pacifica’s tender subject to a reservation of rights but the policy limits were exhausted in May 2008 as a result of unrelated claims. Axis then provided Pacifica with a defense under a second policy and paid $118,624.50 in attorney fees and costs on behalf of Pacifica in the construction defect suit.

Pacifica also tendered a claim to Glencoe. Glencoe issued a wrap-up/owner controlled insurance policy to Pacifica specifically for the Carmel Pointe construction project with a policy period from September 2, 2004 through September 2, 2007. The Glencoe policy had a $5 million limit per occurrence and in the aggregate. The Glencoe policy contained an SIR in the amount of $250,000. The policy stated Glencoe had no duty to investigate or defend any claim until Pacifica satisfied the SIR. It also contained an “other insurance” provision similar to the one found in the Axis policy.

One Accepts the Other Reserves Rights

Glencoe did not accept Pacifica’s tender, but instead, reserved its rights under its policy and requested that Pacifica provide evidence that it had satisfied the SIR. Although Glencoe declined to defend Pacifica, the construction defect suit progressed with Axis providing Pacifica’s defense. The Association produced a preliminary defects list with a total cost of repair of $13,976,250, which included relocation costs and acoustical claims. The Association made a $1 million settlement demand, almost $13 million less than the claim, on Pacifica that was set to expire on December 17, 2008.

In response to the Association’s settlement demand, Pacifica sent experts to Carmel Pointe to evaluate defects and deficiencies and prepare a preliminary scope and cost of repair. Pacifica instructed its experts to identify all potential defects and not just those defects claimed by the Association. The experts created a preliminary repair estimate totaling $1,466,747.50. Pacifica advised Glencoe about the Association’s $1 million settlement demand.  Glencoe stated it lacked sufficient information to agree to fund a settlement but it did not object to Pacifica contributing its SIR to a settlement funded by Axis up to the proposed $1,000,000.

Before the deadline expired the Association and Pacifica entered into a written settlement agreement. Thereafter Axis filed an action against Glencoe alleging causes of action for declaratory relief and equitable contribution.

Trial Court Decision

The court determined Axis had met its burden of proof to establish a claim for equitable contribution with regard to the $750,000 Axis paid to settle the construction defect suit on behalf of Pacifica. The court then concluded that a 60/40 split of the $750,000 settlement payment in favor of Axis was the most equitable result. Therefore, Axis was awarded $450,000 as damages against Glencoe.

Analysis

Equitable contribution is available to apportion a loss among several insurers when each of those insurers is obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others.

In this case, as Glencoe did not raise any objections to the statement of decision. The court is  required to presume the trial court made all findings necessary to support the judgment. In an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of potential coverage under the nonparticipating insurer’s policy. After the settling insurer has satisfied its burden of proof, the burden shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy.

The court found Axis satisfied its burden of proof in proving the potential of coverage under the Glencoe policy.

By settling, the parties avoided the cost and uncertainty of litigation. The settlement and the amount of the settlement are thus presumptive evidence of the insurer’s liability and the amount of liability. Glencoe specifically approved Pacifica’s payment of its SIR toward settlement.

The insured was a named defendant and tendered claims to both primary insurers. Although Glencoe did not agree to defend Pacifica, it reserved its rights under its policy, requested Pacifica provide evidence that it had satisfied the SIR, and monitored the construction defect suit.

A critical inquiry in any action for equitable contribution between insurers is whether the nonparticipating coinsurer had a legal obligation to provide a defense or indemnity coverage for the claim prior to the settlement of a claim.

Equitable contribution claims between coinsurers is not based upon contract, involves equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. California follows the general rule that an insurer that discharges a common obligation of another insurer may seek contribution from the second insurer. The insurers’ respective obligations flow from equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.

In an equitable contribution action, a court reviews the applicable facts and policies and decides what is fair between the potential coinsurers. The Glencoe policy specifically insured Pacifica for its construction project at Carmel Pointe.  Pacifica tendered its claim to Glencoe. Glencoe did not agree to defend, but instead, monitored the litigation and requested to be informed when Pacifica satisfied its SIR. During his deposition, a Glencoe representative acknowledged potential coverage existed assuming the SIR was satisfied. Pacifica did not satisfy the SIR until it contributed to the settlement of the construction defect suit because Axis, a coinsurer, was defending Pacifica. While Glencoe did not agree to contribute to the settlement, it specifically approved Pacifica’s payment of its SIR as part of the settlement.

This is not a case where Glencoe had no notice of the claim or settlement. The trial court found that “Glencoe never made any effort to secure the authority necessary to settle, or contribute to the settlement of the [construction defect suit] even though the insured was facing a time-sensitive settlement opportunity…” with a potential exposure of $13 million more than the offer of settlement.

Conclusion

To allow Glencoe to defeat an equitable contribution claim merely based on the timing of the payment of the SIR would award Glencoe for its inaction and work an injustice. The Court of Appeal noted that Glencoe appeared to hide behind the SIR requirement in its policy and gambled that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit. The Court of Appeal found the conduct to be gamesmanship and refused to to adopt a rule sanctioning such conduct.

When a trial court is required to evaluate claims for equitable contribution among multiple liability insurers, each insuring the same insured on the same claim, the trial court must exercise its discretion and weigh the equities seeking to attain distributive justice and equity among the mutually liable insurers. The trial court properly did equity.

ZALMA OPINION

Insurance companies usually work to protect their insured while, at the same time, protecting its assets. Pacifica was faced with a potential exposure of almost $14 million. It received a settlement demand for less than the policy limits of both its concurrent insurance policies. Had the settlement not been reached both Axis and Glencoe could be found to have acted in bad faith and opened their $5 million policy limits to cover the full $14 million claimed.

Axis recognized the exposure and protected its insured. Glencoe sat back and tried to avoid its obligation by claiming the SIR had not been exhausted.

If Glencoe was an insurer acting in good faith it would have met with Axis and Pacifica and agreed to work together to settle the suit for the $1 million demand and would have avoided the contribution suit.

Lawyers working for insurers in such a situation should advise their clients to avoid litigation and resolve this type of suit. All three are lucky they avoided a major judgment in excess of their limits and Glencoe, rather than attempting to avoid its exposure, should have thanked Axis for protecting them from an excess verdict.

Zalma Insurance Consultants

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Don’t Lie On An Application For Insurance

Abuse of the Incontestability Clause

Zalma on Insurance Makes Top 50

Life and disability policies usually contain an incontestability clause that prevents an insurer from voiding a contract of insurance after it has been in effect for more than two years. People insured know of the incontestability clauses and do not make claim until the two years have expired. Often, even people who obtain a policy by fraud, succeed in obtaining benefits from an insurer who could have avoided the policy for misrepresentation or concealment but are prevented by the application of the Incontestability Clause.

The Sixth Circuit Court of Appeal was asked to review a district court’s summary judgment for UnumProvident Corp. and Robert A. Correa in George Kutlenios v. Unumprovident Corp., et al, No. 09-2604 (6th Cir. 04/06/2012) after George Kutlenios (Kutlenios) sued Unum when the company rescinded his disability insurance policy.  The district court granted Unum’s motion pursuant to the terms of the insurance contract.

FACTS

On March 1, 2004, Kutlenios applied for disability income insurance from Unum with the help of his insurance agent Correa, who had sold Kutlenios insurance related to Kutlenios’s business for the past fifteen years. Kutlenios attested on the application that he had read the application and his answers to the questions on the application and that his answers were true, complete and correctly recorded on the application. He also acknowledged that he understood that if his answers were incorrect or untrue that Unum could deny his benefits or rescind his policy. Kutlenios left unanswered the medical information portion of the application, which asked 20 questions about his health.

Unum rejected Kutlenios’s application because the medical information section was incomplete. It returned the application to Correa with instructions to complete the application. Kutlenios’s application was resubmitted to Unum with all of the questions answered “no” with the exception of question nine, which was still unanswered. One of the questions on the application with the answer “no” was, “Have you ever been diagnosed by a member of the medical profession as having or treated for. . . injury, disease or disorder of the spine, neck, back, extremities, including muscles, bones, joints, amputations or any chronic painful condition, neuritis, neuralgia or neuropathy, sciatica, arthritis or gout?”

Subsequently, Unum contacted Kutlenios for a “phone history interview” as part of the application process. The Unum agent asked Kutlenios questions about his health including the unanswered question nine, which read “Have you, in the last five years, seen any doctor or medical practitioner not otherwise listed on this application?” Kutlenios answered “no.”

Based on the information provided on the application, Unum issued Kutlenios a disability policy that was effective on May 20, 2004. Unum tendered the policy to Correa, who gave it to Kutlenios. The policy contained an “incontestability clause” that prevented Unum from denying Kutlenios benefits because of a misstatement or omission on the application two years after the policy’s effective date. The Unum clause, however, contained an exception for fraudulent misstatements or omissions.

On June 15, 2006, just two years and three weeks after the policy’s effective date, Kutlenios filed a claim for disability benefits. He stated he was suffering from “ankylosing spondylitis” (A/S), a type of arthritis that causes vertebrae in the spine to fuse together. The physician statement from Dr. David Schwartz that accompanied the claim revealed that Kutlenios first saw Dr. Schwartz for A/S on April 9, 2003, nearly a year before Kutlenios applied for his policy.

After receiving the claim, Unum sought more information about Kutlenios’s medical history. Unum’s investigation revealed that Kutlenios sought treatment for A/S in 1998. It also discovered a December 5, 2000 x-ray and a May 23, 2001 report that indicated that Kutlenios was suffering from spinal issues consistent with A/S.A June 28, 2001 report noted symptoms “consistent with [Kutlenios's] history of [A/S],” and a July 3, 2001 medical record contained an x-ray report that confirms Kutlenios was suffering from A/S.

In March 2007, Unum denied Kutlenios’s benefits claim and rescinded his policy based on his misstatements on his application regarding his medical history.

Analysis

Common law has always permitted the avoidance of a contract procured by means of fraud. Fraud occurs when a someone knowingly makes a materially false representation or recklessly makes a materially false representation without regard to its veracity with the intent that the statement be relied on by another party and that other party suffers an injury.

In Michigan an insured is charged with knowledge of the information in an insurance application. Kutlenios, knowing that he was suffering from A/S,  omitted the fact on his application. In fact, Kutlenios had suffered from A/S for several years before he applied for a disability policy.

Unum provided sworn testimony that it would not have issued a policy to Kutlenios if it had known about his A/S. Unum, as a result of the falsehoods presented to it by Kutlenios and his agent, suffered an injury when it relied on the misstated medical history. The misrepresentation, made with knowledge of its falsity, to the detriment of another is, by definition, common law fraud. Since Unum proved the fraud there was no need to consider the incontestability clause.

In a concurring opinion, one Justice noted that it was beyond dispute that the application contained misstatements or omissions concerning Kutlenios’s medical history, and those misstatements are attributable to him. Kutlenios argued that the insurance policy’s incontestability clause protected him from Unum’s attempt to rescind.  However, the record demonstrated, beyond any legitimate dispute, that Kutlenios was under physician’s care for his A/S during the period from May 2004 to May 2006 and, therefore, Unum was within its rights to void the policy based on the misstatements in the application (even if innocently made).

ZALMA OPINION

Mr. Kutlenios, knowing he was suffering from a serious disease that had, or would soon, make him totally disabled. He also knew, if he told the truth to an insurer they would not issue a policy of disability insurance to him because the disability would have been a certainty. Insurance can only insure against contingent or unknown events. First he tried to get the policy without answering any of the health questions. When that failed he answered all but one of the health questions in the negative. That failed again and when he was called by the insurer he responded in the negative although he was simultaneously treating with his physician for the disease that would have disqualified him for the insurance.

Unum properly rescinded the policy and the court properly affirmed the rescission whether for fraud or innocent misrepresentation.

In Michigan, the Insurance Code Section 500.4503 makes a felony for a person to present, cause to be presented, or prepare with knowledge or belief that it “will be presented to or by an insurer or any agent of an insurer, or any agent of an insurer, reinsurer, or broker any oral or written statement knowing that the statement contains any false information concerning any fact material to an application for the issuance of an insurance policy.” (Emphasis added)

The findings of the Sixth Circuit could be sufficient to conclude that a felony was committed when Mr.  Kutlenios told Unum he had not seen a physician and did not disclose that he was suffering from A/S. The Justices should have reported their findings to the local prosecutor.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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Sarah Zalma

My Mother – Sarah Zalma

February 28, 1912 – April 9, 2012

On April 9, 2012, my mother, Sarah Zalma, born February 29, 2012 passed away peacefully of natural causes at her home at Palm Court in Culver City, California.

Only a few weeks ago more than 50 family and friends gathered at the residence hotel where she lived to celebrate her 100th birthday.

We celebrate the life of my mother who was cared for in her last years by her  devoted friend and caregiver, Pacita San Diego.

Born in the small town of Monastir in what is now Macedonia but was originally part of the Ottoman Empire. She was the daughter Isaac Hazan and his second wife Mazaltov. Her father was the Cantor or Hazan of the Sephardic community in Monastir.

Jews first moved there to Monastir in 1492 when the King of Spain ordered the expulsion of all Jews from Spain. The Sultan Beyazit II of the Ottoman Empire issued a decree to welcome the Jews. The Ottoman Jews are identified as Sephardic Jews from the word Sepharad –  which in Hebrew means Spain. Her mother made extra money for the family by taking in laundry from the neighbors which she washed in the nearby Dragor River. Washing machines were as yet unknown.

My mother lived through 100 years of history from the time she was born on February 29, 1912 until she passed away on April 9, 2012. So many things had changed since she was born and she had seen it all happen.

Sarah Zalma

When she was born, the automobile was a new invention, indoor plumbing was only available for the very wealthy and unknown to poor Jewish families living in the Ottoman Empire. There were no radios, television, computers, aircraft, rockets, video games, cellular telephones, or movies with sound.

Some of what happened around the time she was born include:

  • In 1912, the year she was born, Serbia conquered Monastir in the Balkan War ending 530 years of Ottoman rule over Monastir.
  • In December 1915 — Monastir fell to Bulgaria during WWI when she was only three.
  • In November 1916 – Serbia retook Monastir
  • From November 1916 until 1918 Monastir was shelled by Bulgarian and German troops nearly every day for 22 months.
  • When she was only five years old, World War I, the battle of Monastir took place on the Macedonian Front between Bulgaria and France in May 1917.
  • Thousands of Jewish Monastirlis (as the locals referred to themselves) emigrated to North and South America, Jerusalem, and the Sephardic metropolis of Salonika, in Greece.
  • Monastir was virtually destroyed. About 6,000 Jews – nearly the whole community – deserted Monastir for Salonika, Athens and elsewhere.
  • Mother was sent to her stepsister’s house in Salonika, Greece to be safe, get a good education, and help her stepsister with household work.  The family in Salonika lived in a big house and was considered wealthy.
    • It was not a very happy time for Mother because her brother-in-law was very strict and she missed her mother and brothers.

After the war ended in November 1918 my grandmother Mazeltov Hazan, collected Grandma, her brothers Morris and Ralph and her baby sister Becky so they could leave Europe and emigrate to the US where Mother’s three older half-brothers, Israel, Aaron and Albert Hazan had started a new life.

Their emigration was not easy and they stayed in Paris, France for a year waiting for a ship to take them to the US. In Paris mother was impressed and still talks about seeing one of the first telephones. The rest of the extended family, including her half-sister in Salonika, stayed in Greece along with about 3000 of the 11000 Jews who had lived in Monastir before WWI.

In 1941 the Nazi army and its allies reached Monastir and every Jew who stayed in Salonika and Monastir were taken to concentration camps and killed. None returned.

If mother, her mother and brothers, had stayed with her half-sister in Salonika or Monastir, she would not have survived World War II and none of her extended family would have been born.

Mother traveled in steerage class below the water line in the ship. When it arrived in America, they stopped at Ellis Island in New York harbor. The immigrants were checked to see if they were healthy and that they had someone willing to help them. Mother’s little sister, Becky, was sick and taken off the ship to a hospital on Ellis Island in New York. Her brave big brother, Morris, jumped off the ship, swam to shore, found the hospital and found Becky even though he knew no English.  It was a very scary time for mother and her brothers because they knew no English to ask anyone for help except the relatives who had earlier come to New York from Monastir.

People like Mother’s family came to America because it was a place people could live free and where everyone had an equal opportunity to succeed regardless of their family, their religion, race or national origin. If they worked hard they had the ability to succeed. There was no social safety net from the government — the safety net was only family and work.

Mother’s adult half-brothers had come first and worked in factories where they learned a business. Sarah, as a little girl, learned how to sew. She worked in sweat shops with many other young girls making dresses. Today, little girls, 10-years-old, are not allowed to work. In her time she was the only one making money and she supported her whole family.

Because Mother had to work, she didn’t get to finish elementary school. She only went through about the third grade before she started working in a clothing factory. She claimed how sad she was that she couldn’t finish school because she really liked school.

She used to call herself “stupid” because she didn’t get to finish school, but she was wrong. She was only undereducated. She was a brilliant woman who was smarter than most college graduates. She managed to enjoy most of her 100 years enjoying her children, grand children and great grandchildren.

She came to America knowing no English but did speak some French, Turkish, Ladino (the Sephardic version of Spanish) and Greek. She learned English, how to sew and was good enough that she was asked to be a supervisor. Since she was so fast at her work she gave up being a supervisor because she made more money being paid by the piece rather than on salary.

She was a hard worker, a risk taker, a fast learner and an aggressive go getter. She learned by doing. She was strong and unafraid.

As a young woman she married my father, Sam, a Sephardic immigrant from Istanbul Turkey whose family came to the United States about the same time as mother and settled, like her, in Brooklyn. Sam was a hard worker who did any job he could get. Although intelligent enough to be a college graduate, he like mother, had to work before finishing elementary school.

He did everything. He worked as a short order cook at Madison Square Garden in New York, drove a taxi cab, worked in the shipyards in San Pedro and Long Beach, California building Liberty ships during World War II (since he was rejected for the military because of a burst eardrum), drove a Helms Bakery truck, drove a delivery truck for a dry cleaner and eventually started his own dry-cleaning business which he operated until he retired after his second heart attack.

The business was a success because he worked 16 hours a day six days a week and only eight hours on Sunday. He was eventually helped by my big brother who operated the business after he retired. Dad supported his family and kept his mother-in-law in our house until she died.

My mother and father loved each other and tolerated each other. Sam provided for Mother and their children. Mother brought up her children all of whom were successes in their own right. She was there for her children 24 hours a day seven days a week because she and my father felt it was more important that their children always had someone to care for them rather than collect expensive things. They taught their children what was important by example not by lecture.

Sarah and Sam Zalma are the kind of people that made America great.  Impressive, self-sufficient, asking nothing of anyone but the ability to work as hard as they could to live free of fear.  They took advantage of the opportunities the United States of America provided to them – and made a success out of it. They made up for the lack of education with hard work and determination.

Their children grew up with little in the way of things and much in the way of love. We, her children learned by their example, that love and caring for each other was more important than things. Dad, when Irving, Starr and I were young, worked three jobs and would leave for work before we woke and not return until after we were in bed. On Sundays he had the right to sleep late but we would all jump into bed with him and Mother and get into vicious and delicious tickling bouts.

Sarah, after moving to Palm Court, worked every day for her great-grandchildren playing Bingo. Her winnings went into banks for each great-grandchild who received their share of what she earned on Chanukah or their birthday or on her birthday.

Mother will rest beside my father, the love of her life.

She leaves me and my sister Starr, her nine grandchildren and her twelve great-grandchildren behind to miss her.

Mother made friends with what seemed effortless skill wherever she went because she would greet everyone with a friendly touch. She was afraid of no one. She was not, and never could be, politically correct. She said “goodbye” w